Global oil demand reached record levels in June and is poised to peak again in August, the International Energy Agency said on Friday, warning that price hikes could be on the horizon as slowing outputs from major suppliers like Saudi Arabia tighten supply.
Oil prices could be poised to rise even higher in coming months as major producers, particularly Saudi Arabia, move to constrict supplies. Previous production cuts from the Organization of the Petroleum Exporting Countries and its allies, known as OPEC+, have helped drive oil prices up and the IEA warns the bloc’s targets, if maintained, pose “a risk of driving prices still higher.”
TANGENT
The IEA said Russia’s oil exports breached the price cap put in place by the Group of Seven (G7) nations. Prices reached an average of $64.41 a barrel last month, the IEA said, above the $60 a barrel cap the group set. The cap was designed to limit Moscow’s ability to fund its war in Ukraine while simultaneously averting chaos in global energy markets by keeping its oil on the markets and it limits how companies can move Russian oil by cutting access to things like insurance and other key services should they pay more than this threshold. The rule has changed the map of global oil supply chains and exports from Russia, a major producer, away from Europe and towards Asia. The IEA said crude exports to India and China accounted for 80% of Russia’s shipments.
While oil demand dropped during the Covid-19 pandemic and as the world shifted to greener forms of energy, supplies have also tightened from output cuts and disruption from Russia’s invasion of Ukraine. The recent squeeze, spearheaded by Saudi Arabia’s voluntary production cuts, have helped push prices up and Brent crude, a key international benchmark, was trading at $88 dollars a barrel on Thursday, a six month high.
Oil Majors Eye Higher Shale Output This Year
The latest earnings season saw several shale oil majors revise their output projections for the year. Surprisingly, they revised these projections upward.
The revisions were attributed to higher well productivity that Bloomberg said in a recent report had come as a surprise. Thanks to that surprise, U.S. oil production was set for stronger than previously expected growth this year.
Or maybe not, if we are to believe analysts that Reuters polled on their take on the U.S. shale industry. According to these analysts, it would take more than a surprise reversal in well productivity trends to boost U.S. shale oil production meaningfully.
The “surprise” increase in well productivity may have been unexpected for the media, but it certainly wasn’t totally unexpected for the industry. The reason: those companies that reported such productivity improvements said they’d been working at improving their drilling efficiency. And they’ve seen results.
Pioneer Natural Resources, whose CEO Scott Sheffield last year warned that the shale boom is over, citing, among other things, well productivity, has now boasted higher yields thanks to longer well laterals.
Chevron reported record output for the second quarter as it focused on the Texas part of the Permian rather than the New Mexico side. The company expects 10% higher production from the Permian this year.
Yet the analysts polled by Reuters argue that this will not be enough to boost total U.S. output significantly, not at the current drilling rates, which remain subdued.
Oilfield services providers sounded the alarm last month. They said demand for these services in the shale patch was on the decline, with all three supermajors in the space—SLB, Halliburton, and Baker Hughes—reporting a decline in business for North America.
“During the second quarter, we saw reduced frack activity that resulted in increased white space in our calendar,” Chris Wright, the chief executive of fracking major Liberty Energy, told the FT. Wright also said the company might need to reduce the number of its fracking fleet going forward if demand remained at the same level.
So, on the one hand, exploration and production companies are reporting higher well productivity rates while their oilfield service providers are reporting lower drilling activity.
Meanwhile, the EIA revised up its projection for this year’s U.S. oil total to a record 12.8 million bpd, up from an earlier forecast of 12.6 million bpd. Per EIA estimates, last week saw production hitting 12.6 million bpd already.
The industry itself appears to estimate the annual boost in production at 850,000 bpd, thanks to these longer laterals and lower drilling costs. The EIA also cites higher oil prices as drivers of higher production.
Yet analysts note the fast depletion rates of shale wells, noting that it would take a lot more active drilling to offset this natural process and boost production considerably at the same time. But shale majors are not doing this. They remain disciplined despite higher prices.
What all that suggests is that however high U.S. output goes this year, it is not very likely it would go high enough to put significant pressure on international prices, not least because of the record rate of U.S. oil exports.
These exports are putting downward pressure on benchmarks but, once again, it has its limits: Saudi Arabia remains a much bigger exporter of crude than the U.S., and so does Russia, and both have put caps on either production or exports. Saudi Arabia has also warned it could go a step further and deepen its production cuts to keep prices higher.
This is good news for shale drillers. It gives them the opportunity to spend less, pump more, and make more money by selling that higher output abroad thanks to robust and resilient demand in Russia’s former biggest market – Europe – as well as the world’s biggest market for oil, Asia.
By Irina Slav for Oilprice.com