Why a Different Kind of Oil Market Is Taking Shape

_ Several big trends across the global oil and gas industry are taking hold, and they may offer a glimpse of how the business will look and behave into the next decade. Oil prices have climbed well above expectations, yet many of the biggest producers have kept spending plans largely unchanged. Exploration activity has been trending down for years as operators are making smaller discoveries. Despite the need to replenish their reserves with new finds, the appetite for risk is not what it once was, and countries around the world are responding by offering more attractive fiscal terms to attract investment. In the US, tight-oil output was widely expected to peak this year. Instead, stronger crude prices encouraged a modest increase in drilling and production, pushing US output to a record 13.6 million B/D. Nonetheless, the country’s role as the world’s primary source of supply growth is far from given that the Permian Basin, which represents almost half of US supply, is slowing down. As of July, year-over-year Permian production growth was just 130,000 B/D, compared with annual increases over the same period of about 300,000 to more than 500,000 B/D during much of the basin’s post-pandemic era. One of the other clear signs that the shale revolution has entered a more mature phase is the slowdown in merger and acquisition (M&A) activity. Outside of a small number of large transactions, dealmaking has slowed to a relative trickle compared with the pace seen just a few years ago, amid a scarcity of quality rock and companies willing to sell. Higher Prices, Less Spending This year was supposed to be a down one for oil and gas markets. Prices were expected to decline or, at best, remain stagnant around $60/bbl. Then the US-Israeli war with Iran erupted in February, breaking most, if not all, consensus forecasts. Oil prices have instead climbed to multiyear highs. As of late August, West Texas Intermediate was trading well above $80/bbl, with Brent crude topping $90/bbl. Wood Mackenzie said in July that price spikes tied to the ongoing conflict, including major disruptions to energy flows through the Strait of Hormuz, could generate $495 billion in cash flow for the world’s oil and gas companies this year if prices remain around current levels. That figure is double the market research firm’s previous estimate, which assumed Brent prices of $60/bbl. In the past, such a massive injection of cash into the system would spur the upstream industry to invest more in growth. But that does not appear to be the case. Wood Mackenzie found that capital expenditure plans have remained largely unchanged this year among many of the industry’s largest companies. To a large extent, they are taking a “wait-and-see approach,” the analyst firm concluded. However, with oil prices expected to remain elevated in the coming months, the industry could enter next year with a bigger appetite to take on additional spending.