The $95 Oil Question: Why U.S. Shale Isn't Blasting Off

Added: 2026-05-11

[00:00:00]Hello everyone, it's Elliot Gu here with the free market speculator and the energy bulletin and welcome to my Sunday deep dive. Now in this weekly video, we take a look at a key chart, a key trend or an indicator that caught my eye over the past week and I explain what I means or what I think it means for markets.

[00:00:20]Now in last week's Sunday deep dive, we took a closer look at Argentina's fast growing vakam shale play. And this week I decided to return to the energy markets for a topic once again.

[00:00:32]Specifically, I want to discuss what we're seeing in terms of the US shale oil production response to operation epic fury and the closure of the straight of Formoose. Not long ago, there was a notion making the rounds that break even costs for prime acreage in the Peran Basin, well, they're around $35 a barrel. uh which means that as long as prices are above that level, your highest quality producers with the best acreage in the Peran basin can actually generate some level of free cash flow.

[00:01:08]And thanks to efficiency gains and the use of new technologies, particularly artificial intelligence recently, you know, production chemicals as well and automation, uh those break even costs were coming down pretty quickly. uh meaning that a high quality producer, you know, like an Exxon Mobile or a Chevron or a large independent like Diamondback Energy, which I'll talk a little bit more about in a minute, could squeeze, you know, more free cash flow out of every barrel produced even at fairly low or very low oil prices. Keep in mind, this view was most popular towards the end of 2025. you know, when most people were bearish on oil, uh, when the International Energy Agency was forecasting a huge glut of oil in the US through at least the first half of 2026, oil prices at the time were down in the 50s. So, the reasoning was that at those prices in the $50 a barrel level, you know, quality producers in a field like the Perian could generate copious free cash flow and even continue to grow production as needed to meet growing global demand. Now, you also might remember some out there saying that the Trump administration's more energyfriendly policies, basically the drill baby drill mantra we've all heard, meant that US the US would see production growth even in a world of sort of permanently or chronically lower oil prices. Now, longtime readers and listeners know that the bearish consensus late last year was never never my view. However, it was a very common theme I heard from a lot of individual investors I spoke to and that I saw pushed in various media outlets both online and traditional media. Well, now we have a real world world test to evaluate. Right. Here's a chart of Brent and WTI oil prices since actually it's the the front month futures from the end of 2024 to Friday, May 8th, which was last Friday, last week. And as you can see, you know, Brent oil prices were trading around $61 a barrel and at the end of last year, and closed last week over $101 a barrel. Well, WTI ended last year, that's the US oil benchmark, ended last year at around 57 or 58 and they and closed on Friday at a little over $95 a barrel. So surely, right, if US oil producers in the Perian can generate plenty of free cash flow at, you know, $55 or $60 a barrel and grow their output at those prices thanks to greater recovery efficiencies, they must love $90 a barrel oil and they must be planning sort of an epic production increase in 2026, right?

[00:03:58]Just taking the the bears argument to its logical conclusion, right? Well, this month we've heard from multiple producers, companies of various sizes with significant operations in the Peran Basin of both Texas and New Mexico. This is the most prolific oil focus shell play in the United States with the lowest break even production costs. So, we can actually look at their guidance, right? and comments made during their Q1 conference calls and Q&A sessions to understand their production plans in light of current higher oil prices. How are management teams of all levels through the industry thinking about this big surge we've seen in oil prices? So, let's start with the majors in brief.

[00:04:42]Exon Mobile, XOM symbol there and Chevron symbol CVX both have vast acreage positions in the Peran Basin.

[00:04:51]And after we look at those, I want to move on to an independent producer which is going to be Diamondback indust Energy. Just a little spoiler in 2025 as a whole. Now, Exxon Mobile produced 1.6 million barrels of oil equivalent per day from the Peran basin alone. Now, this is oil equivalent. So, what that does is that includes volumes of natural gas and natural gas liquids like ethane, propane and butane.

[00:05:19]and uh in that MBOE figure, that million barrels of oil equivalent per day figure. Now, Exxon doesn't break it out, but a good base case for commodity mix is that that's probably about half 50% or maybe even 55% oil with the rest the other uh 45 to 50% being natural gas, liquids or natural gas. However, their production rate in the fourth quarter, as I said, for the the average through 2025 was 1.6 million barrels of oil equivalent per day. In the fourth quarter, the final quarter of last year, it was 1.8 million barrels of oil per day. So again, if we look at all four quarters of last year as a whole, they produce 1.6 million barrels a day. But since they grew production through the year as part of their long-term development plans, their output in the final quarter of the year was 1.8 million barrels a day. So at, you know, at the time they released their fourth quarter earnings on January 30th, they published Peran production guidance for all of 2026 as well uh at 1.8 million barrels of oil equivalent per day.

[00:06:32]Right? So average last year 1.6 Q4 of last year 1.8 and their guidance for this year back when they released their fourth quarter earnings at the end of January was 1.8 billion barrels of oil equivalent per day out of the perian alone. Uh so uh in late January, Exxon said they expected average production this year to be basically flat with where it ended last year and up about 200,000 barrels of oil equivalent per day. Maybe around 100,000 barrels of of actual oil uh up from the average level last year. So pretty pretty modest production growth from the Perian.

[00:07:17]Really pretty flat production growth from the Perian. uh expected for 2026 back in late January when they reported their fourth quarter earnings and issued their first look at 2026 guidance. Now longer term, Exxon has said they want to get their perian acreage up to a level of about 2.5 million barrels of oil equivalent per day. Now this is really kind of their 2030 target. Uh so do much higher oil prices since late January guidance, right, mean that Exxon is sort of accelerating that plant? So they have a longerterm plan to grow production.

[00:07:52]Previously, they guided for production on average this year flat with Q4 of last year. But does this big surge we've seen in oil prices mean that they're accelerating that plan? They're pulling forward that plan to grow production more meaningfully? Well, when Exxon released their Q1 2026 results, and that happened on May 1st, so just a few days ago, uh, you know, they raised guidance for 2026 production from the Perian. You know, did they raise guidance for 2026 production from the Perian? Well, actually, they didn't. While they don't break out permanent oil production specifically every quarter, you know, Exxon Mobile's total US oil production actually fell slightly in Q1 2026 relative to that Q4 2025 exit rate. Uh, a lot of that had to do with weather, but anyway, it was down. Uh, and Darren Woods, the CEO of Exxon, noted that, and I quote here, "We remain on track to grow fullyear Perian production to 1.8 8 million uh oil equivalent barrels in 2026 with that growth grounded in value, not volume. In other words, Exxon Mobile isn't really about maximizing output, but about squeezing as much value and free cash flow out of every barrel they produce as possible. When asked about competitors in the Perian and a potential production response from those competitors uh during the Q&A portion of the call, Woods said, and I quote again, we're going to continue on the pace that we've been at. I would say we are running pretty full speed. Whether the views of that change in the industry, I can't really comment on. Whether they make a decision to maybe run through their inventory more quickly, I can't comment on that. In other words, growing production from the Perian means accelerating drilling activity and that means burning through your prime drilling locations more quickly. Exxon has no intention of doing that. So, they aren't really guiding for increased production out of the Perian this year.

[00:10:04]They weren't back in late January and they still aren't as of May 1st. So, how about Chevron? Well, here's what Chevron CEO Mike Worth had to say about the Perian. in the perian I think mentioned that's their uh COO chief of operate uh chief operating officer mentioned that uh and again I'm quoting here and you know we're running the perian to deliver strong free cash flow right now we could hit the gas and begin to grow it again but I don't know what the future looks like at this point the value that we're seeing in improved asset reliability and reduced lost production to downtime etc is very real. We get that because we are focused on that and a shift to quickly turn to more production growth might dilute that focus. So, let me ask you, does that sound like a man preparing to chase higher oil prices with a surge in Peran drilling activity? I don't think so. Well, how about the independent producers? Long known for being more aggressive and frankly more commodity sensitive relative to the major producers like Exxon and Chevron, which have a long history, not just in the US, but all over the world of pursuing these long-term projects that are have low break even costs and they sort of have a steady rate of rate of production, steady rate of development regardless of the near-term commodity price picture.

[00:11:29]So let's take a look at Diamondback, you know, which is one of the larger independent producers in the core of the Perian and they actually became much bigger uh via the acquisition of privately held Endeavor Petroleum and that closed back in late 2024. I think it was September of 2024.

[00:11:46]So they reported on the afternoon of Tuesday, May 5th, uh they actually produced, sorry, they actually released their results on the Monday, May 4th. Uh but on Tuesday, May 5th, after Diamondback released its Q1 results the prior evening, you know, I saw this headline from Barrens Online, Diamondback plans to drill more. The stock pays the price. Now, it hasn't been the case since at least 2019, and many companies even earlier than that.

[00:12:17]But the mainstream media loves the narrative that shale producers chase commodity prices by drilling aggressively every time the price ticks higher, effectively sewing the seeds of their own demise and leading to this perennial glut in global oil on the market. And Barons was, I guess, sort of right in that Diamondback shares were down 3.5 a little over 3.5% on Tuesday, May 5th. This was the first trading day after they released results. However, I'd posit that the fact that oil prices were down almost 4% that day probably had more to do with the decline in Diamondback shares than anything said on their call or in their guidance.

[00:12:59]Regardless, let's step back for a moment and look at what the act the actual numbers they released here, their actual guidance and comments about changes in their production for 2026. Okay, first let's look back to February 23rd. That's when the company released its fourth quarter 2025 earnings results and provided us again with our first look at production capital spending and cost guidance for this year for 2026.

[00:13:29]Just like Exxon did back in late January for Diamondback it was February 23rd.

[00:13:34]Diamondback has a little different way of releasing results than a lot of other companies out there. They issue a letter to shareholders at the time they release results and then they host a Q&A only conference call. I actually quite like it because a lot of the opening remarks on most conference calls are just like sort of a summary of the press release.

[00:13:53]This way they get all that out of the way and leave us more time to ask questions. So on February 23rd, WTI oil prices closed at about $66.30 a barrel. um off the lows from late last year, but still more than sort of $30 a barrel below where they closed last week, you know, when Diamondback reported their first quarter 2026 results and updated their guidance. Now, back in February in his letter to shareholders, CEO Case Vanhoff indicated that the environment still represented a yellow light. He uses a stoplight analogy. Green meaning uh the market supports more production, higher prices.

[00:14:35]Yellow meaning caution. It could go either way. And red meaning, you know, just try to survive, try to preserve as much cash flow. Prices are too low to make more. So he was indicating a yellow light for energy producers. Uh though he did say back in late February that the red light danger signal for oil oil seemed less apparent than it did in late 2025. He also went on to say that Diamondback remained positioned with flexibility to moderate activity if prices softened or accelerate activity if the environment were to improve. So let me throw up the actual guidance numbers here on your screen. This is again from late February. So we're just hitting the highlights here. Uh there's a lot more items obviously in their guidance, but we're just going to look at three. Total production guidance in thousands of barrels of oil equivalent per day. So crude oil production in thousands of barrels of oil per day and total capital spending in millions of US dollars. In the fourth quarter of 2025, Diamondback produced 969,100 barrels of oil equivalent total production. So that's oil, gas, and NGL's and about 512,800 barrels per day of crude oil itself. So their production is right around 53% oil, which is pretty normal, as I've said before, for a peran producer. Now, the rest of that barrel of oil equivalent, again, it's natural gas and natural gas liquids. And in the fourth quarter of last year, the company also spent $943 million. Now, most of that is the cost of drilling and completing new wells. In late February, Diamondback guided to first quarter total production, Q1 2026, total production of a range between 930 and 966,000 barrels of oil equivalent per day. At the midpoint of that guidance, exactly in the middle, that's about 948,000 BOE a day, which would represent a total production decline of a little over 2% sequentially from Q4 2025 to Q1 2026.

[00:16:48]Right now, you can also see they guided for lower Q1 oil production specifically and for a small decline in capital spending as well. At the midpoint, Fang's guidance for Q1 2026 capex was just around 93 uh 937 a.5 million about a $5 million decline from that Q4 level.

[00:17:11]Now, guidance for the full year 2026 was also very conservative and this again is back in February. In terms of oil production, uh, Diamondback guided to a midpoint of 505,000 barrels of oil per day, which represented about a 1.5% decline from the Q4 2025 oil production level. So, their exit rate last year, if you will. The midpoint of their capex guidance for this year was $3.75 billion full year. So, that works out to a little under $940 million a quarter, right? which is pretty much in line with their guidance for Q1 and really with their actual spend in the final quarter of last year. So, let's fast forward to their Q1 2026 guidance and results, which were actually released early last week. Now, here they are. Diamondback reported a very strong Q1. Their total production of everything came in at 979,400 barrels of oil equivalent per day, which was actually above the high end of their guidance for the quarter issued just over 2 months earlier in late February.

[00:18:21]Uh their oil production in Q1 came in at 521,000 barrels a day, which was also well above the high end of their guidance range and about 14,000 barrels a day above the midpoint of their February guidance range for Q1. Also crucial is that Diamondback actually spent 933 million in total capex capital spending in Q1, which was slightly below the midpoint of their guidance range for the quarter. In other words, Diamondback spent a little less on drilling and completing wells than expected, yet produced significantly more oil than expected. Now, look at the final two columns here, which detail the full year 2026 guidance issued in February and the most recent guidance from last week. As you can see, the company did raise produ did raise their guidance for oil production from a range of 500 to 510,000 barrels a day to 520,000 plus barrels a day. So that's an increase of 15,000 barrels a day plus, right, from the midpoint of their prior guidance. Obviously, we can't compute the midpoint of guidance 520,000 plus because there's no upper end of the guidance range. However, note that this is only in line, right? 520,000 plus million uh 520,000 plus barrels of oil a day for the full year is only just in line with what Diamondback produced in Q1, which was, as I said, 521,000 barrels a day. So, yes, Diamondback plans to produce more oil this year than they planned to do back in late February. But management is also guiding guiding for production to be basically flat with where it was in the first quarter of this year. Now that's all great news for Diamondback. Strong capital discipline and better than expected production, but that's hardly a massive aggressive production response or just drill baby drill response to higher oil prices. And let's look at all this in a slightly different way. Is Diamondback losing discipline and chasing higher oil prices by accelerating spending activity at the expense of free cash flow and shareholder value? Well, here's a simple metric I watch. This chart just shows the company's total capital spending expressed in terms of capex per barrel of oil equivalent produced. So this is a measure of how much money the company must spend to drill wells, complete fracture wells, and build out mid-stream infrastructure in order to produce a barrel of oil equivalent. The lower the better here because spending less to produce more, well, it's obviously a good thing. Now, as you can see here, their capital efficiency on this basis has been pretty steady. In Q4, they spent $10.81 81 a barrel and they guided for Q1 2026 at $10.99 per barrel, but they actually massively overd delivered on those expectations and their guidance coming in at just $10.58 a barrel of oil equivalent. Their February guidance uh was for fiscal year 2026 capex intensity of $10.88 88 a barrel of oil equivalent and their latest guidance is almost unchanged at $10.91 a barrel of oil equivalent. And there's of course an important caveat.

[00:21:50]Fang's latest guidance is for 972,000 plus uh barrels of oil equivalent per day. So, I just assume they are able to hold total production constant through 2026 at the Q1 level of 979,400 barrels will equivalent per day. Now, normally, as I said, I'd use the midpoint of their guidance, but there is no midpoint for, you know, 972,000 plus.

[00:22:17]In reality, Diamondback has a long, long history of underpromising and overd delivering on production. So my guess is that they end up producing more than 979,400 barrels of wool equivalent per day in 2026. And therefore the capex uh intensity figures I just showed you, they'll actually come in under uh that um that uh that capex intensity. The other thing is they have a tendency to uh beat their guidance on capital spending as well. Now, their guidance for this year is a flat 3.9 billion. Um, but u I suspect they might come in a little below that. At any rate, there is no sign of discipline loss here. Not in the least. During the call, management actually explained what they're actually doing. First, Diamondback has an inventory of what are known as ducks.

[00:23:14]And DUX is just an acronym, DUS, just an acronym for U drilled uncompleted wells.

[00:23:21]So these are basically wells that are kind of partially complete, partially ready to go, but they still they've been drilled, but they still need to be fractured and actually put into production, hooked up to a pipeline, etc. So uh they contract with companies like Hallebertton for what's known as Frack Cruise. This is a company I talked about at length in last weekend's video.

[00:23:43]last week uh last week's Sunday deep dive. But basically frack crews are just teams of people with equipment like pump trucks that go out and perform the fracturing operations and put those ducks into a full actual production state. So Fang had planned to run, Diamondback had planned to run four to five Frack crews this year and they've decided to pull forward that fifth Frack crew, right? And run it earlier in the year than they originally intended. So they're still going to do four to five frack crews this year, but that fifth fat frat crew actually started running earlier this year than they had expected it to be more of a second half of the year story. So, this allows them to complete more of these ducks and layer in some near-term production to sell at current much higher oil prices. Quite logical, in fact. However, you know, the company likes to keep an inventory of ducks on hand to be able to adjust production to take advantage of higher oil prices, right? and their inventory of ducks has been declining recently and it will decline further as they bring on that fifth frack crew because that fifth frack crew will be completing more of those wells which means they'll start running down that inventory of ducks. So they are also spending a bit more in capital to drill wells to replace the ducks they're completing earlier in the year than expected. It's a modest shift, not an aggressive pivot to production growth. And what I thought was really interesting is some of the comments that CEO Case Vanhoff said about the company's uh increased use of automation and in particular artificial intelligence uh technologies to boost their efficiency and improve their recovery rates.

[00:25:32]Indeed, he actually credited these changes with the company's Q1 production beat relative to guidance. So effectively what you're seeing with Diamondback is that gains in efficiency and reduced equipment downtime enabled by largely by AI actually have allowed the company to produce more oil while spending less capital. We saw it in Q1.

[00:25:55]And given high oil prices, the company has decided to maintain spending and allow production to rise a little bit near-term rather than, for example, cutting capex and keeping production constant. Now, this allows them to take advantage of current higher oil prices and they can always choose to adjust further depending on the commodity price environment as we move through the year.

[00:26:20]In fact, they did say that they're going to look at this on a quarter-by quarter basis. If prices come down due to, for example, the reopening of the straight of Hormuz, they'll probably scale back a little bit on intended production activity. The bottom line, we aren't seeing much of a production response from Shale at all to Operation Epic Fury. The majors are just proceeding with their long-term development plans and the independents like Diamondback, they're tweaking along the margin, completing a few more ducks early in the year or passing on AI enabled efficiency gains into slightly higher output. And if shale producers aren't dramatically boosting output at 90 plus dollars a barrel, I think we can lay to rest that curious idea, that curious notion last year that US shale would be the source of endless production growth even at lower oil prices in the $50 or $60 a barrel range. So what about drill baby drill? Well, think about the results I just walked you through. The US is not a communist or a socialist country, and we do not have a national oil company. The central government doesn't dictate how much companies should produce or how much they will produce.

[00:27:32]To be frank, that's why we have been so successful developing shale and oil and gas resources more widely. US oil production is a function of the decisions of thousands of producers of all sizes. big companies like Exxon, slightly smaller independent names like Diamondback, and even some smaller private operators, though there are fewer of those in the Perian than just a few years ago due all the massive wave of industry consolidation we've seen.

[00:28:03]They decide how much to produce each quarter based on the capital they must spend to increase output or maintain output and the price of oil they believe they can get for their production. If prices are low, they will spend and produce less. The government's capacity to harm the industry is far higher than its capacity to help the industry. And let me be clear, I do believe that the Trump administration has introduced some positive, very positive changes for US energy producers, uh, such as the ending of that LG export ban that was put in place under the Biden administration.

[00:28:45]Um, this may clear some of the red tape that can restrain drilling activity and forestall efforts to boost production.

[00:28:53]However, it does not change the laws of economics. If prices are too low for a company to produce a reasonable return on their capital, energy companies will not boost drilling activity or output.

[00:29:07]Now, I'm sure some of you are business owners. Do you target a break even or a cash flow break even from your business?

[00:29:15]Probably not. And neither do energy producers. So why is a 35 or $40 cash flow break even rate relevant? Just because a company can produce oil and generate some modest free cash flow at $45 a barrel doesn't mean that they will. Especially if management feels that prices might rise in the future and the current situation in the straight of hormuz also hints at a duration component. Several management teams have talked about a high degree of uncertainty about the path of oil prices in future. You could see it in the chevron quote I showed you earlier.

[00:29:53]Indeed, look at this chart. Now, this chart shows the current price of every West Texas Intermediate WTI futures contract from June 2026 through the end of 2028. And what you can see here is that while the current front month price, that's for June 2026, is over $95 a barrel, the price of oil for delivery in December of this year, is under $80 a barrel. And the average price of oil for all 12 contracts in 2027 is less than $75 a barrel. For 2028, it's just over $71 a barrel. The futures curve is a terrible predictor of the path of oil prices. However, these contracts are still important because they give you an idea of the prices a producer could lock in for future output using hedges. So, if you're wondering why companies aren't producing more oil at $95 a barrel, one reason is that oil isn't trading at $95 a barrel. Energy companies have to make decisions based on the longer term value they can achieve for their output. The average price of oil next year at around $75 a barrel is probably a better indicator of what your big energy companies are watching when it comes to making longerterm production growth decisions than the front month at 95. In my view, oil prices will need to settle around $80 a barrel or higher, and I'm talking about WTI. And companies will need to gain some confidence that a long-term price assumption of about $80 a barrel is reasonable. It's not just a short-term spike. You'll need to see that before you will see a more meaningful larger US production response. And since I think we will need to see some modest growth in US shale output over the longer ter intermediate to longer term to meet growing global demand and offset the barrels lost to the current conflict. That is where I expect oil prices are headed once the dust settles in the Middle East and the straight of Hormuz reopens. So that's my Sunday deep dive for this week. Thanks for listening. I hope you found it useful and if you did, please drop me a like and feel free to post a comment. I did try a little later time slot this Sunday. So, also let me know if you have a strong preference in that regard as well. I've been doing 2 p.m. This is going to be a little later in the afternoon. Tell me what you like more.

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