OPINION: Shale producers in the US have been restraining oil output, building up cash flow and increasing dividends.

But how long will they be able to continue this discipline in the face of rising crude prices and talk of supply shortages?

Pre-Covid-19, Permian basin drillers historically ploughed free cash into expanding exploration and production.

Oil price - from bust to boom?

Last year’s oil price crash brought many shale players to their knees and triggered huge asset writedowns.

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With Brent crude steady at just under $74 per barrel this week and predictions of a potential return to $100 oil, the good times for shale producers could be returning.

First-quarter earnings this year from US independent EOG Resources showed the company churning out more than $1 billion-worth of free cash.

Chief executive Bill Thomas said they were the second-best results in its history and promised as much as $1.5 billion would be returned to shareholders via dividends throughout this year.

The message was clear that there is a new sobriety on the Eagle Ford and other core US shale patches — a message repeated by Continental Resources and Devon Energy.

Bloomberg Intelligence recently predicted that producers could generate up to $30 billion in free cash across the sector this year.

Money would be used to reward investors and pay down debt rather than expand the business as fast as possible.

US shale drillers are generally assumed to have a breakeven level of around $50 but this can vary from $23 to $70, according to surveys.

A report from financial services stalwart Deloitte last year claimed the previous 15 years of the US shale “boom” had brought 190 bankruptcies and $300 billion of net losses as too many operators — often carrying huge debt burdens — barged in to an already overcrowded field before the price crash.

Traders spy supply squeeze

The value of oil has also wobbled recently along with global stock and bond markets in the face of new Covid-19 cases and downbeat messages from the US Federal Reserve.

Signals that the US central bank might raise interest rates — which are currently low — and rein back monthly bond buying upset capital markets at the start of this week.

Top commodity traders still believe that a lack of investment in new oil production over the past 18 months will cause a supply squeeze.

Glencore, Gunvor and Vitol all told a recent Financial Times conference that $100 oil was a definite possibility.

Investment bank Goldman Sachs is still convinced that oil will be part of a forthcoming new super cycle for commodities.

The new thinking accepts that decarbonisation will accelerate but questions the speed with which an electric economy can take over from fossil fuels.

Strong activity in the shale patch

Meanwhile, US drilling rig numbers continue to rise, hitting 470 at the end of last week — nine more than the previous week.

The US Energy Information Administration has forecast Permian oil production will average 4.6 million barrels per day in June, the highest level since March 2020.

A brake on the shale sector could still come if Opec+ decides to increase its output quicker even as new doubts arise over a possible US-Iran deal to drop sanctions.

Rising confidence in shale certainly makes it easier for companies such as Shell, which is reported to be wanting to sell out of US shale.

The Anglo-Dutch supermajor wants to be a leader the energy transition, as does US President Joe Biden.

But for many others, there will seem plenty of life in the Permian shale patch — at least for the next few years.

(This is an Upstream opinion article.)