Saudis Bet ‘Drill, Baby, Drill’ Over in Push for Pricier Oil

OPEC+ alliance surprised market by keeping oil output in check Saudi minister confident shale producers will stay disciplined

OPEC + Leadership - Energy News Beat

Saudi Arabia just made a high-stakes wager that the glory days of U.S. shale, which transformed the global energy map in the last decade, are never coming back.

By keeping a tight grip on supply at Thursday’s meeting of the OPEC+ alliance of oil producers, Saudi Energy Minister Prince Abdulaziz bin Salman showed he’s focused on boosting prices — and confident that this time around it won’t encourage American producers to surge back and steal market share.

“‘Drill, baby, drill’ is gone for ever,” said Prince Abdulaziz, who’s orchestrated the revival of the oil market after last year’s catastrophic collapse.

His swagger comes mixed with a good dose of diplomatic tension: Russia, Saudi Arabia’s most important OPEC+ partner, has tried to convince Riyadh for several months to increase output, fearing that rising oil prices would ultimately awaken rival shale producers. The Saudis are certain the American industry has reformed itself.

If the prince is right, OPEC+ will be able to both push prices higher now and recover market share later without worrying that rivals in Texas, Oklahoma and North Dakota will flood the market. But if Riyadh has miscalculated — and it’s got shale wrong before — the danger will be lower prices and production down the line.

Brent crude jumped 5% to a one-year high of almost $68 a barrel after the decision. Front-month futures extended gains on Friday and a raft of banks updated their price forecasts, including Goldman Sachs Group Inc., which increased its estimates by $5 — to $75 next quarter and $80 in the following three months.

Brent crude hits 1-year high

“This is an incredibly bold move on the part of OPEC+ to extend the oil price rally,” said KPMG Global Energy Sector Leader Regina Mayor.

If history is a guide, however, trouble may be brewing. The OPEC+ coalition, which groups Saudi Arabia, Russia and almost two dozen other oil producers, has in the past underestimated its American rivals, who year after year produced more than most expected. From a low point of less than 7 million barrels a day in 2007, the U.S.’s total petroleum output more than doubled to hit an all-time high of almost 18 million barrels a day by early 2020, forcing the cartel to cede market share.

Risky Move

“This is a risky take,” Amrita Sen, chief oil analyst at consultant Energy Aspects Ltd., said Friday in a Bloomberg Television interview. While U.S. oil companies probably won’t raise output this year, in 2022 “there’s nothing really stopping them, especially the small and mid-cap producers.”

Sen sees prices hitting $70 a barrel as soon as next week, $80 by the end of the year and a possible climb to $100 in 2022.

For now, U.S. total oil output remains constrained, hovering at 16 million barrels due to the impact of last year’s slump, which briefly saw benchmark prices trade below zero.

Under pressure from shareholders, shale producers have promised restraint, putting profits before the growth they relentlessly pursued during the boom years. Although drilling has risen from the lows of 2020, it’s well below previous levels. In addition, President Joe Biden is trying to temper the worst excesses of the industry, including the indiscriminate natural gas flaring that’s a byproduct of shale’s success.

Oil drilling in the U.S. remains historically low

Under a different oil minister, Saudi Arabia attacked shale producers in 2014 and 2015, flooding the market and forcing prices lower — a strategy that ultimately failed. Prince Abdulaziz is doing the opposite, because oil higher prices will eventually benefit shale producers. Yet, he’s convinced the industry won’t repeat its past excesses.

Shale executives agree with him — at least for now.

“A couple years ago it was ‘drill, baby, drill,’” John Hess, the head of Hess Corp., said in Houston earlier this week. “Now, it’s ‘show me the money.’”

Ryan Lance, the chief executive officer of ConocoPhillips, echoed the sentiment: “I hope there’s discipline in the system. The worst thing that can happen right now is U.S. producers start growing rapidly again.”

As the industry cuts spending to pay shareholders fatter dividends, there’s not much left to finance increased production. Even Big Oil is scaling down its ambitions in shale. Exxon Mobil Corp. had been running 55 oil rigs in the Permian basin that straddles West Texas and southeast New Mexico, part of an effort to boost output to 1 million barrels a day by 2025. After tightening its belt, the U.S. oil giant is running just 10 rigs, and has cut its 2025 output target by nearly a third to 700,000 barrels a day.

Yet, there are also signs that higher oil prices may ultimately reactivate the U.S. shale industry. With benchmark West Texas Intermediate now changing hands above $60 a barrel, some companies believe they may be able to both grow and keep shareholders happy. EOG Resources Inc., the largest producer in the Permian, has announced a big spending increase for next year. And others are following suit.

But the reaction of the stock market made Prince Abdulaziz’s case: investors punished EOG for spending more on drilling, marking down its shares relative to more disciplined rivals.

— With assistance by Kevin Crowley, Dina Khrennikova, Olga Tanas, and Annmarie Hordern -Bloomberg

About Stu Turley 3233 Articles
Stuart Turley is President and CEO of Sandstone Group, a top energy data, and finance consultancy working with companies all throughout the energy value chain. Sandstone helps both small and large-cap energy companies to develop customized applications and manage data workflows/integration throughout the entire business. With experience implementing enterprise networks, supercomputers, and cellular tower solutions, Sandstone has become a trusted source and advisor.   He is also the Executive Publisher of www.energynewsbeat.com, the best source for 24/7 energy news coverage, and is the Co-Host of the energy news video and Podcast Energy News Beat. Energy should be used to elevate humanity out of poverty. Let's use all forms of energy with the least impact on the environment while being sustainable without printing money. Stu is also a co-host on the 3 Podcasters Walk into A Bar podcast with David Blackmon, and Rey Trevino. Stuart is guided by over 30 years of business management experience, having successfully built and help sell multiple small and medium businesses while consulting for numerous Fortune 500 companies. He holds a B.A in Business Administration from Oklahoma State and an MBA from Oklahoma City University.