With Gulf Oil Down, Shale Oil Producers Consider More Output

Oil closed at a 6-week high yesterday amid continued Gulf Coast oil production shut-ins and Hurricane Nicholas, which made landfall last night in Houston as a Category 1 storm. The Colonial Pipeline, which supplies most of the East Coast’s fuel, shut this morning as a precaution due to power outages. Given the vast number of refineries in and around the Texas coast, any storms in the area can spook the market and cause prices to leap higher; the question is how long that pricing effect will last.

With so many hurricane-induced outages for offshore producers, US shale companies are beginning to question whether new drilling activity may be justified. According to a Reuters report, existing wells are beginning to see diminishing returns. Shale oil wells are notorious for having short lifespans, lasting only a year or two before volume falls quickly.  According to the EIA, the Permian oil field, America’s most prolific oil-producing zone, will run out of pre-drilled wells (called “DUCs” or “Drilled but UnCompleted” wells) within the next six months.

Since cutting activity during COVID, many shale companies in the Permian and elsewhere have focused on DUCs rather than drilling new ones to sustain output. Their investors prefer this approach since less drilling reduces expenses and allows more revenue to flow to the bottom line. Shale companies must now choose between pleasing investors and maintaining their output levels. It’s a tough decision for producers, especially since oil prices have been fragile and could drop if they significantly ramp up drilling activity.

US shale production will be an important metric to watch. Current high prices are predicated on supply shortages in Q4, which OPEC+ has been slow to address. If the US increases its oil output and once again takes its spot as swing producer, prices could begin tumbling lower. In the past, shale producers have continued increasing production anytime oil rises above $55 – so it’s possible we could see US oil companies send prices tumbling to 2016-18 levels.