Quiver Quantitative - The surging global demand for oil, compounded by output cuts from giants like Saudi Arabia and Russia, has pushed crude prices to levels unseen since the previous year. This price hike is impacting consumers directly at gas stations, complicating policymakers' endeavors against inflation, and potentially setting the stage for challenges for President Biden in the 2024 elections. However, despite some projections anticipating that oil prices could touch $100 a barrel, U.S. shale companies are showing restraint in drilling more. In particular, the Permian Basin, the nation's most bustling oil field, observed a decline in rigs by about 12% since the end of April, even though U.S. oil prices leaped by around $13 a barrel in that interval.
Many shale companies, instead of ramping up drilling, have committed to returning the profits from these high oil prices to their investors via methods like share buybacks and dividends. Challenges stemming from inflation and elevated interest rates also weigh down their decisions. Exxon Mobil (NYSE:XOM), one of the colossal players in shale drilling, for instance, has dramatically reduced its drilling activity from its pre-pandemic numbers. Instead of increasing drilling, the company aims to extract more oil from existing wells and enhance shareholder payouts.
Chevron (NYSE:CVX), another titan in the industry, while increasing its rig count, is still operating below its pre-pandemic numbers. Their strategy emphasizes restraint, even in the face of escalating prices. Bruce Niemeyer, Chevron’s president of Americas exploration and production, underscores that the past has shown that a hasty pursuit of high prices doesn't always result in profits, hence their ongoing strategy revolves around "discipline". Recent escalations in fuel costs that have pushed consumer prices to grow at unparalleled rates in over a year have received limited comment from the Biden administration concerning oil production.
The U.S., an undeniable force in oil and gas, is predicted by Rystad Energy to achieve a record 13 million barrels a day in production by September. Nevertheless, the journey to recovery post-pandemic for the industry was sluggish. A considerable fraction of this growth was driven by private operators who responded to last year's higher oil prices. However, these smaller entities are now facing challenges like inflated costs of equipment, labor, and steel. Consolidation in the sector has also reduced activity, as larger companies have sidelined the rigs of the smaller ones they acquired. A survey of 55 U.S. oil companies revealed that many would maintain their current activity levels even if oil prices crossed $80 a barrel.
This article was originally published on Quiver Quantitative