Warren Patterson, a commodity strategist at ING, suggests that the recent decline in oil prices is likely to trigger a reduction in drilling operations across the United States.
Hedging Strategies May Offer Short-Term Protection for Some Oil Producers
According to the Dallas Federal Reserve Energy Survey, the average price required for oil producers to profitably drill a new well is approximately US$65 per barrel. With West Texas Intermediate (WTI) crude oil currently trading in the mid-US$50s range, the economic justification for new drilling ventures is significantly diminished. While hedging strategies employed by producers may provide some initial buffer against these lower prices, the prospects for US crude oil supply growth in 2025 and 2026 appear increasingly uncertain. This situation is further compounded by broader macroeconomic concerns, including potential shifts in monetary policy and global demand fluctuations, which add layers of complexity to investment decisions in the energy sector.
The US oil rig count currently stands at 479, reflecting a decrease from its peak of 489 observed at the beginning of April. Data also indicates a downward trend in well completions, as evidenced by a decline in the frac spread count. Moreover, even if drilling activities manage to maintain their current levels, there is no guarantee that this will translate directly into increased production. Producers might opt to postpone the completion of these wells in response to the prevailing low-price environment. Such a strategy would lead to an accumulation of drilled, but uncompleted wells (DUCs), effectively creating an inventory of potential future production that remains untapped until market conditions improve. This strategic holding pattern reflects a cautious approach by producers navigating a volatile market landscape.
A deceleration in the US oil industry also carries implications for the nation’s natural gas supply, considering that a substantial portion of this supply is linked to oil production. This could present a challenge, particularly in light of the anticipated increase in gas demand driven by the expansion of US LNG export capacity. The interplay between reduced oil drilling and rising LNG exports could create a supply-demand imbalance, potentially leading to price volatility in the natural gas market. Furthermore, geopolitical factors and evolving energy policies could exacerbate these dynamics, requiring careful monitoring and strategic planning by industry stakeholders.
