Analysis: Hormuz Jam May Be Tailwind for U.S. Oil Output


   
Karim Bastati
DTN Analyst

   VIENNA (DTN) -- U.S. crude oil has over the past two months become the 
replacement barrel for flows missing on the Persian Gulf's Strait of Hormuz. 
The longer the supply disruption lasts, the more likely it is to incentivize 
U.S. producers to expand operations.

   That would be contrary to expectations at the start of the year when most 
forecasters predicted U.S. oil output to start a decline that could persist 
over the next few years -- despite a history of production growth that often 
surpassed expectations.

   Just six months ago, a sizeable crude oil overhang was predicted, leaving 
spot prices dangerously close to a break-even range for new well drilling.

   This threatened to end the growth trend in U.S. crude production. Output 
growth slowed over the past few years but stayed positive as efficiency gains 
more than compensated for the decreasing number of active rigs.

   Still, the low price expectations initially pegged for 2026-2027 indicated 
there might be too few new wells to make up for depleting legacy production.

   Back then, we cautioned that "global supply side risks remain abound, and 
sustained supply outages caused by wars and embargos could catapult prices into 
a range conducive to continued production growth".

   In a first-quarter survey carried out by the Dallas Federal Reserve, U.S. 
exploration and production firms polled cited an average needed WTI price of 
$43 bbl to cover operating expenses for existing wells, ranging from $34 to $47 
bbl depending on the region. Average break-even for a new well was penciled in 
at the $62-$70 bbl range.

   Fast forward to this week, the Energy Information Administration (EIA) 
forecast a 2026 average of $85.33 bbl for West Texas Intermediate (WTI) crude 
in its Short-Term Energy Outlook (STEO) for May.

   The EIA's April STEO had an even loftier expectation of $87.08 bbl for WTI, 
which it pared this month on concerns that production by the Organization of 
Petroleum Exporting Countries and its allies could rise despite the Middle East 
conflict.

   The EIA had steadily raised its oil price expectations in recent months on 
the assumption that flows through the Strait of Hormuz would return by April 
and May -- a prospect that has already been nullified.

   Two months into WTI trading in the $84 to $113 bbl range, with an average 
far above $90 bbl, U.S. rig counts continued to drop, suggesting that producers 
in the early days of the Hormuz crisis were not confident of the supply 
disruption lasting long enough to warrant new investments.

   With the crisis looking far from unresolved, and WTI prices staying far 
above break-even levels for new wells even after Middle East supply is 
restored, U.S. producers may well opt to expand operations.




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