If you listen closely, you can hear the cursing of OPEC’s (and Russia’s, for that matter) oil ministers bursting forth from their beleaguered petrostates as America’s oil producers add to their collective count of active rigs for the seventh straight week. The cartel—along with some other non-member petrostates—is now committed to cutting its collective oil production, hoping to ease the global glut and induce a price rebound. But that price rebound will help everyone in the business of selling oil, and will be especially welcome to America’s shale producers, many of whom were forced to shutter rigs and ratchet down production when the crude price collapse made such projects unprofitable. Now that prices are starting to rise again, U.S. producers are wasting no time revving the engine of the shale boom. Reuters reports:
Drillers added 12 oil rigs in the week to Dec. 16, bringing the total count to 510, the highest since January, but still below 541 rigs a year ago, energy services firm Baker Hughes Inc said on Friday.
Since crude prices briefly recovered from 13-year lows to around $50 a barrel in May, drillers have added oil rigs in 26 of the past 29 weeks for a total of 194, the biggest recovery in rigs since a global oil glut crushed the market over two years.
Almost two-thirds of the rigs added since May, or 121, were in the Permian basin, the nation’s biggest shale oil formation located in west Texas and eastern New Mexico, bringing the total there up to 258, the most since April 2015.
This isn’t the first time we’ve said this, but it bears repeating: this was always going to be the Achilles heel of any OPEC decision to reduce its collective production. Shale operations are much smaller than conventional fields, and are therefore more responsive to price pressures—there are less up-front capital costs to justify the continued operation of unprofitable fields, or to delay the re-opening of operations in areas that become profitable once again. That’s why we saw American oil production drop more than 1 million barrels per day (bpd) from June of this past year to October of this year. But that’s also why we’ve seen America’s total oil output increase 300,000 bpd over the past month and a half.
Saudi Arabia knew this was going to happen, and it delayed any sort of OPEC market intervention for as long as it could, but the economic damage wrought by bargain oil finally forced Riyadh to concede to coordinated action this fall. So far, oil prices have risen roughly $10 per barrel—an increase of more than a 20 percent—but it’s not clear that this cut will be able to completely erode the glut that brought crude prices down in the first place because, as was just outlined, frackers are especially well positioned to take advantage of the rebound and offset much of OPEC’s drawdown. We’re headed towards the worst-case scenario for the world’s petrostates, where they agree to cede market share to gain higher oil prices, only to see American companies jump on the opportunity and take that share of the market for themselves while simultaneously blunting the rebound. Hence the wailing and gnashing of teeth from all those oil ministers.