US Shale Production Predicted to Decline Amid Low Oil Prices
The head of the largest independent oil producer in the Permian Basin has made a startling prediction that US shale production has peaked and will likely decline from here as oil prices hover near four-year lows. According to Travis Stice, CEO of Diamondback Energy (FANG), "We have a very good view of what the US looks like. And right now that's a business that's slowing dramatically and likely declining in terms of production."
This prediction comes after a shareholder letter issued by Stice on Monday pointed to declining crew count activity in the Permian Basin as an indicator that "production has peaked" and will begin to decline this quarter. The letter also highlighted the rising cost of drilling, which is causing production to plateau after reaching an all-time high last year.
Industry insiders have echoed Stice's concerns, emphasizing that the rising cost of drilling is a major factor in the slowdown of shale production. Weekly rig counts have been trending lower compared to a year ago, according to Baker Hughes data. This decline in activity suggests that operators are scaling back their operations due to the current low oil prices.
The oil price slump has been a pressing concern for the industry, with West Texas Intermediate (CL=F) futures rallying over 3% on Tuesday to hover just below $60 per barrel. Brent crude (BZ=F), the international benchmark, also rebounded to trade near $63 per barrel. The recent price fluctuations have left analysts and investors alike wondering if the market has hit rock bottom.
In April, prices saw their worst monthly drop since November 2021 over demand fears stemming from a global trade war and a decision by the Organization of Petroleum Exporting Countries and its allies (OPEC+) to increase output. Given President Trump's desire for lower energy costs, JPMorgan analysts predict that oil prices would have to drop to $50 before the administration intervenes to support the market.
The so-called "Trump put" in the form of a tariff pause has been touted as a potential solution to boost oil prices and stabilize the market. However, it appears that this option is unlikely given the administration's continued focus on lower oil prices to manage inflation. According to JPMorgan analysts, "While the recent de-escalation in trade talks has reduced the probability of a bear case, the 'Trump put' does not extend to energy, as the administration continues to prioritize lower oil prices to manage inflation."
The implications of Stice's prediction are far-reaching and have significant consequences for the industry. If US shale production declines as predicted, it could lead to a reduction in oil supply and potentially push prices even higher. On the other hand, if operators continue to scale back their operations due to low prices, it could further exacerbate the decline in production.
The situation is complex, and many factors are at play. However, one thing is clear: the current market conditions are challenging for the industry, and a solution needs to be found soon to prevent further declines in production. As the market continues to navigate these uncertain times, investors and analysts will be keeping a close eye on developments and waiting for any signs of improvement.
The Permian Basin: A Region Under Pressure
The Permian Basin is the largest oil-producing region in the US, accounting for over 25% of the country's total production. However, the region has been under pressure due to declining crew count activity and rising drilling costs. The average well cost in the Permian Basin has increased by over 50% since last year, making it increasingly difficult for operators to break even.
The decline in crew count activity is a concerning trend that suggests operators are scaling back their operations due to low oil prices. This reduction in activity will likely lead to a decrease in production, exacerbating the already challenging market conditions. The Permian Basin's production growth has slowed dramatically over the past year, and if this trend continues, it could have significant implications for the industry.
Industry insiders believe that the rising cost of drilling is a major factor contributing to the slowdown in shale production. As drilling costs continue to rise, operators are being forced to adapt their strategies to stay profitable. This includes reducing exploration efforts, cutting back on capital expenditures, and implementing cost-saving measures to maintain profitability.
The Impact of Low Oil Prices
Low oil prices have had a devastating impact on the industry, causing many operators to scale back their operations or even shut down altogether. The current price environment is unsustainable for many producers, who are struggling to break even due to low margins and high production costs.
The decline in oil prices has also led to a decrease in drilling activity, with weekly rig counts trending lower compared to a year ago. This reduction in activity suggests that operators are losing confidence in the market and are hesitant to invest in new projects.
The consequences of this trend are far-reaching and could have significant implications for the industry. If US shale production declines as predicted, it could lead to a reduction in oil supply and potentially push prices even higher. On the other hand, if operators continue to scale back their operations due to low prices, it could further exacerbate the decline in production.
The Future of US Shale Production
The future of US shale production is uncertain, with many factors contributing to the current market conditions. The rising cost of drilling, declining crew count activity, and low oil prices have all taken a toll on the industry, leaving many operators struggling to stay profitable.
However, there are signs that the market may be turning around. Oil prices have rebounded recently, and some analysts believe that this could lead to an increase in production as operators become more confident in the market. However, much will depend on the ability of operators to adapt their strategies to stay profitable in a low-price environment.
In conclusion, the prediction by Diamondback Energy's CEO Travis Stice that US shale production has peaked and will decline from here is a concerning trend for the industry. The implications are far-reaching, with significant consequences for oil supply and prices. As the market continues to navigate these uncertain times, investors and analysts will be keeping a close eye on developments and waiting for any signs of improvement.