Energy Report: Shale Left Out

In recent years, oil price spikes, that were potentially harmful to the global economy, were thwarted by U.S. shale producers. Yet for a multitude of reasons, this time the global economy might not be so lucky. The Biden administration attacks on energy are drying up investment in the shale patch and while oil rig counts are rising, they are not moving fast enough to fill the coming supply gap. With the lag time to bring on production and the massive retracement in global supply, the oil markets are screaming for more production. Saudi Arabia is going to drastically cut production. This move by the Saudis will go unchallenged by the Biden administration because they favor higher oil and gasoline prices. Biden needs oil and gasoline to be so expensive so alternative fuels have a shot to compete. 

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John Kemp at Reuters also is warning about a supply squeeze. He points out that global petroleum stocks have fallen by almost 600 million barrels since May 2020, after rising by over 1.2 billion barrels in the previous five months as a result of the epidemic and lockdowns. He says that stocks are expected to decline by a further 140 million barrels over the rest of the year, according to estimates prepared last month by the U.S. Energy Information Administration. Kemp reports that inventories are likely to end 2021 several hundred million barrels above the level at the end of 2019 before coronavirus struck, but that was a relatively tight baseline against which to measure stock levels. Kemp says that the expected production shortfall in the rest of this year and inventory drawdown, has already been reflected in the sharp rise in front-month futures prices and the shift in calendar spreads into a significant backwardation. Kemp warns that the rapid escalation in spot prices and tightening in spreads is consistent with a market climb towards a cyclical peak and signaling the need for more output to relieve expected future shortfalls.

More than likely we will see the production by OPEC increase when they feel that they can extract the most money out of the global economy without tipping it into a major recession. They will not have to fear a checkmate by U.S. shale as more restrictive policies will allow OPEC Plus to regain market share that was lost to us over the last few years.

Shale of course has had other issues than the Biden administration climate agenda. The covid crash in demand showed that the industry did not control costs in the quest to raise output and cash flow. Tsvetana Paraskova of OIL PRICE writes, ”U.S. oil companies are a motley bunch of large publicly traded corporations and small privately held firms are not making the industry’s pitch to regain investor confidence easier, either. The bigger listed firms continue to vow discipline and sustainable production growth, while some private companies are set to continue outspending cash flows to boost production at these higher oil prices. Considering that U.S. producers are not a coordinated bunch of market players like OPEC, investors are only cautiously optimistic that the 2020 downturn may have resulted in a lasting strategic reset of priorities for the shale patch. Investors want to believe that this time profitability, not production, will inform spending decisions at most companies. The industry, for its part, wants to convince the market that it has finally learned its lesson and has a way to win investors over again. Investors and the market have not rewarded U.S. shale for its record production growth in recent years, and they will punish the stocks again if they do not ‘see the money."

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