Oil markets were back on the front foot yesterday after Monday’s wobble. Chinese growth concerns stoked by a recent flurry of disappointing economic data took a breather as prices took their cues from the ongoing energy crunch. Fuel shortages coupled with the prospect of a colder winter than normal cemented fears that countries would struggle to meet increased seasonal demand. All the while, sentiment was also buoyed by a positive session on Wall Street. Solid quarterly earnings lifted major US stock indices as downbeat macro updates were swept under the carpet. A day after US factory data came in worse than expected, US homebuilding unexpectedly fell in September. Permits for future homebuilding also declined amid persistent shortages of inputs and labour.

Brent and WTI approached fresh multi-year peaks but ended off the session highs to finish 75 cts/bbl (85.08) and 52 cts/bbl (82.96) higher, respectively. Both crude markers are a touch softer this morning amid reports of swelling US crude stocks. Overnight, the API reported a forecast-beating 3.3 million bbls increase in US crude stocks last week. Meanwhile, fuel inventories were seen falling by more than expected. Gasoline stockpiles fell by 3.5 million bbls and distillate fuels inventories declined by 3 million bbls.

Shale force

Things are on the up for the US oil patch. US producers are finally restoring production to the levels seen prior to Hurricane Ida. The EIA’s estimate for oil production in the United States for the week ending October 8 rose to an average of 11.4 mbpd, 100,000 bpd shy of pre-Ida levels. All the while, there are growing signs that US shale producers are being spurred into action as US crude prices scramble above $80/bbl for the first time since 2014. According to the latest drilling report, output from the seven major shale formations is expected to rise 76,000 bpd to 8.29 mbpd in the month.

As is the norm, gains will be led by the Permian Basin. Oil production in the largest US shale formation is expected to rise 62,000 bpd to 4.888 mbpd in November. This puts it within striking distance of a record 4.913 mbpd in March 2020, just before the pandemic-driven production shutdown. Crude oil production in the Permian has climbed closer to pre-pandemic levels but this is the exception rather than the rule. The Bakken and Eagle Ford basins, for instance, are each more than 300,000 bpd below their pre-pandemic levels.

Underpinning this growth are increasing rig counts and the drawdown in drilled-but-uncompleted (DUC) wells. The US oil rig count rose last week to 445—a 12-rig increase—the largest oil-rig increase since April. The rig count is now double what it was this time last year although it remains a fraction of its former self. All the while, strong oil prices have compelled producers to work through their backlog of drilled-but-uncompleted wells. According to the EIA’s latest Drilling Productivity Report, the US had 5,385 drilled but uncompleted wells (DUCs) in September 2021, the lowest for any month since February 2017 and down from nearly 8,900 at its 2019 peak. This decline in DUC inventory levels has gone a long way to offsetting legacy declines from existing wells.

The current rebound in shale activity will ensure that the sector finishes a challenging year on a high. What’s more, this year-end strength is expected to spill over into 2022. US crude prices are forecast to hold above $70/bbl throughout the first half of next year thereby ensuring shale assets remain profitable. This, in turn, should safeguard the revival in shale drilling. According to its latest forecasts, the EIA now sees total US crude supply averaging 11.59 mbpd in 1H22, up from a previous estimate of 11.5 mbpd. Over the course of 2022, US crude production will expand by 710,000 bpd, a sharp increase from this year.

Yet it’s not all positive for US shale. Workers are in short supply. Furthermore, production costs are starting to rise as companies contend with more expensive deliveries of equipment and materials. Cost inflation in the oil patch is likely to run at 10 to 15 per cent next year, notes Rystad Energy. Rising costs aside, there is little to take away from the improving growth outlook for the sector. As things stand, the US crude complex is no longer stuck in neutral. But while supply is on the upswing, US oil producers will not be able to increase production by enough to tame soaring crude prices. US oil output is emerging out of its pandemic-induced slumber, but make no mistake, OPEC+ is still calling the shots on the supply side of the oil equation.