The price of WTI crude recently surged to a three-and-a-half-year high of just over $70 a barrel. In theory, this is more expensive than any major shale oil producer in the United States. Even if the price of WTI crude is as little as $60 a barrel, it is higher than the cost of these producers, according to the Dallas Federal Energy quarterly energy survey in March.
However, US shale oil producers do not necessarily make huge profits, although the first quarter was their best quarterly performance in three years.
Although oil prices are rising, producers' profits are still limited by many factors.
The profits of US shale oil producers have been affected by a number of factors, including Permian pipeline bottlenecks, rising costs of drilling services, some poor hedging investments that have led to lower sales prices than cost, and huge discounts on WTI Midland crude relative to WTI and cloth oil because of soaring production and more investment in drilling activity.
Us shale oil producers face export bottlenecks in Permian basins, which widens the price gap between WTI Midland and WTI crude. As a result, the price of oil sold by producers is different from that seen on the oil price chart.
In its May 2018 report on energy indicators, the Dallas Fed said that while falling inventories and geopolitical risks had increased upward pressure on the spot price of benchmark crude oil, but tighter restrictions on crude oil shipments are widening the gap between Brent crude and Permian basin crude prices.
The spread between Brent and WTI Midland crude widened from an average of $2 in the first half of 2017 to $5.30 in the second half of 2017. Oil production capacity from Permian basins further expanded the discount in 2018. The average spread in April was $10.77, the largest monthly spread since September 2014.
In its short-term energy outlook report on May 8th, the US Energy Information Administration also pointed out that the price gap is widening.
As crude oil production exceeds the capacity of existing pipeline infrastructure, producers must use more expensive modes of transport, including railways and trucks. As a result, the discount on oil distribution for WTI Midland crude has expanded to the largest since 2014. On May 3rd, the price difference between WTI Midland crude and cloth oil reached US $17.69 per barrel. This means that the spread has widened by $9.76 since April 2.
In addition, crude oil producers have increased drilling in Permian basins and even the Bakken area, so their active cash positions have not increased with the rise in the price of WTI crude.
American shale oil companies have invested heavily
James Williams, an energy economist at WTRG Economics, said shale oil companies simply did not generate enough cash to fund all their investments in new wells.
Williams also pointed out that as the company invests money in drilling, money will gradually pour in over time.
Of the 20 key shale oil producers in the United States, most invested more than their earnings in the first quarter, according to FactSet. According to the analysis, only 5 of the 20 companies' earnings exceeded their investments in the first quarter.
Then, even if oil prices are now higher than the average in major basins, cost inflation will make a comeback, and shale companies expect double-digit cost increases this year. In parts of the Permian basin, there will also be a shortage of hydraulic fracturing technicians and truck drivers.
In addition, some shale oil producers have suffered losses from hedging operations, hedging some of their production when WTI oil prices were at $50 and $55. But when oil prices exceed these levels, their actions limit some of the gains.
Hedging is capped at $65 or less. This was once the lifeline of the collapse in oil prices, but now it is a drag on producers' crude oil sales.
Matt Badiali, a senior research analyst at Banyan Hill, said these companies were unaffected by the rise in oil prices because many hedged when oil prices were at $50 a barrel.
Rising oil prices will certainly help US producers, but they still have work to do to turn higher oil prices into higher profits.
The next plunge in oil prices may be foreshadowing.
In fact, when the oil price is at $35 a barrel, it almost reaches the oil production cost of US shale oil producers. With oil prices nearing a high of $70, producers are likely to expand capacity to increase profits, which could lay the groundwork for the next collapse in oil prices.
On May 21, Beijing time, the price of crude oil at 17lv 00tech WTI was 78.76 US dollars per barrel.
The following is a 15-minute chart of WTI crude oil.
