Crude oil prices have unquestionably crashed through their two-year downtrend. The price of West Texas Intermediate bottomed out last April and has moved consistently higher since October, reaching $60.31 per barrel in the latest trading.
This last push coincides with the reopening of more fracking rigs in the Permian Basin in Texas and New Mexico, making the United States the swing-state of global production of crude oil. The key question going forward is whether that will result in greater production or whether the natural deterioration in production of fracking wells will keep supply relatively tight with an upward bias in pricing as global demand recovers over the next two years.
Between March and July of 2020, there was a 498-rig reduction in the number of active oil rigs in the United States, according to Baker Hughes data. In the last seven months, there has been a 237-rig increase in active rigs, which we attribute to an increase in demand for energy during an extremely cold winter and—perhaps more importantly—the anticipation of an increase in the demand for gasoline as consumers move out of their houses.
This all comes within the context of OPEC’s 2020-21 production cuts to prop up the price of crude after demand dropped off the map and its efforts to keep crude prices below the profitability of North American fracking.
According to an analysis by the Dallas Fed, the WTI breakeven price for covering the operating cost of existing shale production is $26 in the Permian Basin and $50 for new wells.
So yes, we can anticipate increased consumer demand for energy, especially given the rapid advances in vaccine distribution. But whether price increases are sustainable or more North American wells come back online is speculation because of the potential of market interference.
