Security Concerns in Red Sea Boost U.S. Oil Appeal

Oil production in the Permian Basin is anticipated to increase at a slower rate in 2024 compared to 2023, influenced by consistent oil prices and cautious production strategies among shale producers.
Security issues in the Bab el-Mandeb Strait have led to increased demand for U.S. oil, especially from European markets, as traders seek safer and more cost-effective sources.
Despite reaching physical constraints in horizontal drilling, U.S. shale producers may adjust their production plans based on market demands and oil prices, demonstrating the industry’s adaptability.

Oil production in the Permian Basin this year is set to grow more slowly than in 2023, industry executives with operations in the area have signaled.

The outlook for the Permian may be somewhat surprising after the strong 2023 that the shale oil industry saw. Yet growth was never going to be a linear, upward curve. Especially when prices are stubbornly fixed in place and traders continue to pile into short positions.

Last week, the president of EOG Resources was quite blunt in his expectations. “Bringing on a lot of production last year, you’ve got a steeper decline to offset this next year,” Billy Helms said at an investor event. “That tells you that US production is not going to be able to continue to grow at the pace that it did last year.”

Then, a survey from Jefferies suggested that most independent shale producers were planning to increase their output only modestly this year. More than two-thirds of respondents in the survey said they expected their production this year to grow by 5% or less, Bloomberg reported, with the same percentage planning to either maintain the number of rigs they deploy this year or reduce it.

Now, some would remember that the industry did not have big plans for 2023 either. In fact, some executives, notably Pioneer’s Scott Sheffield, said in late 2022 that most producers could not really afford to boost drilling a lot because they would run out of resources. Yet production last year surprised with a significant increase.

We might well see a repeat of this surprise—but only if prices move higher. Per the Jefferies survey, mot independent operators in the shale patch need West Texas Intermediate to be at or above $70 per barrel to turn in a profit. At the moment, WTI is hovering around this threshold price.

Then, there is the physical constraints aspect. Last year, much of the drilling productivity gains that resulted in the surprisingly strong output growth came from longer laterals in horizontal wells. This year, per Jefferies, drillers are likely to continue pushing the limits of horizontal drilling, although it will be pushed “more modestly” as well lengths reach 10,000 feet and top it.

Demand, meanwhile, continues strong. In fact, it has recently become stronger as the security situation in the Bab el-Mandeb strait, one of the biggest oil chokepoints, remains volatile. A Mizuho Securities analyst said last week that due to the shipping situation in the Red Sea, traders have been buying more U.S. oil.

Amid continued attacks on ships in the Red Sea from Yemen’s Houthis, many shippers are rerouting their vessels. But when it comes to oil, some are switching suppliers, Bob Yawger said this week, as quoted by MarketWatch.

“For the first time since Houthi Yemeni rebels started to attack international shipping in the Red Sea, we are seeing a spike in U.S. exports,” the analyst wrote in a note, adding that “Apparently, international shippers are worried about being attacked on the open sea, and are getting beat” with higher costs for the longer journeys around the Cape of Good Hope. Meanwhile, sourcing oil from the U.S. remains safe and cheap, making it a preferred alternative for some buyers, especially in Europe.

If this demand holds—and it will in Europe, which has few alternatives to U.S. oil—drillers might reconsider their original plans for the year. The likelihood of that happening would increase if the market recognizes the strength of demand and the drilling plans that the majority of U.S. producers have. If there is one thing that U.S. shale is, it’s flexible. Drillers have proven it time and again.

By Irina Slav for Oilprice.com