Small Frackers Race To Drill As OPEC+ And Big Oil Majors See No Need To Pump Faster
Crude prices jumped Tuesday, nearing $100 a barrel after Russian President Putin sent troops into two breakaway areas of Ukraine and officially recognized Ukraine's separatist republics on Monday. Higher energy prices have given new life to the U.S. shale patch moving drilling rigs back into oil fields despite OPEC+ members maintaining a more balanced approach of not increasing output even as prices soar.
U.S. futures for WTI crude jumped almost 5%, brushing against the $96 handle per barrel. The international oil benchmark Brent rose 3.5% and hovered a little over $99. Both benchmarks hit seven-year highs.
Soaring energy prices have ignited smaller, private shale oil/gas exploration companies to increase output in places like the Anadarko Basin of Oklahoma and the D.J. Basin in Colorado, where drilling has now become profitable now follow the oil crash in the first half of 2020 during the early days of the virus pandemic.
Oil production in these marginal regions isn't expected to move the needle in the global market, which is facing tight supplies, but it could help some oil producers who have lost money in past years. Output in the contiguous U.S. by year-end is expected to increase almost solely from the Permian Basin of West Texas and New Mexico, offset by declines elsewhere, according to energy consultant Wood Mackenzie. -WSJ
Smaller shale companies are drilling like crazy as they take advantage of a "limited window of opportunity," Charter Oak Production Co.'s founder Joe Brevetti, told WSJ. He said his company is bringing one drilling rig back to the Anadarko Basin to double production later this year.
Brevetti said, "the clock is ticking" because higher oil prices will dent demand and reverse prices. He said putting drilling rigs back to work around $45 a barrel or lower in 2020 wouldn't have been profitable for the company. He added profitability is around $60-per-barrel oil, or even $80 a barrel, needed to increase investments.
Even though privates are rushing to add drills in various shale patches, larger companies are taking a more conservative approach, such as Pioneer Natural Resources Co.'s CEO Scott Sheffield, who told investors last week they intend to only boost oil production from 0% to 5% even if oil climbs above $100 a barrel.
We don't expect total U.S. oil production to increase amid the flurry of small shale companies taking advantage of the boom cycle as larger ones hold output steady.
As for OPEC+ members, they too are not rapidly increasing output as Brent closes in on $100. Iraq and Nigeria have been allowed to raise production to balance the market, but it appears that's as aggressive as the 23-nation alliance, led by Saudi Arabia and Russia, will get, according to Bloomberg.
"The market will have more and more oil, so we think there's no need" to diverge from today's strategy, Iraq's Energy Minister Ihsan Abdul Jabbar said. "We will not create any growth to the commercial storage. We will secure all the demand by making the necessary supply."
For decades, the boom and bust cycles have been part of the oil-and-gas industry. It appears top oil players "won't do anything extraordinary at this time because we are expecting a lot of production" from outside of OPEC+," Nigeria's energy minister, Timipre Sylva, said.
After years of fighting low oil prices, a general and possible global consensus is emerging among major oil players who would rather see oil prices stabilize rather than undergo boom and bust phases.
This could be exceptionally problematic for the Biden administration, who has failed to keep pump prices low as Californias pay the most ever (on average) for gasoline.
Biden can now blame Russia for higher gas prices due to the Ukrainian crisis ahead of the U.S. midterms.
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