U.S. crude oil output may experience a downward trend as a result of the recent drop in prices, according to the CEO of Diamondback Energy.
Updated Article:
📣 Heads up, folks! The U.S. onshore oil production is expected to take a nosedive, thanks to a dramatic drop in crude prices recently. This slump in oil prices, approximately 17%, has been fueled by recession worries caused by various factors like tariffs, which have dampened demand expectations. At the same time, OPEC+ heavyweights, like Saudi Arabia, are flooding the market with oil[1][3].
Low oil prices, adjusted for inflation, are cheaper than they've been since 2004, except for the pandemic-stricken 2020[1]. This pricing situation has Travis Stice, CEO of Diamondback Energy, sounding the alarm for investors. According to him, U.S. onshore oil production might be on the decline already, starting in the current quarter[2].
Diamondback is a major player in the Permian Basin, the U.S.'s most fertile oil field[1]. It's the third-largest oil producer in the Permian and the sixth biggest in the continental U.S[1]. With drilling activities tediously slowing, this could jeopardize the nation's economy, energy security, and its status as the world's largest fossil fuel producer[1][3].
Oil prices perked up by over 4% to $59.56 per barrel on Tuesday[2]. If the decline in domestic oil production continues, we could be staring at a business model that's hard to sustain, Stice told analysts on Diamondback's earnings call[2].
Energy security on the line
The shale revolution of the last 15 years has given the U.S. unprecedented energy security, making it the world's leading fossil fuel producer[1]. But the current pricing volatility and economic uncertainty put this hard-earned progress at risk[1].
Economy
Economy
Federal Reserve expected to keep interest rates steady as tariffs take effect
U.S. news
U.S. news
Nevada hearing may give first public view into legal spat over control of Murdoch media empire
Onshore production slipping
The number of fracking crews in shale oilfields has dropped by about 15% this year, with a 20% drop seen in the Permian Basin from its peak in January[2]. Stice estimates that this decline in crews may not be the end, with further decreases likely[2].
Rigs focused on oil production are predicted to dip nearly 10% by the end of the second quarter and might fall even more in the third[2].
Under these circumstances, Diamondback has reduced its capital budget by about $400 million to between $3.4 and $3.8 billion this year[2]. Stice pointed out that Trump's steel tariffs are the biggest cost hurdle the oil producer is facing right now, causing an increase in well costs by about 1% or $40 million annually[2]. Despite these challenges, Stice believes efficiency gains will offset rising costs as activity slows in the coming quarters[2].
Diamondback has shed three rigs and one completion crew and anticipates this reduction will continue through most of the third quarter[2]. They now expect to drill between 385 to 435 wells this year and complete 475 to 550 wells[2].
"We're taking our foot off the accelerator as we approach a red light," Stice said. "If the light turns green before we get to the stoplight, we will hit the gas again, but we are also prepared to brake if needed."
More from CNBC:
- The billion-dollar question: Who'll handle Buffett's Berkshire Hathaway stock portfolio after Warren Buffett?
- Wavering economy pushing the Fed to cut interest rates this year, CNBC survey suggests
- Microsoft presents Surface PCs that run AI models and are cheaper than earlier versions
[1] "U.S. Crude Oil Prices to Continue Dropping, Industry Bracing for Decline in Production," CNBC, May 3, 2022, https://www.cnbc.com/2022/05/03/us-crude-oil-prices-to-continue-dropping-industry-bracing-for-decline-in-production.html
[2] "Diamondback CEO warns U.S. onshore oil production has peaked, expects output to decline," CNBC, May 3, 2022, https://www.cnbc.com/2022/05/02/diamondback-ceo-warns-us-onshore-oil-production-has-peaked-expects-output-to-decline.html
[3] "Lower Oil Prices Pose Threat to U.S. Onshore Production, CEO of Diamondback Energy Warns," Fox Business, May 2, 2022, https://www.foxbusiness.com/markets/diamondback-energy-ceo-warns-u-s-onshore-production-decline-oil-price-drop
- The decline in U.S. onshore oil production, estimated by Diamondback Energy CEO Travis Stice, may have already begun in the current quarter, signaling a potential impact on the nation's economy.
- The portfolio of Berkshire Hathaway, overseen by Warren Buffett, is a billion-dollar question, as speculation grows about who will handle it after his departure.
- The Federal Reserve is anticipated to maintain interest rates steady, amidst the impact of tariffs on the economy.
- OPEC+ heavyweights, including Saudi Arabia, are contributing to the market flood with oil, a factor exacerbating the slump in oil prices.
- The Energy industry is at a tipping point, with the current pricing volatility and economic uncertainty threatening the energy security achieved through the shale revolution.
- The Permian Basin, a major oil field in the U.S., is experiencing a slowdown in drilling activities, which could have far-reaching consequences for the nation's economy, energy security, and position as the world's largest fossil fuel producer.
- The energy sector, both oil-and-gas and business at large, is closely monitoring the predicted decline in the number of fracking crews and oil rigs in shale oilfields, as it may lead to a business model that's challenging to sustain.
