U.S. Shale Output to Further Erode Even as Oil Surges, BNEF Says

(Bloomberg) -- U.S. shale oil production is set to decline through at least 2022 as explorers resist the temptation to start drilling again despite a rally in crude prices, according to a BloombergNEF analysis.

As most drillers continue to focus on paying down debt and returning capital to shareholders instead of pursuing growth, production in the five major U.S. oil shale plays may shrink another 485,000 barrels a day by the end of this year, finishing December with 7.1 million barrels a day, BNEF analyst Tai Liu said in a note to clients on Tuesday. Output may further erode to 6.95 million barrels a day next year based on BNEF’s production models.

“It could be a while before U.S. oil companies feel comfortable growing production again,” said Liu. “A number of producers said they will need to see a structural improvement in the outlook for global oil supply and demand before directing more capital to the drill bit.”

Oil prices are back at pre-pandemic levels, making drilling profitable again in the majority of shale plays. The OPEC+ alliance’s pledge to restrain output has pushed crude up about 25% this year. How the fragmented U.S. shale industry will respond to incentives to drill has become a crucial question for traders and industry-watchers. Staying the course of discipline would validate OPEC+’s wager that it can curb production and drive prices higher without unleashing an onslaught of supply from U.S. rivals. The producer group led by Saudi Arabia will meet later this week to discuss its output policy.

Shale producers’ pledges to maintain a disciplined approach to capital spending has so far been rewarded by investors. Companies in the S&P Oil & Gas Exploration and Production Industry Index have gained nearly 40% this year, which compares to a 5% advance in the broader S&P 500 Index.

The five major U.S. shale plays -- the Permian Basin, Eagle Ford, Bakken, Niobrara and Anadarko -- produced a combined 7.2 million barrels a day in the first quarter of this year, about 68% of total U.S. oil output. A year ago, these plays produced a collective 8.9 million barrels a day.

BNEF’s production analysis is based on crude prices holding between the mid-$50 and low-$60 a barrel range for the next two years.

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