One of the biggest ongoing stories in the international oil market is the growing U.S. output of oil and natural gas. While this has long exerted downward pressure on prices, having only recently changed due to a series of oil tanker attacks in the Strait of Hormuz.
However, there was a small bit of news released on Wednesday that indicates a potential slowdown in the U.S. domestic energy sector could be on the horizon. Despite the fact that oil prices are rising, shale drillers have little incentive to ramp up activity and are in fact shutting down some of their oil rigs.
According to The Wall Street Journal, the number of active oil rigs in the country fell to a 17-month low, declining to 784 as of last week. This is just another sign that pressure from shareholders are forcing these companies to cut back on spending and maximize the efficiency of their existing operations.
It’s a strange reality for drillers, as despite the fact that oil has risen by 25 percent this year and has crossed the $60 per barrel price point last week after OPEC agreed to continue their supply cuts, this hasn’t done much to help drillers. In fact, even if oil prices were to rise even further to $70 per barrel, the ongoing rig count would continue to fall.
“The capital markets haven’t been available. That has led to more conservative budgeting processes and an unwillingness to revise activity upwards even when oil prices are rising,” said Praveen Narra, an equity analyst at Raymond James who is familiar with the matter. In particular, the company expects that oil and gas rigs to fall by another 40 in 2019. At the same time, the International Energy Agency said that it expects supplies of energy commodities to exceed demand next year as production continues to rise. However, this current slowdown in shale output could mean that those growth figures overestimated how quickly the market would reach that point. “That suggests that U.S. production is not going to achieve the levels projected, or may even decline a little bit by the end of 2020,“ added Philip Verleger, an energy economist. “Then the oversupplied market goes away.”
Shale companies as a whole have been struggling to attract capital in 2019. Although the volatility of oil prices definitely plays a role in this, the main reason why investors have stepped back from these businesses is that over the past few years, drills have been more interesting in production growth at all costs rather than maximizing returns.
So far, North American energy companies have raised less than $400 million by selling new shares, a drastic reduction compared to the $6.5 billion raised in 2018.
In order to become more appealing to these investors, shale producers across the nation have begun to cut spending, trim the fat in their asset portfolios, and shut down unnecessary rigs for the sake of profitability.
While this trend is going to hamper shale output in the U.S., time will tell whether this will have a big impact on energy commodity prices. So far, the S&P 500 energy sector has gone up by 9 percent this year but still lags behind every other except health care in terms of performance.