ENB Pub Note: This article was originally run on OilPrice.com. Stu Turley will be interviewing Dan Doyle in a week or so, and covering the book and insights into the oil industry.
- A sustained oil supply shock and higher prices are rapidly reigniting U.S. drilling activity, reversing earlier expectations of a muted shale response.
- Oilfield services are now facing a severe capacity squeeze, with frac crews, service rigs, and drilling rigs quickly sold out as operators rush to boost output.
- Rising costs and tight capacity are putting pressure on service companies’ margins, making higher service prices inevitable as the sector struggles to scale back up.
On March 9th, I wrote in an article for Oilprice.com titled “Why $100 Oil Isn’t Going to Spark a New Shale Boom.” My point, nine days into Operation Epic Fury, was that “No one—that I know—is carrying on much about the recent jump in prices, let alone cheering them on. Outside of thinking we’d better hedge, the response has mostly been a few words, a few shrugs, a ‘let’s take it while we can, attitude. Our collective reaction would surprise outsiders, but…was normal to me. It’s also normal to assume that when the war comes to an end, we will be left with a supply and demand picture that may have changed…but maybe not enough to be supportive of a renewed push to pick up rigs that were just laid down.”
Premeditatedly, a cover-my-ass move, really, I added “If oil were sustained at $90, the script would flip.”
A month later, 45 days into the war, the script has flipped. The Straits is closed and mined, and the Islamabad summit between the U.S. and Iran failed to reach a universal agreement—no surprise given the opposing red lines. WTI is going up, and not down, and even when it does go down, the base oil price reset will last. The once generally accepted year-end price of $58 is a long distant memory when, according to analysts Eric Nuttall and Rory Johnson, 13 MMBO is being lost every day due to closure.
In the event there is any debate about the number, Jeff Currie of Goldman and now Carlyle believes daily losses are even larger.
That is what has woken U.S. E&Ps—the durability of not just higher prices, but higher prices for longer. That is, a lasting supply shock.
In late February, when I was dragging my way towards a 2026 drilling program, trying to convince myself that I was right and everyone else was wrong with their $58 projections, every service company I called was available. Liberty Energy’s Denver camp had plenty of room on their schedule. Then, war, and by the third week of March, they were sold out until September. Two weeks later, they revised to sold out for the year.
That made sense, E&P’s rushing to complete low-hanging fruit like DUCs.
Next up were service rigs. Planned drill-outs after fracs are now absorbing whatever spare capacity is left in the service rig market. Adding to the squeeze is the rush to mobilize rigs to do remedial work like replacing long-neglected downhole pumps and tubing leaks. Why bother at $59 oil? But at $100, it’s a rush to maximize production quickly.
Now it’s drilling rigs. Continental Resources was dropping its entire Bakken program back in January; now it’s not. Rigs that were to be laid down and let go are being kept and extended, with idled rigs being picked up as well. As Trent O’Shields, a salesman for Cyclone Drilling in Wyoming, told me, “the beginning of the year, we had twice too many rigs, now we only got half what we need.”
Service companies like mine, a hydraulic frac company, are being pressured to hold the line on pricing. That’s understood, as we also wear a producer’s hat by way of drilling for our own account. But fuel prices are higher and we’re already seeing price increases for everything that uses fuel, which is everything. To hold our line comes at a further erosion of margins, tough medicine for a sector that has been beaten down by the last few years of inactivity. If we don’t raise our prices, we’re looking at mounting losses on top of those incurred over the last two years. Continue the beating, and we’ll exacerbate operational deficiencies that parked equipment and lower crew counts create. We’re not alone on this either.
With an increase in activity and a squeeze, we’re going to see service-side prices creep up. It’s inevitable. Fleet repairs and hiring are needed. The labor pool is thin, and quick additions of horsepower and equipment may be out of reach as manufacturing slowed down as well. Like operators bringing on old wells, service providers will be looking to bring on old gear. Operators are able to fund through higher oil prices, but the service side can only do it by charging and working more. Reasonable margins are needed because operators never understand when your equipment doesn’t work. But they never want to hear about why.
Editor’s note: Dan Doyle is the author of Of Roughnecks & Riches, a firsthand account of building a frac company during the U.S. shale boom.
Follow Dan On X @dandoyleoil
By Dan Doyle for Oilprice.com
