US shale companies witness a fall as OPEC gains advantage while healing from COVID-19

The US shale industry, which was previously self-confident, bore enormous expenditure in the past few years to capture market share. It now emphasizes preserving cash, putting it at a disadvantage to low-cost OPEC producers as the global economy begins to gain traction again.

Before the pandemic induced lockdown, OPEC countries dominated by Saudi Arabia controlled their production. Shale drillers saw an opportunity and surged US output to a record high of 13 million barrels a day.

The year’s top energy conference stressed that even with a float, $60-per-barrel oil price, shale will not be able to swim back from the COVID-19 pandemic as it did from the 2016 downturn.

The effect of free-wheeling shale companies taking advantage of OPEC’s output restraints propelled into a mini supply war in March 2020. Russia obstructed a three-year agreement to extend production cuts, and Saudi Arabia responded by flooding the markets with oil, leading US futures prices to fall to negative-$40 a barrel.

“Let’s face it. OPEC has had a very difficult time managing to accommodate the US shale players and their ability to grow at low prices,” said IHS Markit analyst Raoul LeBlanc, adding that the key debate within OPEC is what oil price is just low enough to avoid a massive US response.

The pandemic demolished one-fifth of global fuel demand, and many shale companies declared bankruptcy. Others managed to merge to unload debt.

While shale executives expressed concern about reopening the wells too quickly, OPEC nations are expected to ease supply curbs at their meeting later this week, without having to look over their shoulder at shale.

“The worst thing that could happen is that US producers start growing rapidly again,” said ConocoPhillips Chief Executive Ryan Lance.

The market believes that OPEC will loosen production cuts by around 1.5 million barrels per day (BPD), with OPEC’s head, Saudi Arabia, completing its voluntary production cut of 1 million BPD.

At CERAWeek, OPEC against shale is frequently discussed as a confrontation between competing interests, but the conflict of Texas and the Middle East is almost invisible this year. The Exxon or Chevron CEOs didn’t mention shale during their talks as they have cut spending in the US Permian Basin.

Crude on Tuesday, 2nd March exceeded $60 per barrel, up from $44.63 at the start of December, sufficient to strengthen US producers’ earnings given recent cost cuts.

“They are not taking the bait,” LeBlanc said.

Private companies are expected to grow oilfield activity, but this would not be enough to significantly uplift US output, said LeBlanc. He added that US spending is anticipated to stay at approximately $60 billion, flat with 2020, as companies prioritize shareholder returns.

“The severe drop in activity in the US along with the high decline rates of shale and the pressure from the investment community to maintain discipline instead of growth means in my view that shale will not get back to where it was in the US,” said Occidental Petroleum CEO Vicki Hollub.

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