When Iranian-backed Houthi militants began launching missiles and drones at ships crossing the Red Sea near Yemen in October, many feared disruption to the vital shipping lane would drive up energy prices. But oil and gas prices this past month have sunk about 5% and 23%, respectively.
View Full Image
That is largely because of record production of U.S. fossil fuels.
Shippers in November moved more oil out of the U.S. than what was produced in Iraq, OPEC’s second-largest member, at a record 4.5 million barrels a day. Likewise, U.S. exports of liquefied natural gas, or LNG, are set to hit a record in December, according to market intelligence firm Kpler. European countries have snapped up more U.S. cargoes in recent months, becoming less reliant on shipments through the Suez Canal, a key Red Sea artery.
The attacks on vessels, which the Houthis say are in retaliation for the Israeli military operation in Gaza, have intensified in recent days. U.S. officials alleged a Dec. 23 attack drone launched directly from Iran struck a Japanese-owned chemical tanker off the coast of India, though Tehran denied that claim.
The shipping crisis is expected to raise consumer prices for goods that cross the Red Sea, as hundreds of vessels have been forced to reroute around the Cape of Good Hope in South Africa. But it is unfolding just as U.S. frackers have caught a second wind that, so far, has countered inflationary effects in energy.
Many forecasters expected U.S. oil production to grow only modestly in 2023 as frackers responded to investor pleas for conservative spending, allowing the companies to pay off debt and fund dividends and share buybacks.
It isn’t entirely clear how long shale companies can keep increasing production at the same fast clip. Shale drillers, especially privately held companies, deployed more rigs in late 2022 in response to higher commodity prices driven by Russia’s invasion of Ukraine. Much of the production from the wells they drilled came online recently, but the U.S. rig count dropped in 2023 and drillers have proposed relatively modest budgets for 2024.
At the same time, large public shale companies such as EOG Resources, Devon Energy and Diamondback Energy said they have sped up drilling times and are pumping more oil from wells they drilled. The scope and duration of those advances are unclear.
U.S. oil production had grown to about 13.2 million barrels a day as of October, up almost 900,000 barrels a day from the same month in 2022, according to the Energy Information Administration’s latest available data.
Meanwhile drillers in Guyana and Brazil also swiftly increased their output in 2023, though neither gained as much as U.S. shale.
All of that has kept the world’s oil inventories far more flush than traders expected months ago, subduing oil prices. In response, the Organization of the Petroleum Exporting Countries and its alliesmoved in November to cut output furtherto prop up prices. U.S. crude prices have dropped about 21% in the fourth quarter, and were down about 6% in December.
One beneficiary of cheaper oil: President Biden, whose Energy Department has recently accelerated its purchases of crude meant to replace the barrels it sold off in 2022 from the nation’s strategic petroleum reserve. The government had sold the barrels at higher prices that year, and is now competing more actively with international oil buyers.
Tankers have recently carried more U.S. crude to the Netherlands, the U.K., Italy, Spain, France, Germany and other countries as more of Russia’s crude has flowed to Asia following Western sanctions. U.S. oil shipments to Europe have jumped 34% since this time in 2022 and 82% from before Russia’s invasion of Ukraine, Kpler data show.
Longer term, the Red Sea situation could bring more business for U.S. LNG shippers, which are building out export capacity at Gulf Coast facilities and are vying for lengthy contracts with big buyers in Europe, analysts said.
The percentage of LNG tankers set to pass through the Suez Canal has dropped to its lowest point in at least a decade. At the same time, American LNG exports are expected to rise to a record of more than 8 million metric tons in December, up from the previous record of 7.7 million in October, Kpler projected.
Advocates for fracking have long said fast-growing U.S. shale production could help stabilize markets in times of crisis, in part, because of the speed with which a shale well produces. But analysts warned shale’s market influence would diminish if Iran became directly embroiled in the conflict.
“When you’re talking about a minor disruption here or there, surging U.S. production helps,” said Robert McNally, president of consulting firm Rapidan Energy. “But Iran is a problem shale can’t solve, because Iran threatens the Strait of Hormuz, through which 18 million barrels a day flows.”
Also, with oil prices lower than in late 2022, many shale drillers large and small are planning to keep spending roughly flat in 2024, in line with investors’ preferences. That is expected to curtail production growth. U.S. crude-oil production is expected to increase some 300,000 barrels a day in 2024, Rapidan Energy projects.
Spending by U.S. producers is expected to increase about 2% to a collective $115 billion in 2024. That is compared with a 19% spending boost in 2023, and still well below the annual average of $150 billion from 2010 to 2015, the industry’s heyday, according to a survey conducted by James West, an analyst at investment bank Evercore ISI.
“They don’t spend like drunken sailors anymore,” West said.
West said U.S. shale companies have made some incremental improvements in efficiency, such as in the time it takes to drill a well. But the recent production boost is more the result of a large rig count in late 2022 and early 2023, he said.
As of Friday, the number of drilling rigs active in the U.S. had fallen by about 20% since the end of 2022, according to Baker Hughes.
Some analysts also expect continued consolidation in the oil patch to curtail growth, as large oil companies purchase smaller rivals. In October, Exxon Mobil agreed to buy Pioneer Natural Resources for nearly $60 billion in stock, and Chevron announced it would snap up Hessfor $53 billion in stock.
Though the U.S. shale industry has moved away from its hypergrowth phase, there is a dawning realization following global conflicts that demand for oil and gas will remain healthy for years to come, said John Arnold, billionaire philanthropist and former natural-gas trader.
“I think there is growing confidence from investors that the industry isn’t going away anytime soon,” Arnold said.
Write to Collin Eaton at collin.eaton@wsj.com