Oil Glut Set to Thwart Trump’s Call to ‘Frack, Frack, Frack’

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Upgrade to Premium Oil Glut Set to Thwart Trump’s Call to ‘Frack, Frack, Frack’

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Oil Glut Set to Thwart Trump’s Call to ‘Frack, Frack, Frack’

Lucia Kassai, Kevin Crowley and David Wethe Tue, Nov 19, 2024, 6:00 AM 4 min read

Trump has said he’ll push America’s shale companies to ramp up output – telling supporters pump prices would fall even if it meant producers “drill themselves out of business” — but his second term follows two straight years of record US output. Against that backdrop, analysts and traders surveyed by Bloomberg see the US adding just 251,000 barrels a day from the end of this year through 2025, the slowest pace since the pandemic-driven drop in 2020.

There are few levers Trump can pull to change that. Opening new federal lands to exploration would take time, and some of his other proposals – such as a trade war with China – are widely seen as bearish for oil because they would erode demand for the commodity.

“There’s a delay between freeing up federal lands, offering it for auction, having companies bid on it, doing exploration, discovering oil and putting the infrastructure for it,” said Ed Morse, a senior adviser at commodities trading firm Hartree Partners LP. The bulk of any production increases stemming from Trump policies would come after his term, Morse said.

So far, the independent oil producers responsible for most of the shale boom over the past decade have no plans to radically alter their drilling after the election. Diamondback Energy Inc. and Devon Energy Corp. indicated growth of 2% or less in 2025, while EOG Resources Inc. and Occidental Petroleum Corp. expect to keep activity flat. Occidental CEO Vicki Hollub has warned of “declining growth rates” in the US over the medium term.

There is cause for skepticism, of course. Last year, the shale patch surprised the market by adding 1 million barrels a day of output, despite independent producers vowing limited growth. And heavyweight producers including Exxon Mobil Corp., Chevron Corp. and ConocoPhillips are expanding rapidly, posting increases of more than 8% in the past year.

Macquarie Group Ltd., which correctly predicted last year’s stunning growth, sees output reaching an unprecedented 13.9 million barrels a day by the end of this year, 5% above current Department of Energy estimates.

That growth, combined with new barrels from Guyana, Brazil and Canada, have set the stage for a massive crude glut in 2025, with the International Energy Agency warning of a 1 million barrel-a-day global supply surplus. Macquarie sees supply outpacing demand by 2.4 million barrels a day in the first quarter, when Trump will be sworn in. And traders are already pricing in a surplus, with West Texas Intermediate retreating by more than 3% this year.

READ: World Oil Market Faces Million-Barrel Glut in 2025, IEA Says

It’s a much different landscape than when Trump first took the White House. In 2017, new investment from private equity and the supermajors was flowing into the oil patch — prompting producers to grow as fast as possible and burning $300 billion of cash in the process.

The pandemic tanked prices, caused labor shortages in the shale patch, stranded imports of equipment in ports and prompted banks to dial back lending to the sector. Dozens of bankruptcies followed. But those that survived were forced to lower costs and become more efficient, positioning them to begin growing again when oil prices rallied in late 2020.

READ: Most Productive US Industry Is One That Wall Street Wrote Off

Under Biden, the US solidified its position as the world’s top oil producer, now pumping 50% more barrels each day than Saudi Arabia.

That pace will be hard to maintain. A $290 billion wave of mergers and acquisitions in the past two years means many of the independent producers that were driving production growth during Trump’s first time in office were bought or merged into larger entities that reined in capital spending and boosted shareholder returns.

Among the deals, Pioneer Natural Resources Co. was bought by Exxon, Endeavor Energy Resources LP was taken out by Diamondback, and CrownRock LP was acquired by Occidental.

Ultimately, though, oil prices could be the biggest obstacle to US growth, according Raoul LeBlanc, vice president for North American unconventionals at S&P Global Commodity Insights.

“At $70, shale independents can both grow and generate free cash flow,” he said. “But at $60 they have to make a choice — and we believe they’ll choose cash for the shareholders.”