Commentary: Escalating Tensions between Russia and Ukraine could accelerate U.S. shale recovery

2022-06-20 0 By

According to MarketMatrix.net, Russian President Vladimir Putin has long made it clear he doesn’t like U.S. Shale Oil drilling.But if he invades Ukraine (UKR), industry experts say he could fuel a strong recovery in the shale industry.Like other global producers, the OIL industry in the United States (USA) was hit hard by the COVID-19 pandemic in early 2020.Oil prices plunged, with futures on the Chicago Mercantile Exchange briefly falling deep into negative territory.Shale executives have become very cautious, reluctant to put money into exploration and development for fear of angering shareholders.The US oil industry has been slowly recovering, helped by rising oil prices, which rose more than 50 per cent last year.Mr. Putin’s threats to Ukraine helped push oil prices further above $90 to a seven-year high, up nearly 30% since the start of the year.”The last thing they want to do is provide a price incentive for a rebound in U.S. oil and gas production,” said Dan Yergin, vice chairman of IHS Markit.”But they have now succeeded in driving up prices, which is strengthening oil and gas production in the United States.”Russia (RUS) has traditionally been Europe’s largest supplier of oil and gas, and the US has long warned that its control of key energy sources could pose a threat to European consumers.Mr. Putin has been a strong opponent of SHALE gas in the United States, with the Russian president telling a public forum in St. Petersburg in 2013 that shale gas was a serious threat, Mr. Yerkin said.U.S. President Joe Bide said Tuesday that the U.S. and Russia would continue to use diplomatic channels to avoid a military outcome, but cautioned that the situation remained uncertain.Russia had announced it would withdraw some of its more than 100,000 troops from the Ukrainian border.By Wednesday, however, NATO said Russia was sending more troops.”The geopolitics of energy are back,” Says Yergin.Energy is clearly at the heart of the conflict.European gas prices have soared over the winter on fears of supply shortages.First, the region cannot store enough gas.Then, Starting in the fall, Russia cut some supplies.Russia sends gas to Europe through pipelines that run through Ukraine and elsewhere, including Nord Stream 1.Nord Stream 2 – designed to transport natural gas from Russia to Germany (GER) – has been completed but is still awaiting German approval.Mr. Biden reiterated on Tuesday that the pipeline would not be allowed to operate if Russia invaded Ukraine.If Russia invades, the United States and its Allies plan to impose sanctions on the country, and analysts say the worst case scenario for energy supplies would be for the sanctions to prevent Russia from selling energy to Europe, or for Russia to cut off supplies in retaliation.Before the epidemic, the United States was the largest producer of oil and natural gas.Mr Yergin said the US energy industry would regain its dominant position as the largest producer of oil and gas once again.Moreover, the United States is an exporter.According to weekly data from the U.S. Energy Information Administration (EIA), over the past four weeks, the U.S. exported an average of 2.6 million barrels per day of oil and 4.2 million barrels per day of refined products, including gasoline and diesel fuels.The US energy industry has also proved to be an important alternative supplier to Europe.In January, ships filled with U.S. liquefied natural gas (LNG) were diverted to European ports from Asia and South America.LNG imports were up 80 per cent year on year, according to IHS, meaning that for the first time the US supplied Europe with more gas by ship than By pipeline from Russia.In January, 7.73 billion cubic meters of U.S. gas went to Europe, compared with 7.5 billion cubic meters via Russian pipelines, according to IHS Markit.While U.S. LNG is helping Europe through the winter, it is not enough to replace Russian gas.Europe can only handle so much LNG, and shortages remain.”This is the highest level of LNG exports we have ever seen from the U.S. to Europe,” Analysts at Kpler noted in an email to CNBC.Looking at European imports from the United States so far this month, they are unchanged, so we expect to see similar levels – over 5 million tons – in February.”Yerkin pointed out that Europe is a natural market for Russian gas.”Before the Ukraine crisis, Europe was in an energy crisis,” he said.The difference now is that unlike in 2009, when the Russians interrupted the flow of gas through Ukraine, Europe has a more flexible pipeline system so it can deliver gas, and there is the development of LNG.Five years ago, LNG could not make up for the decline in Russian supply.”Meanwhile, the U.S. oil industry is expected to add about 900,000 barrels per day of oil production this year, Mr. Yergin said.The industry’s current production of about 11.6 million BPD could recover to pre-pandemic levels of 13 million BPD by next year.There are already signs of production expansion in the oil industry.According to Baker Hughes’ U.S. Oil Drilling Data (RRC), the industry’s total rig count now stands at 516, up 19 from last week — the largest increase in four years.John Kilduff, partner at Again Capital, said, “I think the Ukraine crisis has solidified the prospects for production expansion for all the companies involved, including now giants like Continental Resources, which just announced a doubling of spending relative to output.Continental is indeed doubling production.They are now willing to accept higher costs to get more oil out of the ground in the near and medium term.”The United States is a large producer, but Russia is a much larger supplier to world markets, exporting about 5 million b/d.Any reduction in Russian oil supplies would be felt around the world in the event of an invasion.Russia and its partners in OPEC+ have been slowly ramping up production as demand recovers, and they should hit their target by summer.But the Russian government has long been wary of high prices because the higher the price, the greater the incentive for U.S. producers to increase production.If Russian crude exports fall, analysts expect Moscow’s OPEC+ partner Saudi Arabia (KSA) to increase supplies.The Middle Eastern country has reserve capacity that the United States does not, and American companies need to drill new Wells to produce more oil.However, U.S. industry could soon see an unexpected surge in oil production, kilduff said, because companies have been starting up Wells drilled but not completed.Analysts say increased production in the United States and other non-OPEC + countries such as Brazil (BRA) has been preventing oil prices from rising significantly.But now American producers may be tested, even as tensions in Ukraine subside.Dan Pickering, chief investment officer at Pickering Energy Partners, said U.S. oil production has been increasing, but because of pressure from shareholders, U.S. companies are still not running at full speed.Under the ESG(Environment, Society, Governance) review, the company has been paying down debt, raising dividends and finding ways to reduce carbon emissions.The increase in the rig count, though relatively small, is significant, he said.”To me, it reflects the strength of oil prices,” he said.Small increments at the margin can be a confluence of many things.You’re not feverishly ramping up production right now.We have some people in the Permian meeting right now.Busy, but not feverish.We have seen the mania.It feels good to be in Midland.But I don’t feel crazy either.”If the industry does start drilling more, he expects evidence of that to come next year rather than in the near future.But he noted that ExxonMobil said it would increase production in the Permian Basin in Texas by 25 per cent this year, while Chevron plans to increase production there by 10 per cent.”Let’s assume there was no Russian invasion,” Pickering said.Let’s say the price of oil hits $82.That’s still a very good number.”The real reinvigoration of the business is happening without external influence and with prices still good.”He says oil futures suggest oil will be around $68 in five years, which is a good price, but not as good as $90.”So there’s a better environment for the industry.Remember they almost died in 2020.Many of them did die and go broke.Things are looking up.There is little confidence in the sustainability of this situation, and if we end up with geopolitical events that send oil prices soaring, that will only add to market tensions.This kind of thing boosts oil prices and boosts the level of confidence in the industry, even if they don’t necessarily react to events like this.”Private companies have been ramping up production, usually accounting for 20 per cent of the increase, but that figure will reach 50 per cent this year, according to IHS Markit.Mr Kilduff pointed to Devon Energy’s higher-than-expected production announcement in its earnings on Tuesday as another sign that the industry is increasing production.The company beat earnings expectations and continued to focus on shareholders, raising its dividend.The stock subsequently rose more than 6%.”Over the last couple of years, as the low-price environment got these companies into trouble, suddenly it made sense again, and it brought them back into their old habits,” he said.————— Market Matrix: Futures & Derivatives Trading Research Center – Find your best trading opportunities from our selected stream of top news sources like Bloomberg/Reuters /CNBC/WSJ!+++ Top investment banks macro/stock index/crude oil/gold research report and strategy!+++ Economic data/industry report in-depth interpretation!+++ Follow ++ View all resources