U.S. shale producers need to slow down with production growth and focus more on capital discipline in an oversupplied market, Continental Resources’ Harold Hamm told the audience at the EnerCom conference, as quoted by Reuters.
Hamm was one of the few voices of caution two years ago as well, when OPEC started cutting production for the first time to reverse the relentless fall in prices. Despite Hamm’s calls for moderation, however, the OPEC cuts resulted in a surge in U.S. oil production. Now, Hamm says, this surge is hurting prices and therefore profits.
“Capital discipline is more important now than at any time I’ve seen it. We can oversupply the market, and we have,” Hamm said. The latest EIA weekly report has estimated average daily production at 12.3 million bpd.
Another thing Hamm advised caution on was hedging. Noting that “We saw a whole lot of people under water with oil hedges last year,” Continental’s chief executive said it was dangerous to hedge a lot of oil production right now.
Indeed, surging U.S. production of crude oil has been the main reason for the most recent price slumps, supported by the trade tensions between Washington and Beijing. However, this has not led to producers curbing production. On the contrary, the shale industry has kept going higher and higher even as prices in the star play, the Permian, collapsed due to a pipeline capacity shortage.
Interestingly, the continued increase in production goes counter to what shale company investors want, which is higher returns and less focus on production growth. And yet they are cutting the number of drilling rigs, according to Hamm. He said these were heading for 800 onshore but “haven’t bottomed yet.”
Hamm also said he expected OPEC to deepen their cuts, which is what OPEC officials have signalled recently as the current cuts are apparently insufficient to prop up prices.