Following April’s US oil cost dip into the negatives, shale drilling companies across the country slowed production to reduce output as oil consumption around the globe slowed due to the ongoing COVID-19 pandemic.
As the world slowly reopens and oil costs rebound close to $40 a barrel, producers such as Parsley Energy Inc. and WPX Energy Inc. are turning their wells on once again.
The elevated production volumes still remain well below the peak ranges before the pandemic, where US companies pumped over 13 million barrels of crude per day. This comes at a time when many of the world’s top producers are voluntarily curbing output to help rebalance the world markets.
On Saturday, the Group of Petroleum Exporting International locations and its allies agreed to continue with reduced production through July, committing to a cut of 9.6 million barrels per day, just shy of the initial cut discussed in April after Mexico decided to not continue with their production curbs.
While international demand for oil has recovered from the slump in April, the Worldwide Power Company estimates that this month demand will still be well below that of previous months, at around 86 million barrels per day.
Turning on existing oil wells will be a temporary boost to US production through the summer. That being said, American oil output is still expected to drop overall in 2020 as shale wells quickly lose steam and many companies have cut back on the number of new wells they are drilling.
In May, as stay-at-home orders eased and drivers returned to the highways, West Texas Intermediate saw their largest monthly increase on record. Crude shares climbed an additional 11% in the final week of May, finishing Friday at $39.55 a barrel.
American producers who are able to sell their oil to an international market may be able to get a higher price, with world benchmark Brent crude closing at $42.30 a barrel on Friday.
While cost may prevent producers from opening new wells right now, there is an opportunity to reopen existing wells. According to the most recent survey by the Federal Reserve Financial Institute of Dallas, oil prices need to be between $23 to $36 a barrel in order for wells to be profitable.
EOG Resources Inc, one of the largest US oil producers, plans to increase production in the third quarter.
They aren’t the only ones. Permian Basin-based Parsley Energy announced that they would be restoring the “overwhelming majority” of their 26,000 barrel per day production cut in May. WPX announced that they too would be restoring their 45,000 barrels per day cut from the previous month.
Concho Resources, Inc., another Permian Basin producer, cut their output by 5,000 to 10,000 barrels per day throughout the lockdown. Chief Financial Officer Brenda Schroer stated that they too are looking to increase production one again.
In the final week of May, US crude production averaged 11.2 barrels per day, still down from the 13.2 barrels per day documented in mid-March.
According to IHS Markit, production for 1.75 million barrels per day will be halted this spring. IHS anticipates that output will be restored by September.
Without new drilling, US onshore production could decline by one third in a 12 month span, much more severely than anywhere else in the world, according to IHS Markit Vice President Raoul LeBlanc.
The number of drilling rigs in the United States has dropped by more than 70% since the start of the year, to just 284 units.