Despite Trump's call to "drill, baby, drill," American shale oil producers are unlikely to respond to the call, but will prioritize taking hedging measures to lock in revenues.
Given the military strikes by the U.S. against Iran, shale oil producers are more inclined to lock in profits through hedging rather than increase production, and they are unlikely to respond to President Trump's latest call to 'Drill, Baby, Drill.'
Analysts point out that due to caution regarding another false recovery in the global Crude Oil Product market, U.S. oil companies may utilize hedging contracts to secure income for future production instead of investing heavily in new drilling rigs. Trump urged an increase in the number of drilling rigs via Social Media on Monday to prevent oil prices from rising.
On Tuesday, after Trump announced that Israel and Iran had fully agreed to a ceasefire, international oil prices plummeted, with Crude Oil currently down over 1.5% to around $65.8 per barrel.
The average daily production in the U.S. is about 13.4 million barrels, exceeding the total production of Saudi Arabia and Iran combined. With appropriate incentives in oil prices, companies in the shale basin have the unique ability to rapidly increase production within 6 to 9 months. However, recently, due to concerns over the impact of Trump's tariffs on consumption and OPEC's increased production leading to falling oil prices, these companies have begun to contract, reducing the number of rigs and workers.
'You can't just 'Drill, Baby, Drill' overnight,' said Tom Seng, assistant professor of energy finance at Texas Christian University in Fort Worth. 'We need to see oil prices rise consistently for several months before companies will increase the number of rigs again.'
Since reaching a four-year low in April, oil prices have rebounded. The U.S. military's strikes on three major Iranian nuclear facilities last weekend raised concerns about disruptions to Middle Eastern energy supplies (the Middle East accounts for about one third of global Crude Oil Product supply), causing a spike in oil prices again at the start of the week.
However, Peter McNally, an Analyst from Third Bridge US Inc, pointed out that executives in the shale oil fields of Texas, North Dakota, and New Mexico are unlikely to change capital budgets based on sudden price fluctuations. US production has basically stagnated this year, with some companies warning that shale oil has reached or is nearing its peak.
McNally stated, "This is not just about price, but about the sustainability of the price. American producers need oil prices to remain high for six months for the Industry to significantly change activity levels."
Kirk Edwards, former president of the Permian Basin Petroleum Association and currently head of a small private oil producer, stated that hedging would take priority over any production increase plans. "If crude oil Futures prices rise to the 70 dollar Range within the next 12 months, US oil producers will be busy hedging for production this week," Edwards said, adding, "Some companies did not hedge when oil prices fell in April, this is a second opportunity to set a safety net for production."
The financial condition of today's shale oil Industry is more robust than it was before the COVID-19 pandemic, when executives financed aggressive expansion plans through debt. Industry consolidation and investors' demand for dividends and stock buybacks have prompted companies to focus on efficiency and strive to retain the best blocks.
Dan Pickering, Chief Investment Officer at Pickering Energy Partners in Houston, stated, "Upstream companies are unlikely to abandon capital discipline due to such geopolitical events. They will accept short-term higher Cash flow, earn some extra money, and may also do some hedging."
Al Salazar, head of macro oil and gas research at energy consulting firm Enverus, said that price spikes caused by geopolitical events rarely persist. "So enjoy this wave, " Salazar said, "History shows this is just a temporary fluctuation."
