Big Money For Big Oil

October 26, 2021 08:30 AM
Oil shortages are lining the pockets of big oil companies
China is bowing out of the COP26 summit in Glasgow
Shale producers are making money again
The Energy Report

The Energy Report

The Phil Flynn Energy Report 

Shutting Down Big Oil

Saudi Arabia is warning that global oil spare production capacity is waning and “big oil” is crying all the way to the bank. The green new deal is making big oil big money as it drives shortages of oil and forces prices to multi-year highs. Money is being sucked out of the hands of consumers and is enriching OPEC and Russia, not to mention the trillions of dollars in tax subsidies that will go to green energy around the globe making green energy lobbyists smile. 

China, the world's biggest polluter, will take a pass on the much-ballyhooed COP26 climate summit in Glasgow as the world waits in eager anticipation as to whether or not we will have another adolescent scream at world leaders. Very exciting. China, at this point, has more interest in keeping the lights on and people from freezing due to coal shortages than they do in saving the planet.

In the meantime, the oil market may take a break from this epic rally as some hope that Iran might rejoin nuclear talks just after the U.S. accused them of a drone attack on a base in Syria housing American forces. So oil may be a little ahead of itself and due for a bit of a break, but the fundamental outlook continues to be very bullish.

Shale oil producers are making money again. Reuters reports that "Sky-high oil and gas prices will fill energy companies' bottom line, rewarding investors who hung on through the pandemic.” U.S. crude averaged roughly $71 a barrel, almost 80% higher than year-ago levels, and natural gas sold for over $5 per million British Thermal Units (mmBTU), a price not seen since 2014. 

This week, the biggest oil and gas producers kick off results with reports from EQT Corp (EQT.N) and Hess Corp (HES.N). Continental Resources (CLR.N), Pioneer Natural Resources (PXD.N), and EOG Resources (EOG.N) will report the week after.

The crude oil market sold off after it was announced that Iran would engage in talks that could lead to more conversations about rejoining the Iranian nuclear accord. The AP reported that "the top U.S. envoy to Iran, Robert Malley warned on Monday that efforts to resume compliance with the 2015 Iran nuclear deal were now in a 'critical phase,’ saying Tehran's reasons for not resuming talks were wearing thin.” 

Speaking to reporters in a phone briefing, Malley said while Washington was increasingly worried that Tehran would keep delaying its return to talks, it also had other tools to keep Iran from getting a nuclear weapon and would use them if need be.

Bloomberg News reported that Saudi Aramco said oil-output capacity worldwide is dropping quickly, and companies need to invest more in production. It’s a “huge concern,” Chief Executive Officer Amin Nasser said in an interview in Riyadh, Saudi Arabia’s capital. “The spare capacity is shrinking.”

While shale is making more money in the US, it might not be able to keep up with demand, with a tougher regulatory environment and lack of incentive to invest for the long term. As a result, the U.S. will continue to be more dependent on foreign oil. 

Mark Finley from the Baker Institute writes that "a key tactic used by the industry to weather the COVID-driven downturn: sharply cutting drilling, yet sustaining production by dramatically reducing the inventory of drilled-but-uncompleted wells (or DUCs).”

Based on the latest data from EIA, the withdrawal of DUCs in oil-focused plays continues, allowing the industry to continue bringing new wells into production without bearing the cost of drilling those wells. The reduction in DUCs last month was equivalent to boosting the oil-focused rig count by over 40%. That is, it’s as if nearly 500 rigs were working rather than the roughly 350 that EIA counted in its latest monthly Drilling Productivity Report.  

Based on that estimate,  DUCs inventory has contributed over 1 million bpd of new products since the onset of the COVID pandemic. That is, if U.S. oil production in these plays had been driven only by new wells drilled & completed—with no change in the DUCs inventory—U.S. production today would be more than 1 Mb/d lower. The industry will need to significantly boost new drilling to replace the production impact currently provided by drawing down DUCs as the inventory of DUCs is depleted. Even with the domestic rig count rising robustly, this represents a potential headwind for U.S. production in the months ahead.

Mark is exactly right, and others that I talk to in the industry agree. The U.S. is going to struggle to keep oil production where it is. Things like pipeline cancelations and drilling moratoriums that some said would have little impact on price have much deeper and long-lasting implications.

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About the Author

Phil Flynn is a senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. Phil is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets.