The history of the oil and gas business in the United States is that every time the “experts” all line up to declare it to be dead, it finds a way to come roaring back. This scenario has played itself out at least half a dozen times across my own 42-year career in the business or writing about it.
Well, guess what: It appears to be happening again. I was about to say that it appears to be about to happen again, but the truth is that the domestic oil and gas industry has already staged a significant comeback from the depths of its COVID-19-induced depression last summer. Take the Enverus Daily Rig Count as an example: On September 1, 2020, that metric showed the number of active drilling rigs in the U.S. sat at just 276 rigs, depressingly near its all-time low. As of today, that number has risen to 460 active and working rigs, a 2/3rds increase in just six months.
As well, the Primary Vision count of active U.S. frac spreads had recovered all the way to 175 as of February 12, more than double the count of just 85 as of August 28 of last year. That count fell all the way to just 41 active spreads during the disastrous arctic freeze event that struck Texas, Oklahoma and other shale states in mid-February, but had recovered back to 140 as of the last available count on February 26.
Granted, these rig and frac spread numbers remain well below the highs of late 2019/early 2020, but they still represent a remarkable turnaround from the depths of the depression in just half a year. This becomes especially impressive when one considers that it has been achieved amid continuing mediocre financial results from big shale producers and ongoing tightness in the financial markets related to the funding of major shale-related projects in the U.S.
While those financial factors continue to place pressure on corporate producers to focus on cutting costs and elevating investor returns, as we have discussed several times in the past, the natural inertia within companies that are still run by engineers and geo-scientists – rather than investment bankers and accountants, as so many are now – is still to drill more wells. Healthier commodity prices only serve to magnify that natural internal inertia.
We certainly do have healthier commodity prices now. Goldman Sachs GS -0.6%, one of the bellwethers for those who like to pay attention to future oil price forecasts, recently raised its forecast for the mid-year West Texas Intermediate price to $72 per barrel. It is key to note that that increased estimate was published on February 22, well before the OPEC+ group surprised markets on Thursday by agreeing to essentially maintain its status quo on current production and export levels through the end of April.
Given that that announcement has already resulted in an increase of 10% in the price for WTI as of this writing Friday morning, Goldman and other price forecasters could have another increased estimate for WTI coming in the near future. In fact, Goldman Sachs raised its projection for 3rd quarter, 2021 Brent prices to $80 on Friday morning. “Key will be the potential shale supply response, although the latest earnings season suggests investors are still a long way away from rewarding growth,” the bank said. It simultaneously raised its forecast for 2022 U.S. shale production by 300,000 barrels per day.
Interestingly, Goldman Sachs also forecasts the Brent price to remain at a very robust level – $75 per barrel – through the end of 2022. Given the current low differential between Brent and WTI of just $3 per barrel, that would indicate a WTI price of $72 through the start of 2023.
Let’s all remember that the U.S. shale industry boomed like never before throughout 2018 and 2019, a time during which WTI traded in a range of $53 to no higher than $72 per barrel. While it is true that the financing market for new shale projects remains tight, it is also true that shale producers who have spent the last two years heavily-focused on cutting costs, increasing efficiencies and deploying improved technologies are now able to present a far more attractive profile to potential investors than they could in 2018. That’s what a depression will do to the companies that manage to live through it.
Another factor to keep in mind is that corporations aren’t the only significant players involved in the shale equation. In fact, Bloomberg recently reported that, as of December, privately held companies like DoublePoint Energy and Mewburne Oil Co. were running half of the active drilling rigs in the Permian Basin. Companies like these have different internal drivers and less pressures coming from ESG-focused investors than corporations, and thus present something of a wild card for those attempting to predict where overall U.S. production might head in the coming months.
The U.S. Energy Information Administration (EIA) reports that domestic oil production for December was roughly 11.06 million barrels of oil per day, about 1.8 million barrels below the peak seen in November, 2019. It is interesting to note that the domestic industry was able to hold production levels relatively stable throughout the second half of 2020 despite running a very low number of active drilling rigs.
The various elements of the U.S. oil industry outlook equation all still revolve around the central element of ‘what will OPEC+ do?’ Or, as Goldman analyst Damien Courvalin put it, “We were already bullish [on] oil prices because we expected OPEC’s conservative demand expectations to leave its ramp-up lagging our above consensus demand forecasts.”
Bottom line: Given that caveat assuming that the current discipline of the OPEC+ group continues to hold together for the coming two year time frame, the domestic oil and gas business is likely headed for another boom time. It will probably be more modest than the last boom, given the more disciplined outlook of the corporate players, but a boom it will most likely be.
