
The heart of the US oil boom is slowing
NEW YORK, May 5 (Reuters Breakingviews) - Oil fields are just as quick to make fortunes as break them. The 1901 Spindletop gusher in Texas jumpstarted the petroleum age, crashing oil prices. A mere two years later, over-extraction drove the field into decline. Sure, today's industry is far larger and more sophisticated. But even in the mighty Permian Basin, which turned the United States into the world's biggest oil producer, resources eventually deplete. There are signs that the peak is already at hand.
Twenty years ago, the U.S. produced about 5 million barrels of crude oil per day, down by half from the 1970s. With even remote fields like Alaska's North Slope sputtering and the cost to find and extract an additional barrel of oil rising, collapse loomed.
The turnaround came when engineers figured out how to inject a mix of water, sand and chemicals at extremely high pressure into shale formations, cracking them apart to reveal the natural gas and oil deposits within. This proved fruitful in fields from North Dakota and Appalachia, but perhaps nowhere more so than the Permian in Texas. This field alone now produces over 6 million barrels per day, nearly half of the nation's current production and more than the entire country produced before the technological revolution.
While that approach, known as fracking, opened up vast new reserves, it has not upended the basic laws of economics. There is a cost to pulling black gold out of the ground. If market prices for it fall below those expenses, drillers will pull back. According to a survey of oil companies by the Federal Reserve Bank of Dallas, opens new tab, this break-even point is around $61 per barrel in the Midland Basin, the heart of the Permian, and $65 for the region as a whole. The market price for West Texas Intermediate (WTI), the widely used benchmark, currently hovers at around $62.
That might not be existential. What matters to most drillers is the expected price of oil over the lifetime of a well, rather than right now. The fear is that the recent, sustained downswing in WTI prices indicates diminishing expectations of future demand - particularly important for the Permian, which has effectively become the world's swing producer, able to ramp up or dial down production quickly as conditions change.
That sensitivity may mean muted future output. The International Energy Agency predicts annual global demand for oil will grow less than 1% this year, opens new tab. Over the long run, things look even grimmer. China accounted for roughly half of all global oil demand growth over the past two decades. The rise of electric vehicles there already has slowed growth to a crawl, and threatens to destroy demand. With a shift to battery power incipient elsewhere, the IEA, opens new tab predicts global oil demand will peak before the end of the decade, leaving a surplus of supply.
While demand predictions should be taken with a grain of salt – as gyrations during the pandemic showed - it's harder to escape rising costs in the Permian. That $62 per barrel break-even price in Midland is up from $46 in 2017. Tariffs on crucial materials like steel will increase these costs further.
Operating costs are not yet high enough to threaten existing wells, plenty of which are profitable at current prices. The Dallas Fed survey indicates that it would take a further 50% cut to the price of oil before it no longer made sense to keep pumping.
Snag is, shale wells have an extremely short lifespan. On average, production drops by more than two-thirds after one year, opens new tab and 95% after six years. So if new wells begin to look like a bad bet, that will show up in overall production numbers quickly.
Of course, average figures belie the wide differences in the quality of land from one patch to the next. Problem is, the best spots are running out. On so-called tier-one acreage in the Permian, drilling can generate a 30% return, based on net present value, at $50 a barrel oil. That's enough to cover operational risk, service debt and pay dividends. This prime real estate could run out in about 3.5 years, reckons research outfit Enverus.
That's not the end of the world; there's another 3.5 years worth of oil that clears the hurdle at prices of $55. But put all of this together, and it's enough to make some of the earliest champions of fracking increasingly bearish. Harold Hamm, who made billions by pioneering the practice in North Dakota, said at an industry conference in March that U.S. crude production was beginning to plateau. Scott Sheffield, founder of Pioneer Natural Resources, said in a CNBC interview, opens new tab that one of the main reasons he sold the company to Exxon for $65 billion in 2023 was that it was running out of tier-one inventory - and that everyone else is, too.
The Permian's future might have already been spelled out. The Bakken Formation, largely in North Dakota, birthed one of the earliest fracking booms. Production increased from roughly 90,000 barrels of crude a day in 2005 to 1.5 million in 2019. As costs rose and tier-one and -two acreage expired, North Dakota's production has declined by nearly a third since.
The biggest energy firms are already in capital preservation mode, preferring to send cash back to shareholders. The top five Western extractors - Exxon Mobil (XOM.N), opens new tab, Chevron (CVX.N), opens new tab, TotalEnergies (TTEF.PA), opens new tab, BP (BP.L), opens new tab and Shell (SHEL.L), opens new tab - spent about $225 billion, a record, on share repurchases and dividends over the past two years. Investment in new production stagnated. To add to the foreboding, cash flow from operations didn't cover the combination of capital expenditures and cash returned to investors at either Chevron or Exxon in the first quarter of this year.
Of course, even if the peak is already here for the Permian, it will - like the Bakken - keep pumping for years. But the effects on U.S. policy could still be substantial. As both the world's biggest producer, and consumer, of oil, fights over fossil-fuel dependence have been intense. Even amid the dramatic rise of electric vehicles or renewable energy, politicians on both sides of the aisle have tended to favor rising production. If the Texan spigot starts to slow, and the U.S. economy tilts toward consumption, that may favor policies that favor decarbonization, if only to offset risks to national security. The last oil crisis served as a spark for all kinds of novel energy ideas. Such a change in the political economy would be the industry's biggest risk of all.
Breakingviews
Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.
Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors.
Hashtags

Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles


Reuters
3 days ago
- Reuters
WTI-Brent spread at narrowest in almost two years as US prices rise
HOUSTON, June 6 (Reuters) - The spread between U.S. West Texas Intermediate and Brent crude futures narrowed to its tightest level since September 2023 on Friday as U.S. prices rose on a sliding rig count and Canadian wildfires that cut supplies, analysts and traders said. U.S. futures ended the week 4.9% higher, while Brent futures rose 2.75%, as OPEC+ output increases put a cap on gains. A narrower spread indicates a closed arbitrage window for traders and weaker shipping economics to Europe and Asia. The tighter spread can act as an early indicator that U.S. crude exports will likely fall in the next few weeks, assuming the premium for Brent crude remains weak. The inclusion of WTI-Midland crude in the dated Brent index has meant that the spread between the two is increasingly correlated to freight rates, as the price of Dated Brent is set by WTI Midland on many trading days. The spread between the two crude benchmarks narrowed to as little as $2.78 a barrel during the session on Friday. A discount of $4 per barrel is typically considered the level that encourages U.S. exports to Europe, as traders see an open arbitrage route. The spread has remained narrower than $4 a barrel since May 1, according to data from LSEG, partly due to concerns around U.S. production, helping keep more barrels onshore, according to Phil Flynn, senior analyst with Price Futures Group. Since April, OPEC+ countries including Saudi Arabia and Russia have made or announced increases totaling 1.37 million barrels per day, or 62% of the 2.2 million bpd they aim to add back to the market. Meanwhile the U.S. oil and gas rig count, an early indicator of future output, fell by four to 559 in the week to June 6, the lowest since November 2021, energy services firm Baker Hughes (BKR.O), opens new tab said in its closely followed report on Friday, stoking some concerns around future U.S. production. This has helped create pricing that encourages U.S. oil to remain in the domestic market, traders and analysts said. Wildfires burning in Canada's oil-producing province of Alberta have further buoyed U.S. crude futures, analysts said, with Canadian daily crude production down by about 7%. "With Canadian wildfire season underway, further disruption could push the WTI/Brent spread below $3 this summer," said analysts at Sparta Commodities. "When you look at the WTI/Brent spread, you can see the concerns a little bit around leveling off U.S. production and concerns about export barrels tightening up," said Price Futures Group's Flynn.


Reuters
4 days ago
- Reuters
Breakingviews - Wise's US listing switch lacks financial wisdom
LONDON, June 5 (Reuters Breakingviews) - Wise (WISEa.L), opens new tab helps customers exchange money more cheaply, transparently and, well, wisely. But the $15 billion firm's plan, opens new tab to shift its primary listing to New York from London seems less clever. CEO, co-founder and largest shareholder Kristo Käärmann wants to tap deeper pools of liquidity and attract more American investors. Yet for a company already trading at a premium valuation, the move raises more questions than it answers. Käärmann's case rests on two key points. Wise's shares are thinly traded in London, meaning investors risk moving the market by offloading stock in large volumes. Second, a U.S. listing would boost the company's appeal to American investors and even customers. There's truth to both. The total daily value of Wise's trading volume has averaged about half of $4 billion American peer Remitly Global over the past two years according to a Breakingviews analysis of LSEG data, even though the London-listed group is much bigger. And some domestic-focused U.S. investors prefer to hold stocks listed in their home market. Yet Wise needn't cross the Atlantic Ocean to boost liquidity. One possible obstacle to winning more investors at home is the company's quirky governance, where Class B owners have nine votes per share. The effect is that Käärmann has a tight grip on the company despite owning less than 20% of the tradable Class A stock, according to LSEG data. The alternative to hopping across the pond would be to get rid of some of the CEO's special rights, which could in turn smooth Wise's entry into Britain's main stock benchmark, the FTSE 100 Index (.FTSE), opens new tab. That would boost liquidity to U.S. levels: LSEG research, opens new tab found that, relative to the volume of companies' tradable shares, FTSE 100 trading levels were slightly higher than in the S&P 500 Index (.SPX), opens new tab in 2022. Nor is the United States Wise's biggest geography, as it was for other listing switchers like CRH and Ferguson Enterprises. For Käärmann's company, the American market comes third after Europe and Asia, making up 20% of group revenue. As for brand awareness, switching trading venue seems like a strange way to gain publicity compared with a marketing campaign. Moving the listing also brings possible downside. Wise trades at 29 times consensus 2027 earnings – beating Remitly, Block, PayPal and others. Other metrics tell the same story: there's no evidence of a valuation penalty because of the company's UK trading venue. That means Käärmann has much to lose if the company ends up as one of the many 'orphaned' pond-hoppers, which switch listing but never quite catch fire in the U.S. market. Research by think tank New Financial earlier this year found that just 44% of the 16 European companies that had moved across the Atlantic subsequently beat the performance of their home continent. The one consolidation is that this doesn't seem to be about extra CEO pay: Käärmann, as a major shareholder, has taken a roughly 200,000-pound ($270,000) cash salary in recent years, which is tiny compared to most bosses. There are no plans to raise that, according to a person familiar with the matter. But for investors, Wise's shift looks like a poor financial trade-off. Follow Karen Kwok on LinkedIn, opens new tab and X, opens new tab.


Reuters
5 days ago
- Reuters
Oil slips on US stockpile build, Saudi Arabia price cuts
TOKYO, June 5 (Reuters) - Oil prices slipped in early trade on Thursday after a build in U.S. gasoline and diesel inventories and Saudi Arabia's cut to its July prices for Asian crude buyers. Brent crude futures fell 21 cents, or 0.3%, to $64.65 a barrel at 0047 GMT. U.S. West Texas Intermediate crude lost 29 cents, or 0.5%, dropping to $62.58. Oil prices closed around 1% lower on Wednesday after official data showed that U.S. gasoline and distillate stockpiles grew more than expected, reflecting weaker demand in the world's top economy. Adding to the weakness, Saudi Arabia, the world's biggest oil exporter, cut its July prices for Asian crude buyers to nearly the lowest in four years. The price cut by Saudi Arabia, key oil producer within OPEC+ - the oil producing group that includes members of the Organization of the Petroleum Exporting Countries and allies such as Russia - follows the OPEC+ move over the weekend to increase output by 411,000 barrels per day for July. The strategy of OPEC+ group leaders Saudi Arabia and Russia is partly to punish over-producers and to wrestle back market share, Reuters has reported. Meanwhile, Canada prepared possible reprisals and the European Union reported progress in trade talks as new U.S. metals tariffs triggered more disruption in the global economy and added urgency to negotiations with Washington. "Uncertainty fuelled by President Trump's shifting stance on tariffs has intensified fears of a global economic slowdown," analyst Ole Hansen at Saxo Bank said in a note.