Joe Biden is in a pickle. Asking domestic producers to boost output is politically incompatible with his administration’s climate agenda. So, he is forced to lean on others. Having failed to persuade OPEC+ to speed up its production, the US is now piling pressure on the world’s largest oil importing nations. President Biden has reportedly asked China, Japan, India and South Korea to tap into their reserves to take the heat out of rising energy prices.

Although no decision has been made, Japan and South Korea have shown resistance. In contrast, China seems willing to join the US in coordinated action to relieve the pressure on soaring fuel prices. As we wait for a response to the request from Washington, China said it was already working on releasing crude oil reserves. It has previously tapped its strategic reserves this year and a repeat performance will likely drive prices lower, albeit only temporarily.

Sure enough, crude oil prices dropped to fresh six-week lows on the news that China was moving to tap reserves. Brent and WTI broke below critical supports at $80/bbl although the bearish momentum eased later in the session. Both crude markets bounced off the day’s lows to finish in the black.

What made this recovery all the more impressive is that it came against a backdrop of darkening Covid-19 clouds. Murmurs of “here we go again” are resounding across Europe as coronavirus cases surge. The continent is facing the return of full lockdowns as a fourth wave of the pandemic brings with it sweeping restrictions. Germany left the door open to lockdown measures after posting record infection rates yesterday. Meanwhile, in neighbouring Austria, the states of Salzburg and Upper Austria will enter a month-long full lockdown next week. The rising tally of new infections in Europe has the makings of a year-end demand shock and must therefore be carefully monitored.

Ready. Set. Drill.

It is starting to dawn on market players that the oil balance is shifting. A wave of fresh supply is on the horizon, and nowhere more so than in the US. Oil production in the US is ramping up in tandem with stronger oil prices. The EIA’s latest DPR report showed US shale production is forecast to rise by 85,000 bpd in December to 8.316 mbpd. Every one of the seven major shale regions is forecast to expand next month. But as is the norm, the bulk of the increase will come from the Permian, where output is expected to rise 67,000 bpd to reach a record 4.953 mbpd in December.

Spearheading these gains is the drawdown in drilled-but-uncompleted (DUC) wells. Strong oil prices have compelled producers to work through their backlog of DUCs. According to the EIA, the inventory of drilled-but-uncompleted wells has shrunk to just 5,104 from a peak of almost 8,900 in June 2020. The total DUC inventory for all major basins has now reached its lowest level since December 2014. This decline in DUC inventory levels has gone a long way to offsetting legacy declines from existing wells. However, with DUC inventories at these levels, US shale producers will need to ramp up drilling operations over the coming months or face a decline in output.

Currently, drilling rates are steadily rising. The US oil rig count rose to 454 in the week to November 12, according to Baker Hughes. This is the highest since April 2020 and almost double that of a year ago. However, it is still down from 683 immediately before the arrival of the first wave of the pandemic in March 2020. This suggests some producers are still showing restraint. Yet current prices provide a strong incentive to boost activity even as operators stick to capital discipline pledges. Consequently, US oil drilling is likely to accelerate in 2022.

This, in turn, sets the stage for a material increase in US supply next year. And sure enough, the EIA forecasts US crude flows will average 770,000 bpd more than this year. The upshot is that the US is expected to provide the largest increase in supply of any individual country in 2022. Yet it won’t be plain sailing. Workers are in short supply. According to the Dallas Fed’s latest survey, 75% of oil and gas service firms were looking to staff up, of which 68% had difficulty hiring workers with lack of qualified workers and wages being oft-cited reasons. Furthermore, production costs are starting to rise as companies contend with more expensive deliveries of equipment and materials.

Even so, this doesn’t take away from the improving outlook for the US shale patch. The US crude engine is shifting up a gear following a prolonged lull in production growth. The anticipated ramp-up in US crude output will have an impact on OPEC’s thinking in the coming months. In other words, US shale is set to return as a thorn in the oil cartel’s side.