New Tech is Fueling Another U.S. Shale Boom

• U.S. shale drillers are revising their production outlook for 2024 due to efficiency gains that have enabled them to produce more oil at the same or lower cost.
• Analysts are concerned about the possibility of oversupply as a result of these efficiency gains.
• The industry has learned lessons from previous price slumps and is less likely to overproduce this time around.

U.S. shale majors are revising their production guidance for the year as efficiencies help them produce more oil at the same or lower cost. Analysts are already talking about an oversupply as a result of those efficiencies. 

Reuters reported this month that several large shale oil producers had announced revised production figures for 2024 during their second-quarter earnings calls. The companies include Diamondback Energy, APA Corp, Devon Energy, Occidental, and supermajors Chevron and Exxon. All of these companies and others that see higher output this year cite efficiency gains as the reason. It looks like it’s only a matter of time before these efficiency gains cause a price slump.

Following the production revisions of shale leaders, Macquarie Group forecast that U.S. oil production would gain half a million barrels daily this year. That’s higher than EIA estimates for 300,000 bpd production growth, which would be a marked slowdown from last year’s output increase of about a million barrels daily—again thanks largely to drilling efficiency gains.

Those gains that everyone talks about include longer well laterals, fitting more wells into one pad, and artificial intelligence: oil producers are using artificial intelligence to improve drilling in the shale patch and boost the recovery rates of fracked wells.

Efficiency gains are what drove the original shale revolution, but it also turned out to be a trap for the industry at the time: everyone got so excited they all wanted to see just how much oil they could squeeze out of the ground that they forgot about things like demand and prices. The result was that they overproduced and suffered a price slump.

This time, the industry is less likely to fall into that trap. It has learned a lot of lessons from the last few industry cycles, with the sensitivity of prices to any major production boosts in the shale patch one of the most important ones. Most shale drillers have also rearranged their strategic priorities, often under pressure from investors, to focus on the bottom line and not the production figure.

What is perhaps interesting in the current situation with U.S. shale is that this higher than previously expected production growth is coming amid a decline in global stocks. It is quite a substantial decline and it should have erased any bearish effect U.S. shale production figures might have on international prices. Yet it hasn’t. Because everyone is focusing on economic indicators.

Global oil inventories have slumped since the start of the year, standing 120 million barrels below the ten-year average at the end of June, Reuters’ John Kemp reported earlier this month. The figure compared with a deficit of 74 million barrels just three months earlier, the market analyst noted. This means that over three months, global oil inventories shed 46 million barrels.

Kemp also noted, however, that this has passed unnoticed by traders who remain fixated on Chinese economic data that they use as a proxy for oil demand and the outlook thereof—which is bearish, based on that data. In the U.S., crude stocks declined as well, standing 11 million barrels below the 10-year average at the start of August, down from 4 million barrels below the 10-year average at the end of June.

So, inventories are on the decline, significantly, but with reports coming in from the shale patch that drillers are pumping more oil for the same money, chances are that prices will get pressured—even though an actual oversupply situation is unlikely. It is somewhat paradoxical but rather typical of the oil market, where the majority focuses on the hot news and misses everything else until it becomes impossible to miss.

How the state of global oil inventories will develop remains to be seen, but if recent changes are any indication, global demand for crude remains quite robust, regardless of monthly readings in Chinese PMI and consumer prices. This means that U.S. shale drillers have space to expand production-wise without worrying about oil prices and where they would go, fundamentally speaking. Demand is there, so bring on the supply.

On the other hand, as mentioned, traders don’t care much about fundamentals these days until fundamentals slap them in the face with a deficit and prices soar. And this, in turn, means that the news of shale drillers producing more oil with less effort would limit any upside potential for oil prices and possibly even pressure them in case of negative economic news. But that’s over the short term.

Over the longer term, there is a chance that fundamentals would start drawing more attention—especially if the energy transition continues failing at the same rate, with EV sales slowing down and outright slumping, proving forecasts of oil demand destruction from the electrification of transport wrong. Should that happen, shale drillers would be the big winners—they have already learned to do more with less, so all they’d have to do is enjoy the benefits of that amid continued robust demand for oil.

By Irina Slav for Oilprice.com

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