It was a day of two halves for risk assets as they fell deep into the red before paring losses to end the session little changed. Brent and WTI initially plunged by almost $2/bbl as they succumbed to COVID-19 fears and tighter lockdown measures. Market players were spooked by the latest swathe of European coronavirus restrictions aimed as containing a blistering second wave of infections. Sentiment was dealt a further blow by reports that OPEC+ laggards made little progress last month in compensating for overproduction in previous months. A technical committee met to review compliance to global oil cuts and claimed the producer alliance still needs to make compensatory oil cuts of 2.33 mbpd.

All the while, stock markets weren’t immune to the risk-off tone. Shares on Wall Street slipped into the red as investors fretted over the latest restrictions around Europe and the absence of fresh US stimulus. Adding insult to injury were figures suggesting that the US labour market is struggling to shake off its COVID woes. The number of Americans filing new claims for jobless support unexpectedly rose last week to 898,000 from 845,000 in the previous seven days. This was the highest level since August. Many rightly fret that the situation is likely to worsen unless Congress get their act together and agree a new coronavirus relief package.

Yet just as all seemed lost, the EIA stepped in and gave oil and equities a supportive kick up the backside. Its weekly report revealed that US oil demand scrambled back above 19 mbpd for the first time since the height of the summer driving season. Meanwhile, as expected, Hurricane Delta spurred a substantial decline in oil stockpiles last week. Crude stocks dropped by a bigger-than-expected 3.8 million bbls as domestic oil production fell by 500,000 bpd to 10.5 mbpd. Unsurprisingly, the decline took place almost exclusively on the USGC. Stocks actually rose elsewhere with Cushing registering a sharp jump of 2.9 million bbls. On the product front, gasoline inventories declined by 1.6 million bbls while distillate fuels stockpiles fell by a whopping 7.2 million bbls, the most since early 2003. As much as the EIA spared oil bulls’ blushes yesterday, additional positive catalysts will be needed to keep selling pressures as bay. The energy complex is back under the cosh this morning as it dawns on traders that the pandemic could rage well into next year.

More shale pain on the horizon

Earlier this month, the EIA revised US oil production higher in the near term. Its updated monthly forecasts suggested that output will average 11.22 mbpd in 4Q20, 140,000 bpd more than a previous estimate. As encouraging as this sounds, it masks a tale of two stories across the US crude patch. On one hand, offshore production is rebounding following a spate of weather-related disruptions. On the other, growth prospects for US onshore production, which is dominated by shale basins, are weakening. The return of curtailed tight oil production over the summer months seems like a distant memory and output is now set to slide in the fourth quarter.

US shale supply is expected to decline by 123,000 bpd in November, the biggest drop since May, to around 7.69 mbpd, according to this week’s EIA drilling report. All seven major shale plays are poised to suffer a drop in production next month, the legacy of the collapse in drilling and investment earlier this year. That said, it’s not all bad news. Despite the decline, the EIA forecasts that new-well production per rig will increase in all but one of the seven shale formations, the biggest rise coming from the Permian. What is more, separate data points to a modest recovery in drilling rates. September marks the first monthly increase in US oil rigs since the 2020 high in March, according to Baker Hughes. This trend has carried through into October with the rig count rising to 193 in the week to October 9, the highest since mid-June. Simply put, fracking activity is improving across US tight oil plays, albeit from a low baseline.

Even so, the recovery in upstream activity will be limited by the prevailing bearish price conditions. WTI again dropped below $40/bbl this week. This low-price environment cannot sustain the current bout of replacement drilling. In other words, the recent uptick in fresh drilling will not have the legs to stand the test of time. Faced with this reality, operators will continue to drawdown on large reserves of drilled-but-uncompleted (DUC) wells. DUC wells are coming out of inventory and into production at an increasing rate. They fell for a second straight month in September to the lowest in almost two years. However, completion rates are only a third of the levels seen prior to the pandemic. Consequently, the drawdown in DUC wells is falling short of offsetting the base decline from existing wells, let alone sustaining a substantive recovery in onshore oil production. Annual declines in US shale production are therefore a shoo-in in the coming months.

Beyond that, a substantive recovery in onshore shale oil production will likely face headwinds from global demand uncertainty and a decline in reservoir quality. Small wonder, then, that many expect the recovery to be slow and painful. US crude supplies will not return to 2019 levels until late 2023 or early 2024, according to S&P Global Platts Analytics. Similarly, Rystad Energy doesn’t expect demand for US fracking services to return to pre-pandemic levels until 2025. Moreover, it warned that US shale production can only reach new highs if oil prices recover to $60/bbl. Others, meanwhile, are even less sanguine. Occidental Petroleum, one of the biggest producers in the U.S. shale industry, joined the growing ranks claiming that America’s oil production will never again reach the record 13 mbpd set earlier this year.

Only time will tell whether US crude output recovers fully from the COVID-19 shock. For now, US shale producers are bracing for one last blow in a crisis-ridden year. A Biden win at next month’s election will bring with it the prospect of tighter restrictions on drilling and higher taxes. In short, an increase in costs for tight oil players. US shale’s annus horribilis is far from over.