Manpower Shortage Keeps The Oil Price Climbing
The myth of rapid response U.S. shale production, or the “call on shale” thesis, will be disproven in 2018 as investors realize shale output is dictated by service sector capacity.
Shale production is currently constrained by pressure pumping equipment shortages. Aging pressure pumping fleets will only compound this over the next year & significant investment is still required.
These are not issues that are solved quickly, and will prove to be a major headwind to shale growth in 2018.
The primary bear thesis on oil currently is that U.S. shale is a new global swing producer, capable of rapidly responding to price and inventory changes to ensure market balance. This thesis, however, is fatally flawed as evidenced by flat-lining Texas and New Mexico production (the two key shale states), and an increase in drilled-but-uncompleted wells. This is despite the fact that OECD inventories have fallen 44% versus the 5-year average as of July, and prices have averaged $49.50 YTD.
The fact is that U.S. shale producers cannot control their output, as it is determined by the capacity, capital availability, and labor market constraints of the oil service industry. These constraints will persist deep into 2018 as fracking horsepower demand exceeds supply by 2 to 4 million hydraulic horsepower, and as companies lack capital to replace & add capacity to quickly remedy the imbalance. The end result is a limited pace of well completions, and another year of disappointing shale growth in 2018.
