Potential Of Peak Shale Puts Oil Market On Edge

If Washington is upset about the influence of the OPEC+ cartel over global oil markets, wait a few years – because it will only get worse.

Many analysts are now forecasting that U.S. oil production could peak around 2024, which means the global oil market will have to make do without its most crucial short-cycle “swing” producer to keep up with growing global populations and demand for energy.

It’s a troubling thought.

The theory that global oil demand peaked in 2019 has been thoroughly debunked. Even the most pessimistic forecasters, like the International Energy Agency (IEA), expect it to surpass pre-pandemic levels in 2023. Indeed, despite today’s recessionary pressures, most analysts now do not foresee peak oil demand happening until 2030 at the earliest.

The prospect of another decade of global demand growth, combined with peak U.S. production within two to three years, is hugely concerning.

After all, U.S. supply growth has almost single-handedly met global demand growth in recent years. This year, for instance, the United States will add roughly 500,000 barrels a day for an average total output of 11.75 million daily. According to the federal Energy Information Administration, U.S. producers will tack on another 610,000 barrels a day in 2023 for an average of 12.36 million barrels.

But after that, if respected forecasters like Energy Aspects and Rystad Energy are correct, the U.S. supply growth story will end. That will shift the onus to meet growing global demand to other countries, which historically has run around 1 million barrels a day.

The problem is that there is not much capacity expected to come online in the next decade outside of OPEC stalwarts Saudi Arabia and the United Arab Emirates, which each plan to add about 1 million barrels before 2030.

Yes, non-OPEC producers like Brazil, Guyana, Canada, and Norway will add significant volumes in the coming years. Still, those contributions will be undercut if U.S. production stagnates.

Inside the OPEC+ cartel, Western sanctions have handicapped some of the world’s largest reserves holders, including Iran, Venezuela, and Russia. The IEA expects Russian production to fall by 1.9 million barrels a day by February due to sanctions and EU embargoes.

Together, this will put more market power in the hands of Gulf OPEC members like Saudi Arabia and the UAEUAE
. And let’s face it, recent events, most notably OPEC’s decision to cut its production by 2 million barrels a day despite the world economy being on the brink of recession, show that these countries will put their interests ahead of Washington’s. That means higher oil prices for U.S. consumers.

That is why many experts have warned about the pitfalls of underinvestment in the oil industry in recent years.

So why is U.S. shale growth expected to dry up so soon, even while oil prices remain high?

Investor demands for capital discipline explain much of the underinvestment in new drilling. Investors have been milking the oil sector for cash in the form of dividends and share buybacks for some time. They want cash returns, not growth – and companies that stray from the dividends path see their shares pummeled.

Longer term, there are questions about the economics of shale and the scale and viability of the resource, which increases the breakeven point for projects to deliver both cash returns and production growth.

Forward prices for U.S. benchmark West Texas Intermediate crude — currently hovering around $78 a barrel for next year — would need to rise above $80 to provide sufficient incentive for shale producers to ramp up investment.

Prime drilling land is also disappearing, with only a few counties in Texas’ Permian Basin – the engine of U.S. production growth – offering the so-called “tier 1” acreage that drives profits.

Some shale players have warned about this for years. In 2018, shale pioneer Mark Papa, founder and former CEO of EOG ResourcesEOG
, spoke of “resource exhaustion,” arguing that shale oil would not grow past 2025 because of inventory degradation.

That has since become the consensus view. At the recent Barclays CEO Energy-Power Conference, Pioneer CEO Scott Sheffield said some operators had started drilling in less productive tier 2 and tier 3 acreage.

The shale industry has exhausted much of the best acreage and drilling inventory during the downturn that followed the pandemic.

A drop in oil-well productivity from less prospective acreage could lead to more challenging extraction, higher breakeven costs, and less incremental drilling, making it more difficult for U.S. production to keep growing. That should make any oil market observer skittish about the future.