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Will US Oil Production Growth Decelerate in 2019?

Nilanjan Banerjee

Volatile oil prices have created uncertainty in the U.S. drilling and production space. Oilfield service giant Schlumberger Limited SLB recently announced that domestic shale producers are planning to align this year’s spending with free cash flow generation. Hence, uncertainty in upstream businesses may hurt their cash flow and result in conservative spending.

Schlumberger emphasized that crude volatility has forced shale producers to refrain from drilling new wells in 2019 but instead allocate capital for drilled but uncompleted wells.

Halliburton Company HAL, another leading oil field service firm, announced that pricing for hydraulic fracturing in North America has become low following a plunge in demand for completions services through the October to December quarter of 2018. Further, the count for active hydraulic fracturing rigs in America’s most prolific basin, Permian, has declined 27% through January this year since June 2017, per Reuters. 

With expectations that capital budget for shale producers will decline, there is possibility that growth in American oil production will be slower in 2019 as compared to 2018 when crude production growth is likely to have been the highest.

EIA Estimates Record Oil Production Growth for 2018

Except last December, the crude pricing scenario in 2018 was considerably healthier than a year ago. According to the U.S. Energy Information Administration (EIA), the average monthly West Texas Intermediate (WTI) spot oil prices through January-October 2018 was well above $60 per barrel. In comparison, the commodity traded at an average monthly spot price of well below $55 for most of the months in 2017.

Strong crude prices backed shale drillers in the United States to produce record volumes of oil last year. Per estimation by EIA, domestic average crude production volumes in 2018 will be 10.9 million barrels a day, reflecting a year-over-year rise of 1.6 million barrels a day.

Crude Volumes Growth Slowing in 2019

Despite favorable crude price for drillers last year, the pricing of the commodity started to weaken through the last quarter of 2018.

Through fourth-quarter 2018, WTI crude plummeted from an average monthly price of $70.75 per barrel in October to $49.52 in December, per EIA’s data. Oil price is unlikely to recover before May, when waivers of sanctions on Iranian oil imports issued by the United States to several countries are slated to expire. However, the global economy which is slowing at an accelerating rate could offset the pricing recovery. Hence, the volatility in crude prices has created uncertainty for the energy market through 2019.

Following this, U.S. shale drillers are curtailing their 2019 budgets, said Schlumberger. Unless the picture for oil price is getting clearer, domestic shale producers and drillers will continue to spend conservatively, announced oilfield equipment supplier RPC, Inc. RES.  

Schlumberger believes that customers’ lower capital budget will be slowing growth in domestic oil production in 2019. Notably, EIA projects average oil production volumes in the United States of 12.1 million barrels per day in 2019, reflecting lower output growth compared to last year. 

Few upstream energy firms that have so far made public announcements about the curtailment in 2019 drilling or production plans are Parsley Energy, Inc. PE, Chesapeake Energy Corporation CHK and Diamondback Energy, Inc. FANG. Diamondback carries a Zacks Rank #5 (Strong Sell), while Chesapeake Energy and Parsley Energy have a Zacks Rank #3 (Hold).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.  

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