What a difference a month makes. The expiring June WTI avoided a repeat of last month’s negative shenanigans yesterday as it went off the board on the front foot. It settled up 68 ct/bbl at $32.50/bbl. The more actively traded July contract finished 31 cts/bbl higher at $31.96/bbl. All the while, the recent rally in Brent cooled as it slipped 16 cts/bbl to end the session at $34.65/bbl. The lull in upside potential came as optimists experienced a reality check. Scepticism grew over reports of a potential COVID vaccine just as underlying economic jitters resurfaced. The Congressional Budget Office warned that the US economy won’t fully recover from its coronavirus-induced shock until after 2021. Simply put, the economic hardship caused by the virus pandemic will leave long-lasting scars.

Economic anxieties will act as a drag on oil prices the foreseeable future. Nevertheless, those of a bullish disposition can take heart from signs of a waning US stock overhang. Overnight, the API reported that US crude stocks fell for a second consecutive week last week. The 4.8 million bbl drop included a hefty 5 million bbl decline at Cushing and confounded expectations for a build of 1.2 million bbls. Meanwhile, gasoline inventories dropped by a smaller-than-expected 651,000 bbls and distillate fuels stockpiles rose by a forecast-beating 5.1 million bbls.

From better to worse to ok

Blows have come thick and fast in the global oil market and nowhere more so than the US shale patch. Typically, price signals impact US production after a six-month lag. However, in recent weeks, shale players have raced to shut in wells as plunging demand and a global supply glut sent prices crashing below breakevens. Evidence pointing to a faster-than-expected slump in US upstream activity is in plentiful supply. Companies have slashed capital spending plans for this year by as much as half. Thousands of workers have been laid off and these dramatic cuts have triggered a collapse in drilling activity. The number of operating US oil rigs has plunged by more than 60% in the past two months to the lowest since July 2009.

Further underscoring the rapid pace of voluntary US well shut-ins is the latest EIA drilling productivity report. The number of wells drilled and completed were both at their lowest levels in April since December 2016. This came as nearly all operators shut uneconomic production. All the while, output from the seven major shale plays in May was downwardly revised by more than 500,000 bpd to 8.02 mbpd. Looking ahead, US tight oil supply is forecast to fall by a record 197,000 bpd in June to 7.82 mbpd, the lowest since August 2018. Each of the main shale basins is expected to register a drop in output, with the once-prolific Permian providing the lion’s share. Supply in the Permian is poised to decline by 87,000 bpd next month to 4.29 mbpd. Taken as a whole, US shale output is on course to fall by more than 1 mbpd in June since the start of the year.

US fracking activity has clearly hit rock bottom this quarter. As for the remainder of 2020, the EIA forecasts that production losses will continue beyond June, albeit at a slower rate. Others, meanwhile, have surmised that a rebound might be on the cards if oil prices recover. Indeed, US shale producers will likely restart shut-in production or complete oil wells if US crude prices scramble back above $40/bbl. This may seem like a tall order given the existing stock overhang. A supply deficit is on the horizon, but excess global oil inventories will take a long time to burn off. What is more, restoring production from shuttered oil wells is not always feasible. Aside from being costly, the shutting in process is often irreversible and therefore results in a permanent loss of production.

This brings us to US shale’s trump card. Drilled but uncompleted wells, better known as DUCs, represent a cost-effective and readily available source of supply that can be brought online in a short amount of time. The backlog of DUCs has shrunk in recent months as producers put them into action to sustain production momentum as drilling activity cooled. Now, though, the fracklog in major US shale plays is once again on the rise. The number of DUCs rose by 13 in April to 7,616, the first increase in 11 months. This suggests shale producers are biding their time and delaying completions until prices recover to more attractive levels. As such, DUCs should provide a future source of production growth for the US shale patch, assuming prices recover. The message is therefore clear: US shale companies are down but far from being out.