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Where Do We Go From Here?

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Now that the OPEC+ cartel has resolved its latest internal spat, it’s a good time to assess where the U.S. domestic oil and gas boom stands and where it goes from here. Despite the presence of the wild card presented by rising concerns about the COVID Delta Variant hanging out on the horizon, there seems to be a consensus forming around the prospect of the boom continuing not just through the end of 2021, but for years to come.

That won’t make the prophets of climate change doom or “peak oil” demand theory happy, but the reality on the ground is what it is, and no amount of wishful thinking or false prophecy can alter those facts. Skeptics will point to the crude oil price crash on Monday, when the Brent and West Texas Intermediate prices fell by 7%. But that was a case of the market classically overreacting to the resolution of the OPEC+ conflict and the group’s decision to gradually add volumes it has withheld back onto the market over the coming year.

Traders pretty much always overreact to major events such as this, but Monday’s reversal has already reversed again, with Brent crude once again trading above $71 in Wednesday morning trading, and West Texas Intermediate up 3% since Monday. This re-reversal is taking place because the global supply/demand balance continues to put upward pressure on prices.

You don’t have to take my word for this – just ask Goldman Sachs. While traders were tanking the crude markets on Monday, analysts at Goldman Sachs said they see the resolution of the OPEC+ spat presents a “modest upside” for for its summer oil price forecast of $80 per barrel for Brent crude. As reported by Reuters, Goldman Sachs told clients in a note that “The OPEC+ deal represents $2 per barrel “upside” to its $80 per barrel summer Brent price forecast and a $5 upside to its $75 per barrel forecast for next year.”

Analysts at Bank of America Global Research also saw the OPEC+ resolution as bullish, raising their projected average Brent price for 2021 from $63 to $68, and their 2022 price projection from $60 to $75. BofA also stated a belief that current market trend could briefly push the Brent price above $100 per barrel next year, adding that a predicted supply response by the U.S. shale industry would then serve to moderate prices later in the year and into 2023.

Prospects for such a supply response from domestic shale producers remain highly uncertain, however, as corporate producers are seeing much improved results via their current focus on cutting costs, improved cash flows and growth through acquisition and consolidation at the expense of higher drilling budgets. Indeed, the upstream oil and gas sector has been one of the top performing investment sectors during 2021, a new reality that limits any need to radically increase new drilling activities.

One indicator of this continued focus on investor returns is the muted increase in rig counts as we move into the second half of the year. In a normal recovery year for the domestic industry, we would expect to see rig counts shooting up as July dawns and corporate operators implement higher revised budgets for the 2nd half of the year. With crude prices up 40% since January 1 despite Monday’s decline, one would expect to see dozens of new rigs and frac crews moving back into action.

But this is no normal recovery, as we have documented all year. This is without question the most cautious recovery we have seen from the U.S. industry in modern times. Thus, we have so far seen a very muted rig response since July 1, with the Enverus daily rig count showing only a rise of about 1 rig per day through July 19, up by just 13 over the previous 30 days. With OPEC, the U.S. Energy Information Administration and the International Energy Agency all projecting rapidly rising global demand through at least the end of 2023, this rate of increased drilling activity exemplifies the cautious approach by management teams at upstream corporate producers.

This caution is now being seen as a definite positive in the oilfield service sector as well. On a call with analysts and investors Tuesday, executives at Halliburton said they expect to see multiple years of ongoing growth in their business, both domestically and globally. In an interview with Bloomberg TV, company CEO Jeff Miller said “The economy feels more than 2% shut in, so the demand growth is there,” adding that drillers are “going to require a lot of services as we meet global demand for oil and gas.”

So what we see here is that Monday’s precipitous drop in crude prices was far from a sign of an oil and gas apocalypse, just a temporary blip on the continuum of the most modest and cautious U.S. oil boom in modern times. Unless the Delta Variant or some other unforeseen global demand-killing crisis intercedes, there is every reason to expect this boom to continue for many months, potentially years, to come.

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