A decision by OPEC and allied countries to cut crude production through March delivered a late Christmas present for U.S. shale firms that have slashed costs, but any rise in prices spurred by the unexpected move may be just a modest stocking stuffer.
U.S. crude oil production has fallen 2 million barrels per day in the last year as low prices and demand forced output cuts. Investors had already been pressuring the industry to curb spending and boost returns before the pandemic hit.
On Tuesday, Saudi Arabia, the world’s biggest oil exporter, said it would voluntarily reduce its production by 1 million barrels per day (bpd) in February and March, after Russia pushed to increase output, worried about U.S. shale capitalizing on the group’s cuts.
Russia and Kazakhstan will increase their output, reluctant to cede market share to the United States. Overall, OPEC+ had been due to restore 500,000 bpd in each of the two months. Saudi officials were concerned new increases would outpace demand during new coronavirus lockdowns.
Crude prices are high enough to bolster U.S. producers’ earnings given recent cost cuts and commitments to keeping output flat, but unlikely to draw producers off their promises to use any additional cash this year to boost investor returns or pay down debt.
In top two U.S. shale fields, oil and gas companies are profitable in the $30 per barrel to low $40s per barrel range, according to data firm Rystad Energy. This year’s higher prices could push the shale group’s cash from operations up by 32%, Rystad said.
Another factor that will benefit producers is low oilfield service costs. Excess capacity at the companies that provide fracking sand and services cut fees and have not been able to raise them.