Facing a decline in commodity prices, the US Shale Industry and gas sector, once heralded for its robust production capabilities, is now slowing down. This deceleration could potentially stagnate production growth just as worldwide demand for these resources soars.
Signs of this standstill are becoming increasingly clear. In its recent survey, the Federal Reserve Bank of Dallas recorded no growth in business activity for the second quarter across 150 oil and gas organizations in its jurisdiction. This zero-growth score is the lowest since the oil price crash of 2020, which was spurred by the COVID-19 pandemic and led to considerable job losses and idle drilling rigs.
Adding to this concern, data released last Friday indicated an eight-week consecutive decrease in the number of operational drilling rigs nationwide, according to oilfield services leader Baker Hughes.
Michael Plante, Senior Research Economist and Advisor at the Dallas Fed, explained, “The combination of weak oil and gas prices and high operational costs has halted growth in oil and gas activity for the second quarter.”
US natural gas prices, which stood above $6 per million British thermal units last year, have fallen to less than $3. Brent crude, the international benchmark for oil prices, is trading around $74 per barrel, marking a sharp fall of over one-third compared to last year.
However, the US Energy Information Administration (EIA) continues to predict an increase in American oil output. This growth is primarily driven by the bountiful Permian Basin in West Texas and New Mexico, with potential to reach a new record high later this year. But these projections are based on drilling decisions made months ago when oil prices were higher. The decline in drilling activity since then suggests any increase in output may be short-lived.
This potential slowdown in US production growth raises global concerns. With worldwide oil consumption on an upward trend, any decrease in US supply, which has been a significant contributor to global supply in recent years, could have severe implications.
Several challenges are currently threatening the industry: fluctuating commodity prices, labor shortages, demands for returns from investors, and declining shale rock productivity.
One executive, expressing the prevailing sentiment among industry players, told the Dallas Fed, “Costs for everything have escalated dramatically while oil prices remain weak. The break-even price for oil now seems to be in the mid-$70-per-barrel range. I’d consider drilling if the costs weren’t so prohibitive.”
Despite claims that oil companies can extract more oil with fewer rigs, recent EIA data shows a significant decrease in new oil production per rig. Nathan Nemeth, an analyst at Wood Mackenzie, explained, “We have mature plays, like the Bakken and the Eagle Ford, that have run their course. They’re no longer the engines of growth they once were.”
With the memory of the shale revolution, which increased US oil production by nearly 2 million barrels per day between 2018 and 2019, the growth forecast for the next year is a sobering 200,000 barrels per day.
While some analysts suggest that this downward trend could reverse if oil prices rally later this year, with the shadow of a global economic recession looming, such a rebound is far from certain. As one respondent to the Dallas Fed survey reflected, “We’re not certain of what to expect. The highs were too high. The lows too low.”
GLOBAL ROUNDUP: China’s CPTPP Entry; Country Evaluated 2,300 Trade Terms
