The Fuse

From High to Low: Could U.S. Shale Production Stall in 2020?

by Gregory Brew | March 02, 2020

Oil production in the U.S. hit a major milestone in 2019.

According to new data from the EIA, total crude output increased by 11 percent and surpassed 12 million barrels per day (Mbd). Average monthly output was 12.86 Mbd, the highest level ever achieved since the U.S. began producing oil in the 1860s.

Fueling the increase was the runaway production in the state of Texas, which now produces over 5 Mbd. Output in Texas is dominated by unconventional crude from tight rock formations, utilizing horizontal drilling and hydraulic fracturing.

There’s no question that U.S. crude oil production is booming. The question now is: how long will it last?

The EIA expects U.S. output to keep rising. The Short-Term Energy Outlook predicts an increase to 13.2 Mbd in 2020, reflecting growth of about 500,000 bpd. National output will rise again in 2021 to 13.6 Mbd, growing by 400,000 bpd, before tapering off somewhat in 2022.

U.S. shale growth could slow this year, potentially plateauing after years of rampant expansion.

But the short-term demand shock from coronavirus, fears of an economic slowdown, and mounting concerns of profitability in the U.S. oil patch might dent American production in 2020. Should OPEC open the taps and end its program of production cuts, U.S. shale growth could slow this year, potentially plateauing after years of rampant expansion.

Before fears of coronavirus took a bite out of oil prices and sent the stock market plunging, concerns were building over the near-term viability of U.S. shale.

In the final months of 2019, bankruptcies swept the industry, as more smaller companies struggled to stay afloat amidst the persistent supply glut and low prices. The rig count fell for 12 months straight. In early 2020, Baker Hughes reported 790 rigs at work in the US, down 248 from early 2019.

With prices below $60 for most of 2019, the S&P 500 Energy index grew by less than 10 percent in 2019. Shale producers sat on $200 billion in debt. Oil majors reported disappointing fourth quarter profits. Analysts in December predicted a slower year for shale, with others wondering if shale had reached the edge of its profitability.

Cut to two months later. The spread of coronavirus brought a shock to the stock market, accompanied by a precipitous decline in major oil prices indices.

In February, China slashed its oil demand forecast. International estimates of the annual oil demand fell across the board. By the month’s end, the concerns over demand turned into a proper rout.

From February 20 to February 28, Brent fell by 15 percent, as prices slid from $58 to $49, before recovering slightly on March 20. Coronavirus has sent tremors through the industry. CERAWeek 2020, the largest energy conference of the year, has been cancelled, as hosts in Houston worry about the disease’s spread.

The S&P 500 Energy index has fallen like a stone. Major U.S energy companies like ExxonMobil have seen stock prices fall to their lowest level in 10 years. Occidental Petroleum is poised to sell off millions of acres in Wyoming as it pays down debt from the $55 billion acquisition of Anadarko Petroleum last year.

Estimates of oil demand grow more bearish by the day, with a growing minority now predicting flat demand growth in 2020, for the first time in 40 years.

Natural gas has driven the fracking revolution. But with prices slipping below $2 per million Btu and markets in Europe saturated—to the point that US LNG shipments are being canceled—gas will be squeezed as well as oil.

The U.S. shale position looks increasingly tenuous.

Amidst it all, the U.S. shale position looks increasingly tenuous. Shale bankruptcies look set to continue, as the industry sags under a crushing debt load made worse by low prices. While the EIA daily energy report gives U.S. producers reason to celebrate, the Drilling Productivity Report from February indicated a slowdown in all fields, apart from the Permian Basin.

Low prices have pushed down upstream investment. That will likely translate into slower supply growth in the future and higher prices. Much of the output growth over the last four years has come from the U.S. shale patch, while the U.S. competition from OPEC has declined due to OPEC production cuts and geopolitically-derived drops in output, from war in Libya to the re-imposition of Iranian sanctions.

Eventually prices should pick back up. But that’s unlikely to happen in 2020. This year could see the dramatic growth of U.S. production slow, and perhaps even stall. While it’s still too early to tell, much will depend on how resilient the domestic sector proves to be against falling demand and global economic instability triggered by the coronavirus outbreak.