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Sanctions on Russia have lifted our 2Q2022 WTI price outlook for
this year by nearly $30/bbl relative to our 1Q2022 outlook, and by
more than $20/bbl for 2023. But public US producers remain
committed to fiscal discipline this year and service capacity
increasingly sparse, foreclosing the possibility of a year of
runaway US production growth. We see US oil supply expanding by 1.1
MMb/d entry to exit (Dec.-Dec.) in 2022, with output at the close
of the year reaching 12.7 MMb/d, a level that will be difficult to
surpass as activity levels are currently set to support those
volumes.
In 2023, we see higher prices supporting US output growth of 1.2
MMb/d entry to exit, with production exiting 2023 at around 13.9
MMb/d.
Capital budgets expand in 2022, but increases are primarily
driven by private operators and service sector cost inflation.
Public operators (independents and globals) are set to increase
spending from $41 billion to $60 billion, which is a significant
increase. However, private operators are looking to more than
double their budgets compared to 2021, raising spending from $23
billion to $49 billion. For public operators, the main drivers of
the increased spend is not additional well counts: a lack of DUCs
for conversions is driving new drilling activity, and service
sector cost inflation of 15% will consume significant capital. DUCs
were never much of a factor for private operators, who will face
even greater cost inflation, estimated at 23% in 2022.
Rising oil and gas prices mean absolute and relative returns
rise for both producers and service providers. Investors are the
big winners this year and next, while the service sector regains
pricing power, albeit at a slower pace. Independents are holding
firm on fiscal discipline and are expected to return $111 billion
to shareholders and debtholders this year. Private operators have
not shown the same restraint and will continue to increase spending
and activity, particularly in the Permian, with prices high enough
to generate excess cash of over $30 billion.
