Saudi Oil Minister Abdulaziz bin Salman is known for his brand of swagger and humour when conducting business. To send a shiver up the spines of oil bears, he invoked Hollywood tough-guy cop Dirty Harry, telling them to “make my day.”
To let the world know that US shale oil isn’t a threat to OPEC anymore, he said “‘Drill, baby, drill’ is gone forever.”
That might have been pushing it—because just a month after his verdict, the prolific US oil industry is proving the minister wrong.
After producing 11 million barrels per day or below for months, drillers in America were projected to have pumped an additional 100,000 barrels a day in the final week of March, the Energy Information Administration said.
But 11.1 million barrels daily is still nothing for a country that once led the world in producing as many as 13.1 million barrels a day, before the crippling demand destruction from the coronavirus pandemic.
There are more statistics that suggest the once booming industry may be taking a new life.
The US oil rig count, a measure of future production, stood at 337 during the week ended Mar. 26, nearly double from the August record low of 172.
While that’s less than half of the pre-pandemic rig count of 683, it was further proof that the “Drill, baby, drill” phrase associated with the fracking revolution in US shale isn’t “gone forever,” as Abdulaziz triumphantly declared in early March. Not yet at least.
Past Saudi Ministers Also Envisioned End of US Threat to OPEC—To No Avail
Abdulaziz isn’t the first Saudi minister who has envisioned an end to the US oil threat to OPEC—the 13-member Organization of the Petroleum Exporting Countries led by Riyadh, which has morphed in recent years into a larger alliance called OPEC+, after a partnership with 10 other oil producing countries led by Russia.
Before OPEC+ was formed in 2014, then Saudi oil minister Ali Naimi had tried, in a subtle way, to kill off the US industry by turning his kingdom’s spigots all the way up in the hope of creating a crude glut and a resulting price crash that would drive most drillers out of business. He got his wish, but only partly.
By 2015, at least 67 US oil and natural gas companies filed for bankruptcy, a 380% spike from the previous year.
But the US fracking boom didn’t die. It consolidated after shaking off the weakest players in the game, then it began growing again.
The US oil rig count went from a record high of 1,609 rigs in October 2014 to 316 by May 2016. From there, it would spike again, climbing to 873 in January 2019, before the COVID-19-induced crash of 2020.
While Naimi couldn’t extinguish the threat of US oil, it was his reign that ended instead. He was replaced as oil minister in 2015 with Khalid al-Falih. Soft-spoken to a fault, with a fittingly-soft approach, al-Falih lasted barely three years on the job.
Abdulaziz, one of the sons of Saudi King Salman, was appointed to the post in 2019. From Day One, he has made no bones of his wish to ensure US drillers never overproduce to crash the market.
But there are mixed variables that indicate US production could continue growing as dynamically as it has from the lows of the pandemic, or become suppressed along the way.
Abdulaziz may have partial control, at best, over the outcome, or he might not even be able to correctly predict its outcome.
It’s A Complicated Situation
A survey of US energy company executives carried out by the Federal Reserve Bank of Dallas at the end of March, shows how complicated the situation is.
Activity and spending in US oil fields is soaring as the industry recovers from the market carnage caused by COVID-19, according to the optimistic-but-wary executives who responded to the Dallas Fed’s poll.
While improved oil prices have boosted expectations for 2021, the poll’s respondents were also cautious about the potential for devastating policy changes by the Biden administration or being stymied by a crafty OPEC.
One executive quoted by Reuters said:
“While the price increases have been welcome news, OPEC+ is a sword of Damocles: if US operators raise capital expenditures, OPEC+ will open its taps and flood the market. There is a tense detente currently.”
But if OPEC raises its own production first, it will give US drillers a good excuse to hike their own in the spirit of competition.
After one year of output cuts, the enlarged OPEC+ alliance decided last week to pump an additional 350,000 barrels per day in May and June, and a further 400,000 daily in July.
More than half of those polled said they were not hiring more workers due to concerns about President Joseph Biden’s green-energy policies and how intense his White House energy team was in phasing out fossil fuels quickly to achieve a faster transition.
Said another executive quoted by Reuters:
“I believe that it is their goal to effectively shut down our industry, and they will pursue that end with great energy.”
But US oil drillers still have one great thing going for them: oil prices north of $60 per barrel. That might convince shareholders—who’ve forced them into strict cash conservation in order to earn dividends off them—to give them a break.
The survey’s respondents said they did not expect the market to come off too much from its current highs. Some companies even reported a break-even price of $50 per barrel, $1 higher than last year, to drill in the Permian Basin, the top US shale field.
That gives them a premium of almost $10 per barrel—enough to grow production, albeit slower, if not at its March pace.
Disclaimer: Barani Krishnan uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables. He does not hold a position in the commodities and securities he writes about.