Oil and gas drilling in the U.S. shale patch is slowing down. Rig counts have been falling for weeks, and the latest Dallas Fed Energy Survey also showed that activity is weakening.
Some say this would lead to supply shrinkage, which would push prices higher. Others remain cautious as they watch where demand is going, suspecting it will remain weak, keeping prices where they are. “It is hard to be in the production business these days.”
The above quote is part of a comment made by a respondent to the Dallas Fed survey. That same respondent summed up the main challenges that the U.S. oil and gas industry is facing right now as follows: “The state regulatory environment is worsening. Costs continue to increase just to do business. Insurance companies are leaving the business.”
Indeed, it seems tough to be in the production business these days, and those who are in the business nevertheless are taking measures to ensure they stay in business. That production growth is not among the top priorities has already become firmly established. But it’s not only production growth. Drillers are actually curbing drilling activity.
“We’re a short term away from seeing the market tighten even further. We are more constructive on where oil prices could go.” This is what the chief operating officer of EOG Resources, Lloyd Helms, said at a recent industry event hosted by JP Morgan, as quoted by Reuters.
Oil and gas drilling activity in the United States has been in decline for seven weeks in a row, according to the weekly reports of Baker Hughes. Reuters notes this is the lowest since April 2022.
Naturally, when drilling activity tightens, it is reasonable to expect tighter supply as well, which should affect prices in a positive way. Unless demand is weak as well, which makes the situation more complicated than usual.
“Saudi Arabia’s recent production cut of 1 million barrels per day planned for July and the similar cut in May have failed to lift oil prices. In my view this is signaling weak worldwide recessionary demand,” one of the Dallas Fed Energy Survey respondents said.
He added that “U.S. expected growth this year of around 1.2 percent signals slow domestic demand, on top of an expected daily domestic production increase of about 600,000 barrels at year end to 12.75 million barrels per day. These expectations point to continued pressure on West Texas Intermediate posted prices.”
China’s demand is in focus, of course, but there is no certainty where it will go at all for the remainder of the year, even though it has been rising steadily and breaking records so far this year. It appears this is insufficient to convince energy executives that there are brighter days ahead for oil prices.
This is because all eyes are on central banks and especially on the Federal Reserve, which has been trying for months to manage an inflation surge that was first dubbed transitory, then admitted to be a problem, and only then addressed.
In his latest update, Fed’s Jerome Powell said that the bank planned at least two more rate hikes until the end of the year. Further rate hikes would affect oil and gas industry costs, and they would affect demand because of the positive effect hikes have on the dollar and the negative effect they have on consumer spending.
It’s not only the Fed, either. On Thursday this week, oil prices slumped by 4% after the Bank of England hiked rates by 50 basis points, which was higher than expected. The surprising size of the hike ignited immediate concern about fuel demand in the country and the outlook for the economy as a whole since this is the 13th rate hike in a row that the BoE is implementing.
“We’re locked in a trading range but prices are held back by the concerns about the economy, the larger economy,” an analyst from Price Futures Group told Reuters.
“We are still globally underinvesting to keep oil production at current levels, while demand continues to increase, with upside in China,” one Dallas Fed survey respondent said, summing the situation up.
“These fundamentals are constructive for oil prices. However, central banks are the main player in how inflation and interest rates are moderating and if we have a U.S. recession, and for how long—that is the uncertainty hanging over the commodity market and capital markets.”
There is also the regulatory environment issue in the United States, with a federal government that is openly backing alternative energy sources, prioritizing them over oil and gas in a pretty categorical way. This further saps any plans to produce more oil and gas in the future.
All in all, then, the supply situation in oil should be of concern, with OPEC’s latest cuts and U.S. drillers’ caution. Yet the demand situation is also concerning because of the persistent recession fears fuelled by central banks’ monetary policies.
