US shale drillers cannot increase production quickly enough to solve an oil supply crisis caused by Donald Trump’s war in Iran, industry bosses have warned, saying a big rise in output would take months to materialise.
Scott Sheffield, a veteran shale boss, said producers would resist costly new drilling programmes until they were certain oil prices — which hit an 18-month high above $80 a barrel this week amid fears of supply disruptions from the Gulf — would last.
A lack of good drilling prospects would also hold back companies, which have cut spending, idled rigs and laid off workers in the past 12 months during a period of weak oil prices, he said.
“It’ll just give them extra cash flow. They can reduce debt. They can do buybacks. They can pay dividends,” Sheffield said of the price surge this week. “But once the war ends, then it’s gonna fall back pretty quickly.”
He added: “Also, you got to remember the companies are running out of [drilling] inventory . . . I do not anticipate anybody adding any rigs.”
The joint US-Israeli attacks on Iran and assassination of its supreme leader Ayatollah Ali Khamenei on Saturday drew a swift response from Tehran, which has targeted energy infrastructure in Arab neighbours and vowed to shut the Strait of Hormuz, the chokepoint for a fifth of global oil supply.
Some huge oilfields in Iraq and Qatar’s giant gas export facilities have already shut as the war intensifies. Trump said on Tuesday that the US could escort oil tankers out of the Gulf but details of the plan were scant.
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Goldman Sachs and consultancy Wood Mackenzie have warned that a sustained supply disruption from the Gulf could send crude prices above $100 per barrel, pushing up fuel prices and inflation and hitting global growth.
But the Trump administration has been sanguine. “The world is very well supplied with oil right now, and I think it gives President Trump more leverage in his geopolitical actions to not worry about a crazy spike in oil prices,” energy secretary Chris Wright told CNBC in an interview shortly before the US attacked Iran.
The International Energy Agency met to discuss the crisis on Tuesday and circulated a document saying US shale would be the “most significant” source of near-term output to offset any shortfall, mainly from recently drilled wells that had not started producing.
Those wells could add “an additional 400,000 barrels per day” in the second half of the year, it said, with 240,000 barrels per day in May.
But those are small volumes compared with the 20mn b/d exported from the Gulf. The most recent prediction from the US government’s own Energy Information Administration said American output, currently at a record high of about 13.6mn b/d, would fall this year.
Reversing that trend would take much more time, even at higher oil prices, said analysts.
“US shale could respond, but incremental supply would require several months given drilling, completion and infrastructure lead times,” wrote Natasha Kaneva, an analyst at JPMorgan.
Producers in a sector accustomed to violent market swings would wait to see how high prices remained and for how long.
“It’s too early for people to make the move [to invest],” said Kirk Edwards, president of Latigo Petroleum, an independent producer based in Texas’s prolific Permian basin. “What Permian producers need in my opinion is a stable $75 price . . . over the next 12 months.”
Trump, who pledged to bring oil prices down to $50 a barrel during the election campaign, said on Tuesday the sharp rise in oil prices would reverse when the conflict ended.
“If we have a little high oil prices for a little while but as soon as this ends those prices are going to drop, I believe lower than even before,” he said.
Many American drillers need much higher prices to turn a profit. On Tuesday, the Brent benchmark settled at $84.22 a barrel, up 6 per cent.
Shale investors also expressed caution.
“Producers are distrustful of the sentiment around the price of oil perceived by market operators and the rhetoric of the politics,” said Cole Smead, chief executive of Smead Capital Management, which owns stakes in Permian producers, including Diamondback Energy and Occidental Petroleum.
“The only thing that will make them get up and dance in the short term is more money per barrel. This conflict is believed to be shortlived. If it’s short, why get up and dance?”
Even if American producers were unable to offer immediate respite from a new energy crisis elsewhere triggered by war, US customers would remain relatively insulated from any shock.
“If it weren’t for US shale this would be a really unimaginable crisis. We would be looking at a worldwide oil price panic,” said Daniel Yergin, vice-chair of S&P Global and a historian of the oil sector.
Additional reporting by Malcolm Moore