Why US operators could be forced to bring down oil production growth

The sell-off in the crude oil market is expected to bring down the pace of US production growth, according to Rystad Energy. 

Global stock markets plummeted to their second-lowest point since 2020 following US President Donald Trump's April 2nd announcement of sweeping new tariffs.

Trade tensions have resulted in oil prices falling to a more than four-year low as investors fear that a full-blown war is likely to decimate global demand for the fuel.

Rystad Energy forecasts substantial risks for US operators in the current price environment, potentially compelling them to curtail their production growth rate.

Matthew Bernstein, Vice President, North American oil and gas at Rystad Energy, said in an emailed commentary:

Oil prices below breakeven cost

Rystad estimates that the new “all-in” breakeven cost for many US oil players is now above $62, which includes higher hurdle rates, dividend payments, and debt service costs.

At the time of writing, the price of West Texas Intermediate crude oil on the New York Mercantile Exchange was at $60.85 per barrel. WTI is the benchmark price for US crude oil. 

Production growth in the Lower 48 states in the US is already improbable outside the Permian Basin. 

If oil prices remain low, a slowdown in the Permian, the country's most productive oil basin, would lead to a decrease in the rate of production growth in 2025, Bernstein said. 

In the week ended March 28, oil production in the Lower 48 states was 13.138 million barrels per day, according to the Energy Information Administration. 

Difficult to sustain business model

When prices fall below the above-mentioned level, the business model that US oil producers have been using for the past several years becomes much harder to sustain, according to Rystad. 

“This means that some combination of near-term activity levels, investor payouts or inventory preservation will need to be sacrificed in order to defend margins,” Bernstein said.

Management teams found it difficult to operate in the uncertain environment created by the policy whiplash, although the steel tariffs' effect on 2025 well costs may be relatively limited.

The majority of the projected increase in oil production within the continental United States (excluding Alaska and Hawaii) for the current year is anticipated to originate from the Permian Basin, a prolific oil-producing region spanning parts of Texas and New Mexico. 

This region's substantial reserves, coupled with advancements in drilling and extraction technologies, have positioned it as a key driver of US oil output. 

Permian dynamics

While other oil-producing regions in the country may experience some growth, their combined contribution is expected to be dwarfed by the Permian's expansion. 

This concentration of growth in a single basin underscores its significance in shaping the US energy landscape and highlights its role in meeting the nation's energy demands.

Although the Permian Basin offers the most commercially viable break-even prices, the promise of high dividends from Exploration and Production (E&P) companies jeopardises the basin’s growth potential. 

This is especially true for operators with less profitable acreage.

Public mid-cap companies operating in the Permian's Delaware basin are particularly vulnerable if oil prices remain around the low $60s for an extended period, according to Rystad Energy.

These operators face high well costs and steep first-year production declines. 

They must also meet substantial capital return requirements. Additionally, they operate in an environment where major companies have already consolidated the majority of the most profitable inventory, Bernstein noted.