Tomorrow is expiration for the May crude oil contract and volume is thin. The June contract today fell $5.58 to $101.90. The decline wipes out gains over the prior two trading days.
Short-term oil moves will be dictated by China lockdowns and Russia's ability to get crude out of the country but the long-term will be determined by drilling.
On that front, we heard from oil-services giant Halliburton today. The company boosted its spending forecast for North American customers to 35% growth this year from 25% previously with a big chunk of that not related to improved activity but to inflation.
Overall, the company is optimistic.
"We expect oil and gas demand will grow over the near and medium term, driven by economic expansion, energy security concerns and population growth," said CEO Jeff Miller. "At the same time, supply remains under structural threat of scarcity. While the war in Ukraine has created a short-term dislocation in commodity markets, the fundamental supply tightness existed before this geopolitical conflict. Current oil supply tightness and commodity price levels strengthen my confidence in the accelerating multiyear upcycle and very busy years ahead for Halliburton."
He outlined how operators will invest in shale but remain reluctant to invest in long-term projects.
"The pursuit of increased investment flexibility leads operators to prioritize short-cycle projects, development over exploration, tiebacks versus new infrastructure and shale rather than deepwater. Clearly, there are important exceptions where successful long-term projects will be developed, but painting with a broad brush, I believe most investments will be directed primarily towards short-cycle activity in the near and medium term. The result of this focus is an industry-wide increase in the level of investment flexibility for operators and the subsequent support to commodity prices.
"With short-cycle barrels, companies make investment decisions annually and can respond more quickly to commodity price signals. As a result, when investment stops, production at a minimum doesn't grow and in the case with unconventionals, it quickly declines. For example, when the pandemic drove the collapse of oil demand 2 years ago, U.S. shale companies swiftly reduced activity and production declined 2 million barrels in 9 months.
"In contrast, long-cycle projects have 2 key elements: a long-time horizon and large upfront capital investment. Once these projects begin, investment continues, and production cannot quickly respond to price signals. This tends to result in market oversupply. The pivot to short-cycle barrels creates the opposite effect, a perpetual threat of undersupply that is supportive to commodity price.
The risk is that shale begins to disappoint. Much of the top-tier acreage in the US has been tapped. While companies continue to highlight good prospects on their remaining acreage, their credibility is strained. Moreover, if they choose to increase production, those inventories will be depleted within the decade. That could leave a deeply undersupplied market with no supply on the horizon.
