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Major U.S. producers of fracked oil and natural gas are investing only enough to keep production at current levels, despite global benchmark Brent crude oil prices briefly breaking through $100 a barrel on 16 February, its highest in almost eight years.
Three leading U.S. fracking producers—Continental Resources, Devon Energy, and Pioneer Natural Resources—all reported 2021’s profits as their best in more than a decade.
However, after the COVID War decimated the U.S. petroleum industry and the fracking sector in particular, the sector’s investors pressured companies to hoard cash and cut capital budgets, as we noted in “Betting on Oil” (22 Jun 2021).
All three companies have pledged to adhere to the conservative strategy, even as oil and gas prices are poised to move higher still.
“The only question investors should ask is why on Earth would they want any [U.S. oil producer] to grow,” Ben Dell, managing partner at Kimmeridge Energy Management Co., said to The Wall Street Journal.
“The sector is working,” he added. “Cash flow is getting returned. This is not the time to change the business model.”
Devon, the S&P’s best performer in 2021, booked $2.8 billion in profits last year, the most since 2007. It will use a large amount of that profit not to develop new reserves but to buy back 60 percent more of its shares than it has so far and hike shareholder dividends to a record level.
U.S. oil and gas production will increase this year by about 240,000 barrels a day, consulting firm Wood Mackenzie predicted. The Permian Basin of Texas will gain more production than that, but increases there will be partially negated by declines in output across the rest of the U.S. oilpatch.
TREND FORECAST: U.S. shale frackers will continue to occupy the sweet spot at which they can maximize prices and profits without accelerating consumers’ shift to renewable energy.
With U.S. producers tightening the spigots and OPEC+ failing to meet its production targets, as we reported in “OPEC+ Continues to Raise Oil Output: What’s the Deal?” (8 Feb 2021). And with Russia/Ukraine/Nato pressures increasing and Russia now moving troops into Ukraine, plus new sanctions being imposed on Russia that will cut oil sales, oil prices will break through $100 a barrel.
And should oil prices continue to rise well above $100 per barrel, so too will inflation, which will in turn force the Feds to raise interest rates higher. And the higher interest rates rise, the deeper equities and the economy will sink.