Back to top

Image: Bigstock

Can the Crude Slump Dent Oil Production Volumes in America?

Read MoreHide Full Article

There is a positive co-relation between producers’ incentive to produce oil and the price of the commodity. Going by this, the 20% drop in the price of black gold is sure to have deterred producers.

However, today’s energy market, especially in the United States, is going against the trend. With the advent of advanced drilling technologies, producers nowadays churn out higher volumes by investing lower capital and rigs. Thus, even though domestic explorers are getting more conservative while considering a capital budget owing to the bearish crude, they are able to produce more.

Oil Slides on Economic Slowdown Fears

Since late April 2019, the price of West Texas Intermediate (WTI) crude plummeted more than 20% from above $65 a barrel to below $55. Fears of a global economic slowdown, owing to intensifying trade tensions between the United States and China, have been dragging down the commodity price.

Wall Street wants the two big economies to put an end to the lingering tensions that investors fear may hurt crude consumption and keep the commodity in the bearish territory.

Bearish Crude is Not a Threat to U.S. Production

The slump in oil prices has been convincing explorers and producers in the United States to curb capital spending significantly.

Moreover, we have seen a significant fall in oil drilling rigs in U.S. resources. Per data provided by Baker Hughes, a GE company (BHGE - Free Report) , the United States removed 11 oil rigs through the week ended Jun 7. With this, the tally for crude drilling rig fell to the lowest level since February 2018. Importantly, Permian — the most prolific basin in the United States which employs roughly half of the nation’s total rigs — has seen a decline in oil rigs in seven of the last eight weeks.

With shale drillers cutting budget by billions of dollars and the rig count plunging in domestic resources, the obvious question that looms large is whether these factors will dent American oil production volumes.

The answer is probably in the negative and even Dan Brouillette — U.S. deputy energy secretary — believes that maintaining record oil production is not a challenge at all. This is because operations of explorers and producers have become so efficient that the United States is unlikely to see a drop in oil volumes despite conservative capital spending and declining rig tally. Investors should know that the United States is likely to see 1.4 million barrels per day of higher oil volumes in 2019 as compared to the 11-million-barrels-per-day record set in 2018, per the U.S. Energy Information Administration (EIA).

Stocks in the Spotlight

According to data provided by EIA, key resources in the United States like Anadarko, Appalachia, Bakken, Eagle Ford, Haynesville, Niobrara and Permian will together produce 8,495 thousand barrels per day of oil in June, higher by 83 thousand barrels per day from May’s volume. Of all the major plays, Permian alone will contribute 49.1% to June’s total oil production, added EIA. The most prolific play will also surpass other domestic resources in terms of higher sequential volumes, per EIA’s data.

Thus, it is clear that Permian is likely to produce higher crude volumes despite rig removal week after week. With Permian drillers getting more efficient, it will be ideal for investors to consider stocks operating in the most prolific play of the domestic market. Devon Energy Corporation (DVN - Free Report) , Pioneer Natural Resources Company (PXD - Free Report) , Diamondback Energy, Inc. (FANG - Free Report) and Concho Resources Inc. (CXO - Free Report) are a few such stocks with a strong presence in the Permian. While Devon Energy, Diamondback and Concho carry a Zacks Rank #3 (Hold), Pioneer Natural carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Today's Best Stocks from Zacks

Would you like to see the updated picks from our best market-beating strategies? From 2017 through 2018, while the S&P 500 gained +15.8%, five of our screens returned +38.0%, +61.3%, +61.6%, +68.1%, and +98.3%.

This outperformance has not just been a recent phenomenon. From 2000 – 2018, while the S&P averaged +4.8% per year, our top strategies averaged up to +56.2% per year.

See their latest picks free >>