New technology is fueling another US shale boom

US shale majors are revising their production guidance for the year as efficiencies help them produce more oil at the same or lower cost. Analysts are already talking about oversupply as a result of these efficiencies.

Reuters reported This month, several major shale oil producers had announced revised production figures for 2024 during their second-quarter earnings calls. Companies include Diamondback Energy, APA Corp, Devon Energy, Occidental and supermajors Chevron and Exxon. All of these companies and others reporting higher production this year cite increased efficiency as the reason. It seems like it’s only a matter of time before these efficiency gains cause prices to drop.

Following production revisions by shale leaders, Macquarie Group forecast US oil output to gain half a million barrels a day this year. That’s higher than EIA estimates for a production increase of 300,000 barrels per day, which would be a significant slowdown from last year’s production increase of about one million barrels per day, again due to increased drilling efficiency.

These gains that everyone is talking about include longer well sides, fitting more wells into a single rig, and artificial intelligence: Oil producers are using artificial intelligence to improve shale drilling and increase well recovery rates fractured.

Increasing efficiency is what drove the original shale revolution, but it also proved a trap for the industry at the time: everyone was so excited to see how much oil they could get out of the ground that they forgot about things like demand and prices. The result was that they overproduced and suffered a drop in prices.

This time, the industry is less likely to fall into this trap. It has learned a lot of lessons from recent industry cycles, with price sensitivity to any major shale production increases one of the most important. Most shale drillers have also rearranged their strategic priorities, often under pressure from investors, to focus on the bottom line rather than the production figure.

What is perhaps interesting about the current US shale situation is that this higher-than-previously-expected production increase comes amid a decline in global inventories. That’s a pretty substantial drop and should have wiped out any knock-on effect the US shale production numbers might have had on international prices. He didn’t do it though. Because everyone focuses on economic indicators.

Global oil inventories have fallen since the start of the year, standing 120 million barrels below their 10-year average at the end of June, Reuters’ John Kemp said. reported at the beginning of this month. The figure compared with a shortfall of 74 million barrels just three months earlier, the market analyst noted. This means that over the course of three months, global oil stocks have lost 46 million barrels.

Kemp also noted, however, that this has gone unnoticed by traders who remain fixated on the Chinese economic data they use as a proxy for oil demand and its outlook – which is bearish, based on this data. In the US, crude inventories also fell, standing 11 million barrels below the 10-year average in early August, down from 4 million barrels below the 10-year average at the end of June.

So stocks are down, significantly, but with reports from shale that drillers are pumping more oil for the same money, chances are that prices will be pressured – even if a true oversupply situation is unlikely. It is somewhat paradoxical, but rather typical of the oil market, where most focus on the hot news and miss everything else until it becomes impossible to miss.

How the state of global oil stocks will develop remains to be seen, but if recent changes are any indication, global crude oil demand remains quite robust regardless of China’s monthly PMI readings and consumer prices. That means U.S. shale drillers have room to expand production-wise without worrying about oil prices and where they would go, basically. The demand is there, so bring the offer.

On the other hand, as mentioned, traders don’t care much about fundamentals these days until the fundamentals slap them in the face with a deficit and prices go up. And that, in turn, means that news that shale drillers are producing more oil with less effort would limit any potential upside for oil prices and possibly even pressure them in the event of negative economic news. But this is short term.

Longer term, there’s a chance that the fundamentals will start to gain more attention – especially if the energy transition continues to fail at the same rate, with electric vehicle sales slowing and falling for good, proving that predictions of oil demand destruction from the electrification of transportation are wrong. wrong. . If that happens, shale drillers would be the big winners – they’ve already learned to do more with less, so all they have to do is enjoy the benefits of this amid continued solid oil demand.

By Irina Slav for Oilprice.com

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