Less-Than-Severe Energy Crisis Gives Shale Oil a Breather

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Written by Daniel Graeber for Industrial Info Resources (Sugar Land, Texas)--The energy crisis that brought increased market share to the United States has proved to be less severe than expected, the International Monetary Fund (IMF) said, which could provide some tailwinds to commodities, but alleviate some of the pressure on shale.

The IMF said there may be a new dawn for the global economy, with global growth expected to reach 2.9% this year, an upward revision from the previous estimate for a 2.7% expansion.

"Economic growth proved surprisingly resilient in the third quarter of last year, with strong labor market, robust private demand, and better-than-expected adaptation to the energy crisis in Europe," the IMF's report read.

Inflation is showing signs of improvement too. In the U.S. economy, the world's largest, the price of all consumer goods increased by 6.5% through the 12-month period ending in December, a slowdown from double-digit inflation during the middle of last year.

Volatile components such as food and energy, which are stripped out to determine core inflation, remain elevated, however. Retail-level gasoline prices are up nearly 15% since the end of 2022, and fuel oil is up 41.5% over the 12-month period ending in December.

But the global picture looks a bit better, due in part to the heavy lifting from the United States during much of 2022. Inventories of natural gas and liquefied natural gas (LNG) are at better-than-expected levels in Europe and that could improve even further once the Freeport LNG facility in Texas returns to service in the spring.

That might not translate to momentum in the United States, however. The IMF said it expected growth in advanced economies to slow from 2.7% last year to 1.2% for 2023. China and India account for half of that growth, with the combined U.S. and European economies contributing only 10% to global momentum.

We've already seen some pressure in the U.S. economy, with the Federal Reserve Bank of Dallas seeing a slump in manufacturing activity in January, though there were tepid gains in the service sector.

Nevertheless, some of the strains seen in the energy sector--a lack of hiring, lingering supply-chain issues--are still present. Respondents in the utilities sector said they haven't seen any growth in business activity, while contacts in the securities and commodity sector said higher interest rates are trickling down to product and service prices.

U.S. crude oil, meanwhile, has increased its market share in the global economy. Federal data show total U.S. crude oil exports averaged 3.5 million barrels per day (BBL/d) in December 2020, before the COVID-19 pandemic, and reached 4 million BBL/d in November 2022, the last full month for which the government published data.

But the emerging sentiment on U.S. crude oil is less than upbeat. While production levels for both this year and next should set records above 12 million BBL/d, the pace of growth is on the decline.

An increase in crude oil production and exports nonetheless has helped support hegemonic tendencies for the United States. No longer is it beholden to foreign producers, alleviating some of its security obligations in the Middle East.

Russia's invasion of Ukraine in February 2022, meanwhile, marked the start of the worst outbreak of war in the region since World War II. U.S. crude oil in a way supports a containment strategy that countered Russian ambitions for much of the latter part of the 20th century.

Russia, however, countered that strategy long ago by securing a seat at the OPEC table.

A recent research note from London oil broker PVM finds the role of U.S. crude oil on the geopolitical stage may be on the decline, however. "Spiraling costs and lack of available labor together with Wall Street's demand of dividends and share buybacks are denting any significant growth potential in the U.S. shale patch," analysts wrote. "Whilst the EIA has been predicting uninterrupted expansion in shale production the rate of the increase is considerably slowing, which will lead to a plateauing or even declining U.S. share of the global supply market."

We've already seen that in the quarterly earnings reports from the likes of Halliburton Company (NYSE:HAL) (Houston, Texas) and Exxon Mobil Corporation (NYSE:XOM) (Irving, Texas), which both emphasized shareholder return. There could still be some tailwinds for energy companies still keen on investing in upstream. PVM sees Brent hitting a ceiling of around $90 per barrel, while Swiss investment bank UBS is bullish at $110 per barrel. That, however, comes at a time when energy companies are getting on the energy transition bandwagon. But as that accelerates, and with the IMF downgrading the severity of the energy crisis, the slow pivot away from fossil fuels could prove to be a buffer for the slow decline for U.S. shale.

Industrial Info Resources (IIR) is the leading provider of industrial market intelligence. Since 1983, IIR has provided comprehensive research, news and analysis on the industrial process, manufacturing and energy related industries. IIR's Global Market Intelligence (GMI) helps companies identify and pursue trends across multiple markets with access to real, qualified and validated plant and project opportunities. Across the world, IIR is tracking over 200,000 current and future projects worth $17.8 Trillion (USD).