US shale oil output hits record level, but market still strained

United States oil output from seven major shale formations is expected to rise by 74,000 barrels per day (bpd) in October to a record high of 8.843 million bpd, the US Energy Information Administration said in its monthly drilling productivity report on Monday.

Although US shale producers have added millions of barrels to the global crude supply in recent years, that does not mean they can quickly replace barrels lost from weekend attacks on Saudi Aramco facilities, energy experts say.

The largest change is expected in the Permian Basin in the states of Texas and New Mexico, where output is seen climbing around 71,000 bpd to a record high 4.485 million bpd in October. That is the ninth consecutive month of increases in the basin, its longest streak of rising production since December 2018.

Output in the Bakken Formation in the states of Montana and North Dakota is expected to edge higher by about 2,000 bpd to a record 1.471 million bpd, the data showed. But that is the smallest increase in the area since May.

Production increases in the Permian and Bakken have been at the forefront of a shale boom that helped make the US the biggest oil producer in the world, ahead of Saudi Arabia and Russia.

Even though the number of rigs drilling new wells in both the Permian and Bakken has declined since the start of the year, output has increased in both areas because the productivity of those rigs – the amount of oil that new wells actually produce per rig – has increased to record levels.

But despite the huge uptick, US shale production is unlikely to make up for the supply lost in Saudi Arabia.

‘Open up the spigot’

Meanwhile, shale producers this year have been cutting budgets and workers, as well as trimming production goals, after years of heavy spending.

They remain under intense pressure from investors to restrain spending and return money to shareholders through buy-backs and dividends rather than an expansion of drilling.

Since shale is a short-cycle oil supply – one able to add or reduce production relatively quickly – producers can respond to increased demand, especially from buyers in Asia.

But producers need 90 to 180 days to drill, complete and bring new production online.

There are about 1,000 Permian wells that have been drilled but not completed or hooked up to pipelines, said Bernadette Johnson, vice president of market intelligence at consulting firm Enverus.

“[Shale] cannot simply open up the spigot,” she said, adding that “the infrastructure simply isn’t there yet to get it to the coast” prior to the oil being exported from North America.

Representatives for Exxon Mobil Corp, Royal Dutch Shell and Chevron Corp, which all produce shale, declined to comment on the potential impact on their operations by the events in the Gulf.

‘Will take the higher prices’

If the attacks lead to sustained US oil prices in the mid-$60-a-barrel range, it could cause US output to grow by about two million barrels per day (bpd) next year, from about one million bpd this year, Johnson said.

US oil companies would then see some benefit.

The strikes in Saudi Arabia knocked out oil-processing facilities and production at the Khurais oilfield, which produces a light oil somewhat similar to what shale suppliers offer.

The Eagle Ford Shale field in South Texas has the ability to add significantly to supplies, and prices in the mid-$60s per barrel would cause companies operating there to add rigs gradually.

Still, its ultralight barrels are not quite similar enough to be a great substitute for lost Arab Light oil, Johnson said.

Shale producers generally could use the recent jump in crude prices to add hedges – contracts that lock in future energy prices – allowing them to capture some of the expected price increases, said Matt Portillo, managing director at investment bank Tudor, Pickering, Holt & Co.

“Producers will take the higher prices and essentially bank that to balance-sheet repair or to accelerating shareholder returns,” Portillo said.

But on balance, fossil fuel firms in the US likely may not drastically alter their strategies in response to geopolitical instability in the Middle East.

Oil companies operating in the Permian Basin will not “be changing their plans this week based on what happened in Saudi Arabia”, said Andy Lipow, president of energy consultancy Lipow Oil Associates.