Lower oil prices have started to take effect on drilling activities in the US.
US crude oil production rose to a record level of 13.47 million barrels per day in April, according to the US Energy Information Administration.
“There are some indications that this marks an interim high and that production will fall in the coming months,” Carsten Fritsch, commodity analyst at Commerzbank AG, said in a note.
The price of West Texas Intermediate crude oil on the New York Mercantile Exchange has traded in the low $60 per barrel over the last couple of months.
In June, the WTI price, which is the US benchmark, spiked over $75 per barrel as concerns over supply disruptions added risk premiums. However, the rally in prices was short-lived with an imminent ceasefire between Iran and Israel.
According to reports, US oil producers and drillers require WTI prices to trade between $60 and $70 a barrel in order to break-even.
At the time of writing this report, the price of WTI was at $65.47 a barrel, largely unchanged from the previous close.
Drilling activities slow
According to data from oil service provider Baker Hughes, the number of active oil rigs in the US fell by a further six last week to just 432.
Drilling activity is thus at its lowest level since October 2021. The decline since the beginning of April amounts to 9% or more than 40 oil rigs.
“The significantly lower price level since the slump at the beginning of April is clearly taking its toll,” Fritsch said.
According to a survey conducted by the Dallas Fed at the end of March, US shale oil companies need an average WTI price of $65 per barrel in order to drill a new well profitably.
In the Permian Basin, the average break-even price was $65 per barrel. However, depending on the region, this average fluctuated between $60 and $70 per barrel.
The WTI price was mostly below $65 between the beginning of April and mid-June.
OPEC’s strategy
The Organization of the Petroleum Exporting Countries and allies’ strategy to flood the market with more crude oil has also played a role in lower oil prices.
The eight members of the OPEC+ alliance, including Saudi Arabia and Russia, have been increasing production of oil by 411,000 barrels a day since May.
The OPEC eight are also scheduled to raise production by the same amount this month as well.
The market expects the cartel to raise output by the same amount next month as well.
The eight OPEC members are scheduled to meet this weekend to discuss oil output levels for August.
Commerzbank’s Fritsch said:
OPEC+’s strategy of reclaiming market share from shale oil producers therefore appears to be paying off for the time being.
The same cannot be said for the mantra ‘Drill, baby, drill!’ postulated by US President Trump.
Replenishing of oil reserves postponed
Meanwhile, US President Donald Trump is also lagging behind his own ambitions on another important point of his energy policy agenda.
During the initial phase of his second term, Trump prioritised the swift replenishment of strategic oil reserves.
However, the US Department of Energy announced last week that this year’s planned replenishment would not occur as rapidly as initially anticipated.
The reason given was maintenance work at the storage facilities.
The former US President Joe Biden had authorised purchase of 15.8 million barrels of crude for January to May, but only 8.8 million barrels have been delivered to date.
A ministry spokesperson informed Reuters that the quantities obtained through previous solicitations and exchanges have been rescheduled until the end of the year.
“As a result of the lower reserve purchases, the US shale oil industry is likely to lack important support, which, in addition to the low prices, argues against an imminent recovery in drilling activity,” Fritsch added.
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