[Reuters Analysis] OPEC must squeeze US shale much more to win oil price war: Bousso

• US drillers slow down operations following oil price drop
• US oil output growth set to slow in 2025
• OPEC will need to deepen price war to significantly impact US output

By Ron Bousso

LONDON, May 29 - Oil drillers in the U.S. shale heartland are slowing down operations, a sign that OPEC's high-stakes price war is starting to pay off, but Saudi Arabia will need to exert a lot more pain to make a lasting impact on market share.

U.S. oil producers upended the global market in the early 2010s, as the innovative ‘fracking’ drilling technique allowed them to tap vast onshore shale formations. Consequently, the United States, long the world's top oil consumer, became its leading producer as of 2018. It currently pumps around 13.5 million barrels per day, around 13% of world supplies.

The rising tide of U.S. oil has long irked the Organization of the Petroleum Exporting Countries, which has seen its market share steadily erode over the past two decades.

Saudi Arabia, OPEC's de-facto leader, in 2014 sought to curb surging U.S. output by flooding the market with cheap oil. This effort bankrupted a number of shale producers, but it only temporarily paused the country’s ascent as companies adapted to lower prices and the industry consolidated.

PRICE WAR REDUX

Riyadh and its allies, a group known as OPEC+, are now giving it another go. They surprised the market earlier this year by announcing that they would rapidly unwind 2.2 million bpd of production cuts introduced in 2024. The group is expected to announce further increases in production later this week.

Benchmark U.S. oil prices have dropped by nearly a quarter since January to around $61 a barrel in response to OPEC+'s strategy as well as concerns over U.S. President Donald Trump's trade wars.

At these prices, many shale wells are not profitable, as frackers require an oil price of between $61 and $70 a barrel to expand production, according to a survey conducted by the Dallas Federal Reserve Bank.

And sure enough, nimble frackers have already responded by paring back drilling activities to conserve cash.

The number of U.S. onshore oil drilling rigs dropped by eight to 465 last week, the lowest since November 2021, according to energy services firm Baker Hughes.

Crucially, drillers in the Permian Basin in West Texas and eastern New Mexico, which accounts for nearly half of U.S. production, cut three rigs, bringing the total down to 279, also the lowest since November 2021.

Crude production from new Permian wells, a measure of productivity, slightly improved in April, but that was largely offset by declines in other basins.

And multiple indicators suggest activity is set to decelerate further.

Importantly, Frac Spread Count, which measures the number of crews actively performing hydraulic fracturing, has seen a 28% annual drop to 186, according to energy consultancy Primary Vision, an indication that production could fall sharply in the coming months.

Another measure to watch is drilled but uncompleted wells (DUCs), or partially completed wells that can start production quickly, offering operators flexibility to withhold production until market conditions improve. DUCs have risen by 11% since December 2024 to 975 in the Permian Basin.

DOWN BUT NOT OUT

While the latest data on shale drilling activity suggests U.S. production will continue to slow, it is far from falling off a cliff.

The U.S. Energy Information Administration reduced in May its forecasts for U.S. production in 2025 and 2026 by around 100,000 bpd to 13.4 million bpd and 13.5 million bpd, respectively, compared with 13.2 million bpd last year.

Production in the Permian Basin is forecast to average 6.51 million bpd in 2025, down from its previous estimate of 6.58 million bpd. But that would still mark a significant increase from 6.3 million bpd in 2024.

OPEC+ may find it even harder to have a sustainable impact now than it did in 2014 as the U.S. shale landscape is significantly different from a decade ago.

True, 15 years of intensive oil and gas drilling have depleted a large chunk of the most profitable shale acreage.

However, shale drillers have in recent years adopted much stricter spending discipline, focusing on returning value to shareholders in contrast with last decade’s focus on growing production. Independent U.S. oil and gas producers have so far reduced their planned 2025 spending commitments by an aggregate 4% to $60 billion, while output is expected to remain largely flat, according to consultancy RBN Energy.

Also, production today is concentrated in the hands of far fewer companies, such as Exxon Mobil and Chevron. These energy majors have developed highly efficient drilling techniques and boast strong balance sheets that leave them better equipped to withstand the OPEC assault.

Current oil prices are therefore likely to temporarily curb U.S. production but not lead to the type of sharp deceleration seen in 2014. OPEC+ will therefore need to deepen and extend its price war for many months if it seeks to fundamentally change the oil production balance of power.

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U.S. oil production

Permian basin oil production

Global oil production

US oil rig count