Under Trump Oil Production Booms & Prices Drop

Drill, baby, drill!

That has been a renewed motto for U.S. oil firms over the last twelve months as crude prices have recovered from a thirteen-year low. American oil output has spiked more than 10% since May 2015 to 9.3 million barrels per day (bpd), and this trend may not slow down anytime soon.

Because President Donald Trump has taken the U.S. out of the Paris Agreement, analysts are warning that domestic production could amplify. If the forecast is correct, U.S. production levels could contribute to the global oil glut, even as the Organization of the Petroleum Exporting Countries (OPEC) extends its production freeze.

In Vienna last month, the oil cartel extended its production freeze of 1.8 million bpd by another nine months. The purpose of the move is to reduce oil supplies that have flooded the international market over the last few years. Investors fear that U.S. firms will offset OPEC’s efforts which could impact prices for the rest of 2017.

It isn’t just the U.S. that is boosting production. Libya, Nigeria, and South Sudan have all rejuvenated output.

Igor Sechin, head of Rosneft, Russia's largest oil producer, thinks the U.S. could add as much as 1.5 million bpd to global oil production next year. Meanwhile, the Energy Information Administration (EIA) projects that output could top 10 million bpd in 2018.

Moreover, the government agency notes that oil drilling has gone up for nineteen straight weeks. According to recent data from Baker Hughes, an energy services organization, U.S. drillers added eleven rigs last week to a total of 916. This is the twentieth consecutive week of rig additions. Industry experts also say that the summer-driving season will have little effect on global stockpiles.

Evidently, the shale revolution has immensely transformed the global energy market. For decades, U.S. administrations and lawmakers have called for energy independence. Today, the U.S. sits right behind Russia and Saudi Arabia when it comes to top-tier oil producers.

President Trump announced the withdrawal from the Paris accord last week, a 2015 global agreement to combat climate change. The announcement drew harsh remarks from the international community, including the energy industry. It is believed that the nation’s exit could spark U.S. oil production at a much faster rate.

Stewart Glickman, energy equity analyst at CFRA in New York, told Reuters that Trump is facilitating the shale revolution:

Trump seems to be removing any barriers he can find that would obstruct growth of crude oil or natural gas. It’s kind of ironic because by doing that you’re encouraging more volumes to come out of the ground.

In a research note to investors on Friday, using quarterly industry reports, Barclays avers that exploration and production firms can persist in their cost-effective drilling for years to come:

[Drillers] will moderate activity only if prices constrain activity. At current price levels, many producers will continue to meet or exceed their 2017 production guidance.

Although many U.S. oil firms are still reeling from 2014’s collapse, the average cost to break even when manufacturing oil has ceased tumbling and has steadied between $50 to $55 per barrel. Even if crude prices dropped to $40, IHS Markit says many U.S. drillers can still make money, particularly in Texas, where it is cheaper to drill.

It isn’t as rosy for the oil industry as many say, notes Bank of America Merrill Lynch. Per the financial institution, oil businesses still have other issues to contend with, such as a shortage of workers and problems relating to hydraulic fracturing:

People will come back into the market and we may also see availability of mine sand go up later this year or in early 2018. So there will be cost inflation, but not that much.

That said, for the foreseeable future, the two biggest threats to Saudi Arabia’s multi-decade dominance on the world stage are the Paris Pact departure and the state of Texas. Today, the Lone Star State accounts for more than a third of the nation’s output.

As Jeff Mosier, energy and environment reporter at The Dallas Morning News, writes, the only hurdles the U.S. may need to overcome are the number of oil workers and the amount of oil rigs. If that happens, the U.S could surpass Saudi Arabia as the world’s No. 2 oil producer under Trump’s watch.