Shale executives have gone to great lengths to convince investors that they will not drill aggressively now that oil prices have rallied into the $60s. But in a new report released on Tuesday, the EIA essentially said that those assurances are just a lot of hot air.
The EIA’s Short-Term Energy Outlook predicted that U.S. oil production would top 11 million barrels per day (mb/d) this year. Last month, the agency said that the U.S. wouldn’t hit that threshold until November 2019.
The revision from just a few weeks ago is dramatic. In January the EIA estimated that the U.S. would surpass 10 mb/d at some point in February. But recently published data shows that the U.S. actually hit that milestone last November, and now, the agency says the U.S. actually averaged 10.2 mb/d in January.
On an annual basis, the U.S. produced 9.3 mb/d last year, a figure that is set to jump to 10.6 mb/d for 2018. Things slow down a bit in 2019, with an average of 11.2 mb/d.
What do we make of all of this? Well, the shale industry is clearly drilling at a frenzied pace, with an increasing concentration in the Permian basin. The rig count continues to rise in the Permian, while remaining mostly flat elsewhere. So far, the Permian has shown no signs of slowing down, despite some evidence of bottlenecking and cost inflation. Production continues to rise at a scorching rate.
The big question at this point is how rapidly expanding shale production will interact with the pace of inventory builds/declines and the OPEC production limits. Some analysts, including Goldman Sachs and S&P Global Platts, recently raised the prospect of OPEC tightening the oil market too much, allowing inventories to drain well below the five-year average.
The massive upward revision in shale production from the EIA might dampen those concerns. The EIA says that inventories will build by an average of 0.2 mb/d over the course of 2018 and 2019, and the agency predicts Brent will average just $62 per barrel this year.
Meanwhile, global financial turmoil is testing oil prices. WTI and Brent have retreated from recent highs over the last few trading days, dragged down by the global selloff. The enormous build up in bullish bets from hedge funds and other money managers presents a deeper downside risk.
But Goldman Sachs shrugged off the instability, and reiterated its bullish case for commodities for this year. In fact, the selloff increases the odds of more gains in the months ahead, Goldman analysts argue. “Commodities proved to work just as advertised” during the sudden selloff in equities, Jeffrey Currie, the bank’s head of commodities research, said in a Bloomberg Television interview. “In fact, you saw base metals and gold trade up as the equity market went down.”
“Historically, when you look at commodities they perform very well during rate-hiking cycles,” Currie said. “Oil’s what we called backwardated, where spot prices sit above forward prices, so you buy at a discount and roll up the curve. In other words, it pays you to be long.” The investment bank says there is no reason to abandon the bullish case for commodities for this year. Goldman predicts Brent will top $82 per barrel within six months.
If that is the case, then surely the shale industry will accelerate drilling. After all, the EIA sees the industry adding upwards of 1 mb/d between January and December.
Still, it might be too soon to tell if shale drillers are going to abandon those claims of restraint. Goldman Sachs said in a research note that the most recent spending plans and guidance published by a select few shale drillers does not necessarily point to a drill-at-all-costs mentality. Goldman looked at 8 shale companies that released specifics, and the capex and production estimates from those companies are about equal to consensus estimates. In other words, the recent rally in oil prices has not significantly altered the approach of the shale industry for 2018, at least not yet.
The EIA’s latest prediction, however, assumes the shale industry throws caution to the wind. The U.S. could hit 11 mb/d in 2018, a full year earlier than previously expected.
By Nick Cunningham of Oilprice.com