The U.S. shale patch cannot and will not come to the rescue of a potentially catastrophic loss of crude supply from the Middle East as the war in Iran set fire to the world’s most important oil-producing region.
The escalating war and the de facto closing of the Strait of Hormuz is threatening to hold back more than 15 million barrels per day of oil supply for weeks and forcing Gulf producers to begin shutting down output as storage fills up.
The International Energy Agency, which was created in the 1970s to coordinate actions during the Arab oil embargo, suggested after an emergency meeting on Tuesday that U.S. shale could be the “most significant” near-term offset to any losses from the Middle East. A document by the IEA, circulated after the meeting and cited by the Financial Times, says that the shale patch could add supply from recently drilled wells that have not started production yet. About 240,000 barrels per day (bpd) could be added in May and “an additional 400,000 barrels per day” may come on the market in the second half of the year, according to the IEA.
This is a drop in the ocean compared to the 20 million bpd that pass through the Strait of Hormuz daily—at least they did before the war began.
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Should the conflict stretch into May, the devastating loss of so many barrels – 20% of the world’s daily oil consumption – cannot be offset in any way, and 400,000 bpd wouldn’t make a difference.
Strait of Hormuz Crisis
The IEA said that “ahead of the military actions that began on 28 February, global oil supply was also expected to far exceed demand in 2026. However, prolonged supply disruptions could flip the market into a deficit.”
Tanker traffic activity at the Strait of Hormuz crashed from nearly 40 ships per day on average transiting in January to a single tanker making the trip on March 3, according to data from energy flows analytics firm Vortexa.
“While the U.S. has pledged military escorts and a financial safety net to break the “no-go zone,” the on-the-water reality remains one of extreme caution and paralysis,” Vortexa’s freight analyst Wanying Zhang wrote in a note on Wednesday.
“Whether these interventions can successfully restore confidence for the mainstream fleet, or if the Strait will remain the exclusive domain of high-risk “dark” operators, will be decided in the critical days ahead.”
Another vessel-tracking and analytics firm, Kpler, noted on Wednesday that its base case assumes the conflict remains contained and relatively short-lived.
U.S. Shale Not Rushing to Boost Production
Most analysts and shale executives do not expect severe disruptions to last beyond three weeks, although investment banks, including Goldman Sachs and JPMorgan, have forecast oil prices at $100 and above in case of prolonged de facto blockade of the Strait of Hormuz.
Volatility, though, will remain high, at least in the first half of the year, regardless of how the conflict and the threats to supply play out.
Against this backdrop, U.S. shale is reluctant to change carefully drafted capital budget plans for 2026, especially considering the lead times necessary to actually boost drilling.
The current price of U.S. benchmark WTI Crude at over $77 per barrel may look tempting on paper, but no one is rushing to boost drilling. Shale executives say the patch would need such prices to remain stable at these elevated levels for a year to warrant efforts to increase production. Most of them also expect prices to pull back sharply, possibly within weeks, before any new drilling rigs could be added.
Instead, the shale patch is now looking at using the surging prices to lock in future production at higher prices and to return more cash to shareholders from the expected windfall to cash flows.
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Following the U.S.-Israel strikes on Iran on Saturday, shale producers were ready as soon as Sunday to execute major hedging transactions when markets open on Monday, Matt Marshall, president of Aegis Hedging, told Reuters this week.
“Even though it was a Sunday, I would estimate about a quarter of our oil-producing customers were watching at the open and had coordinated with us and counterparties to be able to hedge,” said the executive at Aegis Hedging, which handles hedging for about 25-30% of U.S. production, per internal estimates.
For example, Formentera Partners on Tuesday hedged 80% of its production through early 2027 at $70 per barrel, managing partner Bryan Sheffield told the Wall Street Journal.
Moreover, Sheffield says that contracting a new rig could take six weeks, by which time oil may have dropped even lower than before the conflict.
“Do you really want to sign a contract at $75 plus oil, or let’s just say $90, and by the time you sign the rig contract, get the rig out there 90 days later, oil is straight back to $50?” Sheffield told the Journal.
Kirk Edwards, president of Permian-focused independent producer Latigo Petroleum, told FT, “What Permian producers need in my opinion is a stable $75 price . . . over the next 12 months.”
By Tsvetana Paraskova for Oilprice.com
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