(Public) It's More Like Decline Baby Decline At $50
You can throw out the idea that US shale oil producers will grow if oil averages in the $50s. That's just wishful thinking.
What a world we live in.
When Chris Wright, former CEO of Liberty Energy, became the US Secretary of Energy nominee, the entire energy sector cheered. Finally, someone with actual oil & gas experience as the Secretary of Energy.
But then, reality hits.
In an FT article published last night titled, "Trump’s energy chief says US shale can ‘drill, baby, drill’ at low oil price." Chris Wright claimed that:
The US sector could “absolutely” deliver both lower prices and higher production by “innovating” and driving “efficiency gains”.
But he predicted a period of industry disruption ahead, similar to that experienced by the shale sector during a bruising price war between Opec producers and the shale industry in 2014.
“There were a lot of bankruptcies. There was a lot of disruption, but the end result was far lower costs to produce a barrel of oil,” he said. “We are going to see those same kind of market dynamics now. New supply is going to drive prices down. Companies are going to innovate, drive their prices down and consumers and suppliers will bounce back and forth.”
Huh?
That's a joke, right?
That doesn't sound like someone who has experience in the energy patch. It sounds like someone detached from reality.
Bankruptcy? Innovation? Survival? Consolidation?
US shale producers have gone through every iteration of that since 2014. Do people realize that despite 11 years of an oil bear market, US shale has managed to push US crude oil production to ~13 million b/d?
Do people realize that outside of the Permian, US shale oil production from Bakken and Eagle Ford has failed to pass their previous peak?
Innovation? No, geology is what saved the day first and foremost, and if it wasn't for the Permian, the global oil markets would've been in a steep structural supply deficit already.
And now the Secretary of Energy wants another oil price downturn? Does he realize that US shale crude oil production is all but plateauing and rolling over already (at $70/bbl WTI)?
It certainly feels like I'm screaming into the void here. But I'm not going to argue with policymakers, because they can have wishful thoughts, but reality will differ materially. And in the case of this fairy dust like thinking about US shale oil production growing at $50/bbl, you can throw that analysis straight into the garbage can.
Drill baby drill? More like decline baby decline...
US crude oil production finished 2024 at the weakest growth (excluding 2020 COVID) since the Permian revolution started in 2016.
Using our real-time US crude oil production tracker, US crude oil production is failing to gain any traction:
As we explained at the end of 2024, a weak December has important ramifications on production growth in Q1. Typically, US shale producers backweight their capex programs to have higher production going into year-end. In this case, Q4 production growth was one of the weakest since 2016, which means Q1 growth will be equally weak.
In addition, weather-related events forced US oil production lower in January and February. The end result is a lack of growth to start 2025, which is already contradictory to the "drill baby drill" narrative.
To make matters worse, here's our sensitivity analysis forecast for the various oil prices:
$65/bbl WTI average: -350k b/d y-o-y, US crude oil production will fall to ~12.9 million b/d with an exit close to ~12.65 million b/d (-550k b/d exit-to-exit).
$60/bbl WTI average: -600k b/d y-o-y, US crude oil production will fall to 12.65 million b/d with an exit close to 12.4 million b/d (-800k b/d exit-to-exit).
$50/bbl WTI average: -1.1 million b/d y-o-y, US crude oil production will fall to 12.05 million b/d with an exit close to 11.9 million b/d (-1.3 million b/d exit-to-exit).
In essence, we are already at the oil price where we will see US shale oil production start to falter. For every $5/bbl decline, we expect -250k b/d of production loss on average. Exit-to-exit production profile worsens as the moment producers start to cut capex, production in the backend parabolically declines.
Innovation this time around won't bail out the US shale oil producers. It wasn't innovation that saved producers from the COVID downturn. It was drilling the tier 1 wells at dramatically reduced servicing costs that eventually saved the day. Not to mention the scale of the production shut-ins we saw in April and May coupled with the oil hedges in place that saved US shale producers' balance sheets. But never mind facts, because Chris Wright "believes" that US shale can do it again...
The reality is that if WTI falls into the $50s, US shale will go into survival mode. Producers are barely generating enough free cash flow at $70/bbl WTI to fund dividends and capex. At $50/bbl WTI, even the most cost-efficient producers like Diamondback Energy will generate no free cash flow.
Now extrapolate that across the entire US shale sector and you quickly realize how fast the tone will change from drill baby drill to decline baby decline.
What if?
Let's just entertain this scenario for a bit: what if WTI declines to $50/bbl and stays there for a year? What's next?
Well, US crude oil production would reach ~12 million b/d, and associated gas production would fall by 2.5 to 3 Bcf/d.
The decline in associated gas production would all but guarantee a natural gas price spike in 2026. If oil does drop, you want to be irresponsibly long natural gas.
But it won't just be US shale oil producers that suffer. Canadian oil producers would also push production lower. In aggregate, we expect Canada to lose ~500 to ~600k b/d.
In total, between both the US and Canada, the combined supply loss would be ~1.8 to ~1.9 million b/d at $50/bbl WTI.
In essence, the only way to justify a price fall that steep would be for global oil demand to drop by just as much.
Conclusion
It's easy to spew nonsense and it's another when you have to face the data and reality. In the case of US crude oil production, the narrative of drill baby drill is just unrealistic. It was unrealistic at $70/bbl and it's delusional at $50/bbl. What's more likely than not is for US shale production growth to be so weak as to change it from drill baby drill to decline baby decline.
We think the latter has a higher chance of happening at $50/bbl than the wishful thinking from Chris Wright.
Analyst's Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours.