Analysis: Risks of U.S. Drilling Rut Rise as Prices Slide


   
Karim Bastati
DTN Analyst

   VIENNA (DTN) -- In light of crude oil prices slipping  below break-evens for 
some U.S. drillers, production may have already peaked -- especially if prices 
continue to slide amid a growing global glut.

   Crude prices are still above levels required to cover expenses for existing 
wells but are on the brink of sliding into territory where drilling becomes 
uneconomical. Oil producers in the Permian require a minimum average WTI spot 
price in the high $50s bbl if not low $60s bbl to profitably drill new wells, a 
necessary requirement for keeping production afloat as output tends to decline 
as a well matures. A Dallas Federal Reserve survey conducted last year even 
found an average WTI spot price of $61 bbl to $70 bbl was needed.

   These thresholds are above many current price forecasts given an expected 
global crude overhang of several million bpd this year. The U.S. Energy 
Information Administration in its latest Short-Term Energy outlook expects an 
average WTI spot price of just under $55 bbl in the first quarter and just 
under $50 bbl by year end.

   Consequently, the EIA believes that U.S. crude production has already peaked 
in the fourth quarter of 2025, and predicts marginal declines throughout 2026 
before dropping 2.5% in 2027.

   Drilling activity has already been slowing in the current low-price 
environment but was still high enough for productivity gains to compensate for 
the slowdown. Prices falling under break-even thresholds, however, could 
drastically change this picture.

   On the flip side, global supply side risks remain abound, and sustained 
supply outages caused by wars and embargos could catapult prices into a range 
conducive to continued production growth. The latest Dallas Fed Energy Survey, 
conducted in December, found that industry executives were far more optimistic 
than EIA analysts. Respondents expected WTI to average $63 bbl this year and 
$69 bbl in 2027, high enough to keep production near or even above current 
record levels.

   Fewer oil rigs would also mean less associated gas production, which 
accounts for well over a third of U.S. natural gas production. For refiners, a 
drop in crude prices may be less enticing if it comes alongside higher input 
costs for the more energy intensive parts of fuel production like 
desulphurization, particularly given that these processes are necessary to 
refine the most profitable parts of the barrel. At the same time, global crude 
supply additions are rapidly outpacing refinery capacity growth, meaning the 
divergence between product and crude prices is likely to continue, guaranteeing 
healthy margins. The U.S. is even poised to lose refining capacity this year -- 
at a greater rate than even oil the most pessimistic models predict for oil 
production declines.

    




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