What is holding back US oil production?

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What is holding back US oil production?


The US energy sector continues to be an outlier in this bear market, gaining 6.6% last week thanks to the rally in crude oil prices after Yemen’s Houthi rebels said series of attacks on Saudi Aramco oil storage facilities.

May Brent Crude Oil (CO1: COM) settled + 12% at $ 120.65 / bbl while May WTI Crude Oil (CL1: COM) closed + 10.5% for the week at $ 113.90 / bbl.

The attacks came at a time when supply risk is higher than it has been in years, with Price Futures Group’s Phil Flynn telling MarketWatch the the deficit between supply and demand will get worse.

Meanwhile, US natural gas (NG1: COM) rose 15% for the week to $ 5.571 / MMBtu, fueled by bullish sentiment from news that the US will. increase LNG shipments to Europe in an effort to reduce the continent’s dependence on Russian gas.

With the oil and gas markets decidedly bullish, e the Biden administration unusually encourages it Amid a global energy crisis and skyrocketing fuel prices, one might think that US producers are rushing to make hay as the sun still shines turning on the oil and gas taps.

However, it looks like it will take a lot longer to get more production from long-suffering US producers.

A recent Dallas Fed poll found that Big Oil intends to increase its median crude oil production by a mere 6% yoy, while smaller companies aim to expand theirs by 15%.

But this time around it’s not all about money: 41% of respondents believe the WTI price of between $ 80 and $ 99 / bbl is enough to boost production growth; a further 20% believe $ 100 to $ 119 is sufficient, while a small portion said $ 120 / bbl or higher. Nearly a third of respondents (29%) said that growth will not depend on the price of oil.

Indeed, I know Phillips (NYSE: COP) CEO Ryan Lance says oil prices are so high that “we are invade the area of ​​demand destruction. “

More than half of respondents attributed the containment of growth to investor pressure to maintain capital discipline, indicating that some tough lessons have been learned in recent years.

Rising costs

Another big reason Big Oil is just trying to slightly increase production is inflation and the resulting increase in costs.

According to the report, oil and gas trading activity in the first quarter is already showing record highs in several indicators. Prices received for services, oilfield service company (OFS) operating margins, and industry employment indicators all hit new highs in the Dallas Fed’s 6-year history.

Unfortunately, the dampening of these numbers is record-breaking in the input costs of OFS companies and the costs of exploration and production (E&P) companies to find, develop resources and manage their leases. Costs for OFS and E&P companies increased for the fifth consecutive quarter, as did E&P lease operating expenses and research and development costs. For OFS, a record index for input costs was found.

“We are dealing with the same inflation and supply chain that every other manufacturer has to deal with in the US. You are seeing double-digit inflation rates on a wide range of commodities and categories, including land, trucking and commodities. chemicals imported from Europe. All those supply chain problems are affecting our capabilities “, I know Phillips Ryan Lance told CNBC earlier this month. Lance says extracting new oil now won’t bring immediate relief from the high prices seen around the world for at least a year.

“We have never faced a scenario where we need to increase production, when in fact supply chains not only in our sector but in every sector of the world. [are] affected by the pandemic “, Western oil (NYSE: OXY) CEO Vicki Hollub also told CNBC, saying the industry was “in a very dire situation”.

Another growing problem is the shortage of labor.

“We have the platforms but we can’t find employees. However, oil companies need to understand that oilfield services and, in particular, land-based drilling contractors must be paid at a deliverable rate to justify the enormous cost of operating capital, upgrading and manning a modern ground drilling rig. Lack of staff to work, delivery and cost of pipes, sand tailcoat, cement, etc. are all concerns for our business. It will take quite a while. ‘of time before growth takes place. It is also the pressure of investors “, said one interviewee.

Alex Kimani for Oiprice.com

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