US oil production: record output at low prices a troubling combination

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As Saudi Arabia makes production cuts, its US oil rivals make hay. American production, recently measured at 13.2mn barrels a day, has hit an all-time high. This is slightly more than the previous peak in 2019. At the same time, benchmark Brent and WTI prices have fallen back from $90 a barrel in the early autumn to less than $80.

US onshore producers risk entrapment in a cycle of inefficient drilling, forsaking positive cash flow for greater volumes and market share. High production could also make the Biden administration more focused on promoting other forms of greener energy.

Independent exploration and production companies (E&Ps) have changed radically. They not only generate cash but reward shareholders with steady dividends and buybacks.

These E&Ps insist they are not backsliding financially by increasing output. Geopolitics has merely allowed them to fill a market void. But if commodity prices remain depressed, expect investors to scrutinise these E&Ps’ production decisions.

ExxonMobil on Wednesday said it would boost its standalone capital expenditure budget slightly to as much as $27bn annually. It has also recently announced a $60bn deal to buy Pioneer Natural Resources, with large acreage in Texas’s Permian basin. This area accounts for more than half of onshore US output. 

That deal has triggered a wave of consolidation, with rivals such as Chevron and Occidental Petroleum pursuing their own buyouts to acquire the best remaining real estate.

True, Exxon’s expanded capex will still be below its pre-pandemic ambitions. Exxon even said that its forecast cash flow, at more modest oil prices, would still permit it to boost its buybacks after the Pioneer deal closes.

The consolidation may force greater discipline, reining in excess investment and operating overheads. Good news for shareholders. Still, expect discomfort in the White House should both elevated oil prices and elevated production prevail.