Forbes Piece: U.S. Shale is Slowing Down Due to Factors Beyond its Control

[Note: This story is also published at Forbes.com]

The U.S. shale industry is slowing down, and a recovery during the rest of 2023 seems increasingly unlikely due to a variety of factors beyond anyone’s control.

From its’ January 14 peak, the Enverus Daily Count of active North American drilling rigs has now fallen by 20%. Baker HughesBHI said Friday its own weekly rig count has dropped six straight weeks. One week could be a blip; two straight might be a coincidence; but six straight weeks is definitely a trend.

Given the state of other market factors, it’s a trend that seems unlikely to reverse itself during the second half of 2023, despite continuing forecasts of better times ahead from some analysts and agencies.

What are those other factors? Let’s look at a few:

• Saudi Arabia’s announced cut of 1 million barrels per day starting July 1 failed to shore up crude prices. For the week, the U.S. benchmark WTI price dropped by 6% in the wake of the announcement;

• China’s economic recovery as it emerges from last year’s draconian COVID-19 lockdowns is stalling. Bloomberg reports that the slow pace of growth is now creating growing fears of deflation in the Chinese economy, lowering expectations for oil demand growth in the second half of the year;

• Biden officials are suddenly moving to purchase oil at these low prices in an effort to re-fill the U.S. Strategic Petroleum Reserve, which the President chose to deplete to half its normal capacity to keep gasoline prices low in the run-up to the 2022 mid-term elections;

• U.S. shale drillers continue to deal with the massive inflation of the past two years in costs for steel and other critical materials for their operations, along with continuing supply chain disruptions. The higher costs and delays have the impact of raising break-even prices for drilling new wells, which in turn is leading to a scaling-down of drilling budgets as marginal prospects become non-economic.

It is key to remember that most of the larger shale producers went through the process of deciding their 2nd half 2023 capital and drilling budgets during April and May, when oil and natural gas prices hovered in the same low range we see today. Thus, these budgets, which kick in on July 1, are almost certain to be lower than the 1st half 2023 budgets, which were determined last October/November amid commodity prices that were considerably higher and expectations that favored a strong Chinese recovery.