The U.S. shale industry’s sizzling growth rate likely peaked last year, according to a survey of major forecasters, cooled by investors demanding financial returns over increased oil output.
Around 1.3 million barrels per day (bbl/d) of new U.S. shale oil production should hit the market this year, down from around 1.5 million new bbl/d that arrived in 2018, according to the average of recent forecasts from four energy research firms and the U.S. government.
U.S. producers hit a monthly record of 12.16 million bbl/d in April, the latest available data, continuing a string of record levels driven by advances in oil-well design and drilling.
Slower shale growth could allow OPEC and allies, which have been cutting 1.2 million bbl/d since January to avoid an oil glut, to avoid deepening their cuts when they meet this week. But it also piles pressure on struggling oilfield services firms hoping shale producers expand their drilling budgets.
__________________________________________________________________________________________________
RELATED:
“Peak Oil Demand” featured in the July 2019 issue of Oil and Gas Investor
Upward Bound: Will US Shale Live Up To Production Expectations?
Analysts: Oilfield Service Growth “Muted” Into 2020
__________________________________________________________________________________________________
Shale's rapid growth over the last decade has redrawn trade flows and driven OPEC to curb output to prop up prices. OPEC ministers are expected to continue the present output cuts when they meet on July 2.
Most of the increased output comes from the Permian Basin in West Texas and New Mexico, the top U.S. shale field. The Permian boom reversed a decades-long decline in U.S. oil output and drove the country to become the world's top oil producer in 2018, topping Saudi Arabia and Russia.
Last year's 1.5 million bbl/d shale increase was an unexpected inflection point, far outstripping forecasts, which boosted overall production to an average 11 million bbl/d. The jump depressed global prices late last year while lifting U.S. exports to a record 3.8 million bbl/d in June.
Ample supplies and investor demand to curb spending on new production has hurt shale suppliers. Pricing for oilfield services will remain "under stress," according to credit rating firm Moody’s Investors Service.
A wave of producer and service-company reorganizations is likely to start in late summer, said bankruptcy attorney Matthew Cavenaugh of law firm Jackson Walker.
Volatile oil pricing, investors shunning equity issues and a shift away from asset-based lending is forcing shale companies to live on operating cash flow. Just seven out of 29 shale producers generated more money through operations than they spent on drilling and shareholder payouts last year.
No publicly traded exploration and production companies has issued shares this year and bond market issuance for those firms is headed to a decade-low in offerings, said Brian Lidsky, a senior director at researcher Drillinginfo.
"It’s a new paradigm" following a decade of easy capital, Lidsky said, adding that a slowing growth rate "does help the global oil supply-demand balance. It does help support prices."
The number of rigs drilling for oil, an indicator of future output, fell in June to the lowest level in 16 months as shale firms trimmed drilling budgets.
Producers were "spooked" by the $34 a barrel drop in oil futures between October and December, said Matt Lewis, director at East Daley Capital Advisors, piling pressure on them to limit drilling expenditures to within cash flow from operations.
A recent rebound in oil prices is unlikely to spur more drilling. "Oil is stuck in upper $50s," said Reed Olmstead, researcher director at IHS Markit. "It clamps down on how much more these operators can grow."
But even at a less blistering growth pace, the U.S. could exit this year pumping more than 13 million bbl/d, another all-time high, growing to 14 million bbl/d next year, according to IHS.
The U.S. will continue to drive global oil supplies over the next five years, adding 4 million bbl/d, peaking no sooner than 2025, researchers project. The U.S. Energy Information Agency estimates shale output could rise into the mid-2030s, but never again at last year's pace.