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US oil producers unlikely to increase output in wake of Saudi attack

While an attack on Saudi Arabian Oil Co.'s Abqaiq facility on Sept. 14 knocked out almost 5% of the world's oil production indefinitely, independent oil producers in the U.S. might not rush to increase their output, even as oil prices jump, according to analysts.

Both West Texas Intermediate and Brent crude prices were up more than 10% at midday Sept. 16 with WTI prices back over $60 per barrel. However, unlike in past price spikes, most industry observers believe independents will stick to their self-imposed fiscal discipline and will hold off on increasing production just yet.

Though the exact culprits behind the Abqaiq attack remain unclear, the impact of the strikes are more obvious. Saudi officials said Sept. 14 that 5.7 million bbl/d of production, or approximately half of the kingdom's capacity, had been shut in. The duration of the production halt remains unclear, but Aramco planned on releasing an update Sept. 16.

Even though the opportunity to increase production may be tempting to U.S. independents with half of Saudi Arabia's production temporarily sidelined, the response so far has been complete silence. Williams Capital Principal Gabriele Sorbara said odds are independents will stay quiet.

"I don't think this is going to be all that exciting," he said, noting the repeated commitments to fiscal discipline made by executives. "It would have been different five years ago."

Sorbara also pointed to the futures market, which would be the area that would have to show significant change in order for producers to seriously consider production increases. Those, he said, were showing far less movement.

"[Independents] are looking at 2020 and 2021," he said. "There, prices are only up about $3."

If the damage to Abqaiq can be repaired quickly, the major possible trigger for a U.S. production increase would be eliminated. If it is more long-term, then futures prices could increase further and motivate independents to push the production levels higher.

"It remains to be seen how long it lasts," Morningstar analyst David Meats said of the Abqaiq outage. "This would need to look like a sustainable windfall to impact E&P capex."

With pipeline capacity increasing out of the Permian Basin, the U.S. is in a better position to respond to a crude shortfall than it would have been a year ago. But even if independents decide to throw promises of fiscal discipline out the window and increase production, the lag time between making the decision and actual results could short-circuit the potential benefits.

"Although short cycle, this response is likely to take several months however, with a typical lag of four months between drilling and production," Goldman Sachs said in a Sept. 15 commentary. "This was visible last year, with the rally to $60/bbl WTI prices in late 2017 leading to an acceleration in production growth in the following summer."

While the attack on Abqaiq probably will not spur a major spike in U.S. crude production, it still could have benefits for U.S. independents.

"They could increase their hedging [at higher prices]," Sorbara said. "This could also get the equity markets a little more interested in them."

In his Sept. 16 note, Mizuho analyst Paul Sankey said the battered stocks of independents may get a boost from the situation, as their safe and consistent production could take on increased appeal with investors.

"Clearly, the value of acreage and production outside the Middle East just re-valued higher, with our over/under for price impact at $10/bbl at the front, $5/bbl at the back, there is a revaluation higher of beaten down E&Ps … the prevailing logical analysis of markets was bearish. Total turnaround," he said.