U.S. shale oil production shows signs of peaking, potentially altering global supply dynamics and impacting oil prices.
Oilfield service veteran David Messler suggested last month that oil production in the U.S. shale patch could be nearing its peak, potentially leading to a plateau in the near future. This perspective aligns with the U.S. Energy Information Administration's (EIA) forecast of a modest 16,000 barrels per day (bpd) increase in shale oil production for May 2023, which would bring total output to approximately 9.86 million barrels daily.
The context for this potential turning point in shale output comes amid geopolitical tensions, specifically following Iran's missile attack on Israel. Despite the severity of the attack, oil prices experienced only a minor increase. Analysts believe that the market's reaction was subdued partly due to the quick de-escalation of the situation, and partly because of the current expectations of U.S. shale oil supply.
The EIA's recent report noted an unusual rise in the number of drilled but uncompleted wells (DUCs) in March, the first increase in a year, suggesting a possible reluctance among drillers to push for production growth despite West Texas Intermediate (WTI) crude prices nearing $90 per barrel. The EIA had previously indicated a slower pace of output growth for 2023 compared to the previous year, and the latest figures seem to support this forecast.
David Messler, citing factors such as accelerated decline rates for shale wells and a surge in oil space acquisition deals, supports the notion that shale production may be facing a slowdown. Additionally, industry executives mentioned by Reuters have expressed a lack of incentive for robust production growth, attributing this to gas prices and rising costs.
The EIA and independent analytics firm Enverus have both projected modest increases in U.S. crude oil output for the year, with figures of 260,000 bpd and 230,000 bpd, respectively. These estimates fall significantly short of the 1-million-bpd growth seen in 2023.
Oil prices, traditionally influenced by Middle Eastern geopolitical events, are currently being buffered by the confidence in U.S. shale oil supply. However, as growth in shale output slows, perceptions of global oil supply adequacy may shift, potentially leading to price changes later in the year.
David Buckland, an adviser for Engine AI and former Citigroup chief equity strategist, noted in an opinion piece for the Financial Times that geopolitical events now have a diminished impact on international prices due to U.S. shale. He contends that a realignment of expectations regarding the unending growth of U.S. shale oil supply could have significant repercussions.
As it stands, the oil market is at a potential inflection point, with the forthcoming months likely to clarify the future trajectory of U.S. shale production and its broader implications for global oil supply and prices.
