After growing to record highs over the last two years, U.S. oil production growth could falter this year due to uncertainty in the energy sector, fears of a trade war between the U.S. and the rest of the world, and lower oil prices. The already high breakeven price of U.S. crude will make it difficult for oil companies to turn a profit, potentially leading them to cut capital expenditure over the next year, rather than boost production.
Limited Oil Growth in 2025
U.S. oil production is expected to continue increasing this year, but at a slower rate than during the last years of the Biden administration when it rose to record highs, according to energy flows intelligence firm Kpler.
Oil prices have faltered in recent months, falling by over 15% since the beginning of April. This has largely been blamed on fears of a recession owing to the introduction of sweeping U.S. tariffs and an oversupply due to increased output from OPEC+. In early May, the group decided to increase collective production by 411,000 barrels per day (bpd), which is almost triple the previously planned output. The move by OPEC+ responds to the growing role of the U.S. in the international oil market. The production increase is expected to provide OPEC+ with a larger market share.
When the West Texas Intermediate (WTI) Crude benchmark fell to $57 a barrel, it led to fears of falling profits across the U.S. oil and gas industry. This is far below the 2024 average WTI price of $77 a barrel. Falling oil prices have resulted in Kpler reducing its production forecast by 120,000 bpd to 170,000 bpd for the rest of the year and into 2026. Analysts at Kpler explained, “With WTI, the main US benchmark crude, now near breakeven levels for new wells, producers are likely to cut back drilling.”
The slow growth of crude output was not on the cards when President Donald Trump came into office in January proclaiming oil companies should “drill, baby, drill”. However, rising pressures on the U.S. economy and widespread uncertainty in its energy sector have led several companies to reconsider their spending, as well as seriously question any plans to expand operations.
Fears of Falling Oil Prices – Can Oil Majors Break Even?
U.S. oil companies are highly sensitive to price fluctuations and often change their business strategies based on oil price trends. A forecast of lower margins has prompted several oil and gas companies to reconsider their capital expenditure for the coming year.
The looming threat of tariffs, across several countries and industries, is concerning for oil companies operating in the U.S. due to the potential for increased production costs. Meanwhile, economic uncertainty and the higher global crude output are driving oil prices down, which will make it increasingly difficult for companies to make a profit. While many companies have improved efficiency in recent years, higher service costs and energy transition spending have led to tightened budgets. Analysts are now predicting measures including cuts to share buybacks and capital expenditures.
The average breakeven price is $62 a barrel in the Permian Midland Basin and $64 a barrel in the Permian Delaware Basin, the two largest basins in the Permian, according to data from a Dallas Fed Energy survey. RBC Capital Markets estimates Exxon’s breakeven to cover both dividends and buybacks is $88 per barrel for 2025. Chevron’s is even higher, at $95 per barrel.
Matthew Bernstein, the vice president at Rystad, stated, “Some combination of near-term activity levels, investor payouts or inventory preservation will need to be sacrificed in order to defend margins.” Bernstein added, “The corporate reality for public players means that already modest growth could be at risk if prices remain near $60 per barrel.”
Both the Brent and WTI benchmarks futures fell to their lowest since February 2021, during the Covid-19 pandemic, following President Trump’s threat of sweeping tariffs. A reduction in capital expenditure by oil companies will largely depend on the depth and duration of the slump, which is still unknown.
Will Q1 Earnings Shape Oil Majors’ Spending Decisions?
Some U.S. oil majors reported positive first-quarter earnings, which have led to a split in how companies are now planning to spend their capital. Investors were waiting to see whether companies would cut share repurchases due to lower crude prices, in a bid to keep cash to fund projects.
ExxonMobil and U.K.-based Shell have maintained the pace of share buybacks, while Chevron and BP have stated plans to reduce buybacks in the second quarter. Exxon’s sharp increase in crude production at its Guyana oilfield has helped boost the company’s non-U.S. business and its net-debt-to-capital ratio stood at 7%, making it the only integrated oil company not to increase net debt during the first quarter.
Earlier in the year, Chevron announced plans to lay off up to 20% of its employees in a bid to simplify the business and cut up to $3 billion in costs. It has since said it will reduce buybacks to between $2 billion and $3.5 billion in the current quarter, a decrease from $3.9 billion between January and March. It cited market conditions as the cause.
There is still great uncertainty over the impact of the trade war and other factors on oil prices, however, the economic instability and unclear sectoral outlook in the U.S. will likely make many oil companies rein in their spending as they wait to see where the oil demand and prices go over the next year.
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