As oil prices soar, U.S. shale, OPEC in no rush to resume price war -Breaking
By Liz Hampton
(Reuters) – The U.S. shale oil producers and OPEC were engaged in a price war not too long ago. This week, they found themselves on the same side as oil prices rose well beyond $100 a barrel. There is no urgency to increase production.
OPEC began to flood the market with crude oil less than a decade back in an effort to push out U.S. producers. However, they were experiencing a surge in production due hydraulic fracturing improvements that led the so-called “shale explosion.”
On Monday, the two sides met at an oil conference held in Houston. The U.S. producers gave Mohammad Barkindo, Secretary General of OPEC, a bottle marked “Genuine Barnett Shale”, which is from the same oilfield that sparked the shale revolution.
Barkindo displayed the memento proudly as he left that meeting which featured executives from Hess Corp (NYSE :), EQT Corp (NYSE 🙂 and Chesapeake Energy (NYSE :). The annual dinners were started by OPEC in 2017 as a way to understand the rivals.
Drillers worry that while high oil prices could boost profit for both OPEC members and U.S. producers, they may also be able to reduce demand if there is a push by governments to expand alternative energy. Both parties worry that massive new drilling projects will only produce oil after the crisis is over.
Chesapeake CEO Domenic Dell’Osso spoke out in an interview, stating that the company doesn’t like to try and chase up prices in the short-term, which would make the run-up ineffective.
He said that shale had been able to increase production but prices fell and “we have destroyed much of shareholder value” and didn’t help the problem.
Russia’s oil ministry, who is an regular participant at such gatherings, was absent from the meeting of oil barons. Moscow’s incursion in Ukraine has caused global buyers to avoid Russia’s cargoes, fearing sanctions.
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Oil prices have risen by 30% over the last year. U.S. diesel has reached its highest level since 2014. Fuel shortages in Germany are also increasing. The global benchmark for oil settled at $109/barrel on Thursday. [O/R]
Scott Sheffield, Chief Executive Officer of Pioneer Natural Resources (NYSE): The elder statesman in U.S. shale this week stated that the Biden administration must reach out to OPEC Leader Saudi Arabia to increase production rather than trying for agreements with Iran, Venezuela and other oil producers Washington sanctions.
Biden called for the Organization of the Petroleum Exporting Countries (OPEC+) to increase production more quickly, but the organization and its allies have stuck with a plan that will boost monthly output by 400,000 barrels/day after cutting back on demand during the pandemic.
Sheffield stated to Reuters that Saudi Arabia was needed for assistance. He spoke about the urgent need for Middle East oil. “I prefer him to go in that direction than reach out to Venezuelans and Iranians, asking for more oil,” Sheffield said.
Although he was unable to attend the OPEC dinner this year, he said that he believes that rising oil prices will lead to another decline in demand.
Shareholder pressure is pushing some U.S. producers to buy back shares and pay dividends, rather than spending more on exploration and drilling. Pioneer Natural and other large companies have pledged to limit new production.
Artem Abramovi, Rystad’s head of shale analysis, suggested that this could change. According to him, drillers will find it difficult to resist high-priced shale.
A combined industry response, as well as some luck with navigating supply chains challenges, could result in as much as 1.7million additional bpd for this year’s fiscal year. He said that the goal would lead to unprecedented labor bottlenecks, and additional cost inflation which will be difficult for investors.
The annual dinner is hosted by OPEC state-run oil firms. This was to gain a better understanding of private funding sources that enabled new companies to rise from near bankruptcy and resume drilling. Energy bankers and advisers were available to help them keep new market share fights from erupting.
Barkindo stated this week that they had very low expectations at the start of the trip. “We didn’t expect to be accepted by U.S. independences, or even heard from,” he said. As the years went by, dinners became more co-operative.
Both sides had a common interest in stabilizing the prices following 2014-16’s price war. Even more prices crashed when there was a shortage of demand during the 2020 pandemic. According to the Global Exploration Spending Report, global exploration expenditures fell to $51 billion last year. Morgan Stanley (NYSE:) Estimates, same as 2005 even though last year’s oil consumption was 24% more.
Due to declining oil and gas investment, and investors moving capital to alternative fuels, the surplus oil capacity that is available for the world in an immediate emergency is about 2%. Saudi Aramco Amin Nasser, CEO of SE:, said that this week.
Six months after oil reached $120 per barrel earlier this month it was in a recession. JPMorgan (NYSE) estimates that each 10% rise in oil prices will result in consumers spending $23 billion.
Vicki Hollub (NYSE: Occidental Petroleum) CEO this week stated that no one anticipated the need for significant growth this year. According to Hollub, companies that have not prepared for increased production can’t now pump any more if they don’t plan.
Output gains are also being affected by shortages of essential equipment and supplies. Costs are also rising due to a shortage of labor.
It would take several months to get a brand new rig. Service providers would also need to hire new workers to maintain that rig. According to Chesapeake’s Dell’Osso, labor is extremely scarce in the oilfield.