America’s Oil Power Might Be Near Its Peak

A U.S. shale boom that helped suppress oil-price surges over the past two years is waning.

The country’s crude oil output is expected to increase by just 170,000 barrels a day in 2024 from last year, down from a jump of 1 million barrels a day in 2023, according to federal record-keepers. That is the smallest annual increase since 2016, not counting the pandemic.

Gushers of new U.S. crude have helped cap soaring oil prices despite OPEC production cuts and global turmoil, including most recently in the Middle East. The gains were driven by private producers that commandeered rigs after Russia’s invasion of Ukraine sent prices soaring to more than $120 a barrel in early 2022.

Now, that growth is expected to slow dramatically. Declining oil prices led producers to lay down rigs last year. Then, many of the operators that had been drilling with abandon were acquired by bigger players looking for ways to expand in the U.S. Those big public companies have given priority to returning cash to shareholders over drilling new wells.

“The ease in growth has gone, unless somebody comes up with a very dramatic new technical innovation,” said Paul Horsnell, head of commodities research at Standard Chartered Bank.

Last week, Morgan Stanley analysts lowered their estimate for U.S. oil output this year and raised their forecast for Brent crude to a range of $80 to $85 a barrel, from $75 to $80.

The move came a day after Diamondback Energy said it was buying privately held Endeavor Energy and indicated it would give priority to controlling costs.

Private companies such as Endeavor have been the country’s swing producers in recent years, boosting production when prices are high and cutting back when they fall. Ten private producers, including Endeavor, accounted for half the Permian Basin’s production increase between December 2019 and March 2023, according to S&P Global Commodity Insights.

The Permian Basin, which straddles West Texas and Southeast New Mexico, has accounted for nearly all the country’s oil output growth since the pandemic. Last year, the U.S. produced an estimated 12.9 million barrels of oil a day, which would be a record high and more than any other country.

But the number of oil rigs operating in the U.S. has dropped nearly 20% since the end of 2022 to about 500, according to oil-field services firm Baker Hughes.

The decline signals a huge deceleration in growth could be coming, since so many wells have been drilled recently and because a shale well’s output declines most rapidly early in its life, said Standard Chartered’s Horsnell.

Thirty-nine private exploration and production companies were also acquired by public companies in 2023, according to analytics firm Enverus. That includes four of the big 10 that powered the Permian’s postpandemic comeback.

Dealmaking mania has depleted the country’s supply of untapped wells. Companies looking to sell themselves often frack previously drilled wells to boost output and appear more attractive to buyers. Hess, for example, dramatically ramped up fracking in North Dakota’s Bakken region before its takeover by Chevron was announced in October, according to research firm Energy Aspects.

Meanwhile, bigger players have to work on integrating their acquisitions. They also tend to narrow their focus to the best prospects of the combined companies, said Michael Oestmann, chief executive of Tall City Exploration, a Permian-based private operator.

“The buyer gets it and now he starts prioritizing,” said Oestmann.

Still, some analysts believe the U.S. oil industry could surprise the market again. Walt Chancellor, an energy strategist at Macquarie, expects it to produce 660,000 barrels a day more in December of this year than it did in the same month in 2023 since drilling efficiencies tend to rise as rig counts fall. The remaining private companies—along with new ones—could also step up production, he said.

“We’ve seen these guys re-emerge over and over and over, so that’s one of the key things to watch in 2024,” said Chancellor.

Even large public companies will find a way to amp up output if prices are high enough for long enough, said Chris Wright, the chief executive officer of fracking firm Liberty Energy.

“People are not going to change plans for short-term blips,” Wright said, “but the U.S. capacity to grow oil production, that’s not gone.”
Source: WSJ