Starting out with a few energy headlines today, let’s begin with this item from FinancialTimes.com. The article’s headline reads, ‘Oil Chiefs Warn of End to US Shale Boom’. The following is from the linked item:
“US oil companies are cutting spending and idling drilling rigs, as Donald Trump’s tariffs push up costs and falling crude prices squeeze profits, prompting executives to warn that a decade-long shale boom is ending. Surprise decisions by the Opec+ cartel to pump more oil have compounded the gloom across the US oil patch, sparking fears of a new price war and prompting analysts to cut output forecasts. “We’re on high alert at this point,” Clay Gaspar, chief executive officer at Devon Energy in Oklahoma City, told investors this month. “Everything is on the table as we move into a more distressed environment.” Oil output will fall by 1.1 per cent next year to 13.3mn barrels a day, according to S&P Global Commodity Insights, as prolific shale drillers that made the US the world’s biggest producer idle rigs in the face of prices driven lower by fears of oversupply and Trump’s trade war. That would mark the first annual decline in a decade, excluding the 2020 pandemic when collapsing demand sent oil prices below zero and triggered widespread bankruptcies across states such as Texas and North Dakota…Trump has promised to “unleash” more drilling and production in a bid to secure US “energy dominance”. But production, which hit a record high under his predecessor Joe Biden, could fall still further if prices keep sinking.”
The author adds that Shale producers need $65/bbl to break even, a statistic taken from the Federal Reserve Bank in Dallas. The article also adds that the ‘watchword now is ‘hang in there.’ The article also touches on how it will likely prove difficult for the President to see his energy goals realized with such a depressed crude pricing environment.
So we have this view, and there are other viewpoints out there. One of those viewpoints, which is gaining momentum in some circles, is that the OPEC promises of more production increases could wind up being a headfake by OPEC, as physical markets are indicating a tighter supply outlook than what most are reporting. It’s the adage of paper barrels vs physical barrels; paper barrels are what people say they will produce, with physical barrels being what is produced. The Saudis are tired of yielding market share to the United States. By jawboning talks of their pivot to increase production, they are having a chilling effect on US oil producers, who are already laying down the means of production in the US. There is no significant appetite for capital expenditures with oil values in the low $60s. To date, on the physical side, OPEC has not restored over 550,000/bbls of production they claimed they would put back into global supply by June 1st…which is right around the corner. To repeat, as of yet, the Saudis have not increased their production.
Will this be a case of OPEC trying to play chess, spoofing the markets into thinking a flood of oil would be coming, which has depressed prices across the planet, caused companies to make real-world decisions to decrease production and not invest in new production, and shown how ramping fallow production back up can take 6-18 months, depending on the fields and/or well quality, or will they really do it?
Either way, the markets have reacted and believe they will increase supply to the global markets…if they are jawboning and do not follow through, their actions are sowing the seeds of the next significant oil price spike. If they follow through, the seeds for the next price spike are still being planted, but it may take longer before that event is realized, which will include more pain for US oil producers.
Anything that happens with oil eventually makes its way to propane and propane values…if oil goes higher, propane follows, and the inverse is also true, which is why we spend a good deal of time following the oil markets.