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The prolific U.S. shale oil and gas industry is decelerating in the face of weak commodity prices, suggesting production growth will stall amid buoyant demand.
There is growing evidence that economic activity is stagnating. Some 150 oil and gas groups in the region scored zero for growth in business activity in the second quarter, a Dallas Fed survey showed, suggesting any expansion has hit a wall. It was the lowest score since 2020, when plunging oil prices amid the coronavirus pandemic forced operators to cut staff numbers and idle rigs.
Oilfield services firm Baker Hughes said data on Friday showed the number of rigs deployed nationwide fell for an eighth straight week.
“Weak oil and gas prices” and “high costs” “contributed to the stalling of oil and gas activity growth in the second quarter,” said Michael Plant, a senior research economist and advisor at the Dallas Fed.
US natural gas prices have fallen from more than $6 per million British thermal units a year ago to less than $3. Brent crude, the benchmark for international oil prices, traded at around $74 a barrel on Friday, down more than a third from a year ago.
The average producer needs an oil price of $66 a barrel to break even this year, barely profitable for many drillers, according to HSBC.
However, U.S. oil production is still rising and may even hit new highs later this year, driven by the prolific Permian Basin in West Texas and New Mexico, according to the U.S. Energy Information Administration.
But those numbers reflect drilling decisions made a few months ago when oil prices were higher. A drop in drilling activity since then suggests the surge in production will be short-lived. Shale oil production requires more drilling to keep production steady, and new production often comes on stream months after wells are fracked.
As the world consumes ever-increasing amounts of oil, any deterioration in U.S. production growth would be alarming given that the U.S. has been the main source of new supply in recent years.
Issues affecting shale’s ability to grow include commodity prices, worker shortages, investors’ insistence on returns and growing concern that shale rocks are becoming less productive. Shale rock has made the U.S. the most dynamic producer in the world.
Rising costs for everything from casing to pressure pump equipment are also eating into profit margins.
“Everything is going up dramatically, and . . . prices are still soft,” said a Dallas Fed executive surveyed. “The breakeven price for oil seems to be in the mid-$70s a barrel right now. I’d drill if the cost wasn’t that high. “
Some point to the ability of oil companies to produce more oil with fewer rigs. But new oil production per rig has fallen sharply as production in once-prolific basins has slipped, EIA data show.
“There are certainly mature reservoirs, like the Bakken and Eagle Ford, that have are operating on their own terms.” “They are no longer a true growth engine.”
U.S. oil production, which surged by nearly 2 million barrels a day in 2018-2019 at the height of the shale revolution, will rise by just 200,000 bpd over the next 12 months — nearly all of that growth in the Permian Basin, as other Basin shrinkage.
The oil and gas rig count at the field fell for the eighth straight week last week to 682, down more than 100 from the past six months.
Analysts say that trend could reverse if oil prices rise in the second half of the year, but with the threat of a global recession looming, that is far from a foregone conclusion.
“We’re not sure what’s going to happen,” said one respondent to the Dallas Fed survey. “The highs are too high. The lows are too low.”