For the first time in three years, production costs in the US shale region have fallen, indicating that US operators may be able to stabilise their earnings.
While the cost reduction is just 1%, it marks a turning point from the rising production costs seen since the COVID-19 pandemic. The cost of steel and diesel has been trending downward, dig rates are down by a tenth, and the cost of drill pipes has halved this year. The cost of labour is continuing to grow, however.
In addition, Goldman Sachs forecasts that production costs will be 10% lower overall next month, which should help increase the earnings of US operators and encourage them to produce more oil. Despite posting record profits in the first quarter, ExxonMobil, the maker of the Mobil SHC gear oil, warned that its second-quarter profits could fall sharply down due to narrower refining margins and lower natural gas prices.
The reduction in production costs will be particularly welcome given that oil prices look likely to stay below $80 per barrel for the rest of this year. Morgan Stanley recently downgraded its forecasts for later this year and early next year, saying in a note:
“Despite low investment, non-OPEC+ supply has been growing robustly and supply from Iran and Venezuela has been creeping higher. We still model stock draws in Q3, but expect oil price softness to continue as the market’s focus shifts to H1 2024 when balances look in surplus.”
Nevertheless, some analysts believe prices could rally later in the year as recessionary fears begin to abate.