Oil prices have responded to a more ‘normal’ US economy: After West Texas Intermediate prices (a good gauge for US oil) bottomed out at $21 per barrel in March 2020, prices hit $74 in July 2021, and are now roughly $70.
These price fluctuations are largely a result of the pandemic and resulting demand drop.
The massive cuts that OPEC and associated countries (called OPEC+) took helped the markets recover some. However, the sub $40 price per barrel immediately crippled cash flow for many US shale producers, who operate on very slim margins.
“The most crucial thing to me is that the pandemic basically put a clamp on shale production,” UH energy finance professor Praveen Kumar said. “Many smaller shale producers had to shut down production and did not have the financial ability to ride out financial collapse and went bankrupt. US shale production is still significantly below pre-Covid levels.”
The challenges for shale producers in coming back up to speed is what led to these higher prices this spring. “The shale financiers got badly burnt last year and are not likely going to be rushing back to shale investments,” Kumar said.
The loss of an experienced workforce in the shale patch has added a further constraint in resuming production, and this is what has been keeping upward price pressure – but it won’t last forever.
The challenge in determining how much and how long this shale production impact will last is because the price of oil is driven by the marginal barrel of oil, where the markets get cleared.
For more information visit www.opec.org
