Shale Struggles

US shale still drives the global oil market—but it doesn’t seem to be going anywhere in a hurry

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• Overall, US crude oil production has struggled to regain its once-rocketing growth trajectory in the COVID era, with growth more or less stagnant over the past year despite a promising run-up in late-2021.

• Agency forecasts remain optimistic; the EIA’s latest STEO release today predicts strong US production growth reacceleration over the course of the year, ending 2022 about 900 kbpd above December 2021 levels.

• Rig counts and drilling activity have started to rebound, but frac spread counts and completions have slowed alongside supply chain bottlenecks.

• While an easing of supply chain bottlenecks could help reaccelerate production growth this year, even optimistic forecasts today pale in comparison to the pre-pandemic growth norm despite a substantially higher pricing environment.

Despite a promising run-up in late-2021, US oil production has struggled to durably grow over the past year, seemingly stuck well below pre-COVID highs. Yet even with this recently lackluster record, agency forecasts are still relatively optimistic regarding growth in the once-rocketing shale patch. The EIA’s latest Short Term Energy Outlook (STEO) released today, for instance, sees US crude oil production ending the year 0.9 million barrels per day (MMbpd) above the end of 2021 and shale picking up where OPEC+ production normalization drops off in 2023: 1.32 (more than three-quarters, chart below) of the 1.71 MMbpd of global liquids production growth is expected to come from US wells.

So, how do we square this circle?

Hooked on shale

First and foremost, the oil market has come to depend on US shale producers for the lion’s share of incremental global barrels. This is because pre-COVID US shale-driven production was the overwhelmingly dominant source of global supply growth over the past decade, accounting for more than 2 of every 3 incremental barrels produced globally between 2010-2019 (chart above).

Then came COVID-19: US production fell back sharply—as you’d expect from fast-cycle production like shale—but still hasn’t recovered. And now, despite prices rocketing to levels not seen since the 2008 mega-spike, US production growth has remained relatively muted.

Quick note: Definitions are important when discussing oil supply and, from this point forward, I am speaking in terms of crude oil specifically. While US total liquids supply is around 20 million barrels per day, less than two-thirds of that volume is actual crude oil—the rest is primarily natural gas liquids (NGLs) and other liquids (biofuels, refinery gain, etc.), which I’ll dig into in a future post.

In the past year, US crude production growth can be best described as tentative, moving from 11.2 MMbpd in March 2021 to a high of 11.8 MMbpd in November and then back down to 11.3 MMbpd as of this past February. Over the past 13 months of accurate data through February (12 is deceptive given winter storm Uri’s base effect), US crude oil production has grown by a pokey average pace of only 20 kbpd m/m. And production remains 1.7 MMbpd below the pre-COVID peak of 13 MMbpd in November 2019.

We continue to see a barbelling of investment appetite amongst US firms. Larger producers are growing modestly, public independent producers are growing much more slowly, and private producers are ramping up activity quickest of all. What minimal growth we are seeing is concentrated in the Permian basin, which makes up the bulk of the Texas/New Mexico series on the chart above (official basin-level statistics aren’t yet as accurate). Certainly, a broader basin-wide turnaround would be ideal as a base for future growth—but we’ll be watching the Permian basin for the earliest and strongest signs of reacceleration.

Optimism still abounds

Admittedly, forecasting shale output has been extremely tricky in the COVID era, with changing investment behaviour, truly terrible weather, and supply chain bottlenecks tying up everything from people to pipes to proppant (i.e., sand).

The EIA’s recent STEO forecasts have been slightly optimistic relative to where the actual data has landed thus far this year. Similarly, the weekly production estimates (which are modelled, not surveyed like the monthly) undercounted output in late-2021 but are currently overcounting as of the latest known data. While the January STEO initially had US crude output ending 2022 at around 12 MMbpd, the 2022 exit was upgraded to 12.5 MMbpd after the Russian invasion and resultant price spike.

The STEO forecast has been pretty darn good all things considered: while it obviously missed the freeze-off/storm effects, other forecast errors were generally modest. The forecast initially missed the extent of the pullback in early 2020 and then missed on the downside, actually, in 2021 as shale bounced back more quickly than anticipated.

But what are the sources of such optimism… or concern?

DUC yeah

One clear source for optimism: drilling is finally picking up again. Over the past six months the level of drilling activity has continued to climb, now up 30% from November.

However, the number of observed “frac spreads” (i.e., the teams and equipment that do the completions) have remained more-or-less flat since November (up ~3% as of today, with ups and downs in between). In the almost half-year since I last published on US oil production, drilled but incomplete wells (DUCs)—which had already fallen by more than a third from their all-time high in mid-2020—have fallen by a further 20% to their lowest level on record today, with most of the remaining wells being old, uneconomic, and unlikely to ever be completed.

In my November piece, I explained that:

Drilled but uncompleted wells are a function of the fact that the US shale production process has two major steps: (1) a well is drilled with a drilling rig and then (2) it is “completed” by a different team (i.e., the actual fracking part) after which it begins to produce marketable crude. When drilling runs ahead of completions as it largely did through 2017-19, the industry accumulates a sizable mountain of this potential production.

This rebalancing of drilling and completion activity is already beginning to shift the focus from drilling capacity to completion capacity, but we’re also clearly running into supply chain bottlenecks throughout the industry.

Supply chain strain

Meanwhile, oilfield service companies are running into a cacophony of supply chain constraints. While I hope to dig into key supply chain constraints in the near future, the most frequently mentioned include labour, tubular steel (i.e., pipe), and sand.  

Oil & gas sector employment in Texas, as an example, remains well below pre-COVID levels (left chart above). Surging average hourly earnings seem to indicate that people aren’t coming back to the sector eagerly, and wages are rising at their fastest pace since the onset of the shale boom (there could be composition effects in the average hourly earnings numbers (e.g., hiring a disproportionate number of higher paid trades), but they’re unlikely to be the be the driving factor here given stories from hiring managers in the field).

Further, there simply isn’t enough pipe for scoped projects. While broader steel prices fell off by nearly half their prior heights before beginning to rise again, the price of oil country tubular goods (i.e., pipe) held its ground and has proceeded to set fresh all-time highs (right chart above).

On top of these, I’ve also seen countless stories about the (un)availability of sand used as proppant in well completions or in-basin trucking capacity to get anything moved—but I couldn’t get my hands on good data, and anecdata suggest that these latter two pinch points have mostly resolved themselves today.

Conclusion

US shale still drives the global oil market—but it doesn’t seem to be going anywhere in a hurry. Despite continued optimism, a rolling series of speedbumps have thus far prevented US producers from gaining real momentum. While a rebound of rigs coupled with a modest easing of some supply chain bottlenecks could potentially facilitate a reacceleration to a growth pace of around 1 MMbpd y/y by the end of December as seen in the latest STEO forecast, even that heady achievement would pale in comparison to normal pre-pandemic growth despite a substantially higher pricing environment.

I recently announced the formal launch of Commodity Context, a new kind of commodity market data and analysis service that delivers numbers, narrative, and nuance straight to your inbox. If you enjoy my research, please consider LIKING this post and upgrading your subscription today—future posts will be limited to paid subscribers beginning in June.