Will oil prices rise in 2022?

Americans who have long struggled with hyperinflation are finally getting some relief. After a relentless rise, average national fuel prices in the South fell to a 10-week low and settled at $3.28 a gallon. Fuel prices began to stabilize after President Joe Biden announced in Last November 23 announced the largest ever withdrawal from the strategic oil reserve, ignoring the rejection of experts for this as a mere aid tool, in the face of high fuel prices, and many Americans blamed the Biden administration, while the real culprit is the financial markets. Wall Street.

In a report published by “Oil Price” (oil priceThe American writer, Alex Kimani, said that the reason for the rise in fuel prices today is related to the financial pressures that oil companies are experiencing due to a decade of devastating losses and poor shareholder returns that have forced them to dramatically change their business models.

For years, Wall Street has pressured oil and gas companies to cut capital expenditures and invest their money in order to achieve financial goals such as increasing dividends, repurchases, debt repayments and decarbonization, after the fracking revolution left the US shale sector heavily indebted.

As a result, investment in new wells has collapsed by 60% since its peak in 2014, causing a decrease in US crude oil production by more than 3 million barrels per day, or nearly 25%, in conjunction with the spread of the Corona virus and then the failure of the sector to recover with the economy .

digging stop

With the recovery of Wall Street, US shale oil stocks fell dramatically, and according to the latest drilling productivity report issued by the US Energy Information Administration, the United States had 5,957 incomplete drilling wells in July 2021, the lowest number recorded by the United States in any month since November 2017, after peaking 8,900 wells in 2019, at this rate, shale oil producers will have to ramp up drilling of new wells to maintain the current production rate.

The Energy Information Administration reports that a sharp decline in the number of incomplete wells in most of the major oil-producing regions in the United States means more well completions, as opposed to less drilling of new wells. While the high completion rate of well drilling has contributed to an increase in oil production, drilling completions have sharply reduced inventories of incomplete wells, which should significantly limit the growth of US oil production in the coming months.

There are two main stages in the drilling process of an oil well, namely drilling and completion. The drilling stage includes sending a drilling rig and a crew to drill one or more wells in the required location. As for the next stage, it is usually carried out by a separate crew and includes well capping, shoring, drilling, and hydraulically fracturing it from production order. Generally, the interval between the two phases is several months, which means that there are a large number of incomplete wells that producers can keep as stock available to manage oil production.

According to data from S&P Capital IQ, 27 major oil producers tripled their capital spending between 2004 and 2014 to $294 billion, then cut it to $111 billion by last year, once the old wells were shut down. , New wells will not be available to quickly fill the production gap, and the question is: How long will drilling restrictions continue?

Shale oil producers must intensify drilling of new wells to maintain the current production rate (Reuters)

Return of shareholders

Aside from significantly restricting new drilling activity, US shale stocks also maintained a pledge to provide greater returns to shareholders in the form of dividends and share buybacks.

Oil shortage

According to the International Energy Agency, crude oil consumption is expected to improve to reach an average of 99.53 million barrels per day, exceeding the rate of 96.2 million barrels per day recorded last year, but slightly less than the daily consumption for 2019 of 99.55 million barrels, and of course the rise in demand will depend on the ability of The world is quickly gaining control of the mutated Omicron strain.

The writer stated that the high demand for oil will lead to pressure on both the Organization of Petroleum Exporting Countries (OPEC) and the shale oil industry in the United States to meet the increasing needs, but many OPEC countries are already struggling to increase production, while the shale oil industry in the United States has to deal With investors demanding to stop spending.

So far, the US shale oil industry has not responded to high oil prices as it did previously, with total US production averaging 11.2 million barrels per day in 2021 compared to a record 13 million barrels per day in late 2019.

US production is expected to rise by only 700,000 barrels per day in 2022 to 11.9 barrels per day, according to Claudio Galimberti, senior vice president of analysis at Rystad Energy.

The writer pointed out that Canada, Norway, Guyana and Brazil may try to bridge the supply and demand gap, but many Wall Street speculators are betting that their attempt will not be enough and oil prices will remain high.

Barclays Investment expected that the price of contracts for West Texas Intermediate crude will rise from the current rate of $ 73 a barrel to an average of $ 77 a barrel in 2022, noting that the Biden administration’s sale of oil from the strategic oil reserve is not a sustainable way to reduce prices, and added. Barclays believes that prices could rise above those expectations if the outbreak of the Covid-19 virus decreases, thus allowing demand to grow more than expected.

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