By Avi Salzman
U.S. oil companies are pulling back on new drilling, and are likely to keep holding back for the next few months because the oil market is weak, according to oil services companies, analysts, and government forecasters.
International oil prices were at $74 per barrel on Monday, down from more than $80 two weeks ago. Chinese demand has been weak and Israel's conflict with Iran hasn't escalated to the point where it affects oil supplies. Global production is also set to ramp up next year, potentially leading to oversupply.
The sluggishness in U.S. drilling comes as both Vice President Kamala Harris and former President Donald Trump say they will encourage more exploration activity if they are elected president. Already, U.S. oil production is at a record high. Trump has made "drill baby drill" a policy centerpiece of his election campaign, claiming that more activity will bring down prices and tame inflation. But the economics of the oil business now make it less likely that U.S. production will see a further boom in the near term, regardless of who wins.
Energy-service companies warned investors last week that their customers -- oil and gas producers -- are cutting back on activity because oil prices are falling and are expected to stay relatively low in 2025. Activity in the U.S. may already be in the midst of a serious downturn: The research firm Tudor Pickering Holt thinks that weakness in the oil market is "set to potentially lead to a low double-digit decline in U.S. activity in the fourth quarter."
The two companies that reported earnings last week -- SLB and Liberty Energy -- both sounded cautious, and their stocks fell. Liberty lost 8.9% after disclosing its results on Wednesday, while SLB's numbers helped send its stock down 4.7% on Friday.
SLB, the world's biggest energy services company, said that North American activity would likely be flat next year, and possibly down. "We do not see U.S. activity rebounding in the near term, and any potential increases in gas rigs could be quickly offset by further decline in oil rigs due to increased operating efficiency," CEO Olivier Le Peuch said on a call to discuss the results with analysts and investors.
That doesn't mean that U.S. oil production will decline outright. Producers have figured out how to get more oil out of wells without drilling as many new ones.
It does mean that growth could tail off, however. This month, the U.S. Energy Information Administration reduced its expectations for 2025 production growth to 2.4% from 3.2%. U.S. production in 2023 was 7.9% higher than in 2022.
Liberty said that it expects to benefit from the current difficult environment for service companies because smaller peers will go out of business, leaving less competition. SLB also said it was managing the downturn well, by becoming more efficient, selling more digital services, and leaning into areas like natural gas and offshore oil drilling that will be less affected by a shorter-term downturn in drilling activity.
Investors will hear from other peers in the coming weeks. Halliburton, the biggest U.S. drilling-services provider, reports its earnings next month.
Write to Avi Salzman at avi.salzman@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
October 21, 2024 12:54 ET (16:54 GMT)
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