Upstream oil and gas spending could contract this year for the first time since 2020, although US oil output should grow as producers hedged during a price spike, JP Morgan analysts said.

“Drawing from data provided by 145 public companies during their 1Q25 earnings results, along with our estimates of private operators’ spending, we estimate a 1.1% ($5.9 billion) reduction in global upstream oil and gas development spending, bringing it down to $543 billion, marking the first year-over-year contraction since 2020,” the analysts said in a report.

With the second-quarter earnings season around the corner, market watchers will be paying close attention to the spending and production plans coming from oil producers.

Considering recent price volatility stemming from the conflict over Iran’s nuclear program, and US President Donald Trump’s tariff plans, companies have been cautious about growth.

However, a brief rally in oil prices in June following strikes from Israel and the US targeting Iranian nuclear enrichment facilities likely spurred hedging activity, the analysts said.

“We estimate that during the sharp spike in hedging activity, 200-250 million barrels of hedging was executed, primarily for late 2025 and full-year 2026 barrels, with some volumes extending into early 2027. This equates to approximately 38% of US crude production in 2026 from 37 companies being hedged at an average WTI-equivalent price of $67/bbl, representing 10.4% of total US crude production,” the analysts said.

The “improved hedge coverage is expected to support production activity that might otherwise have been minimized. Accordingly, we have revised our 2026 US crude and condensate supply growth estimate from 110 kbd to 165 kbd,” they said.

Of the total US liquids production growth of 672,000 b/d, 253,000 b/d is expected to come from crude and condensate production, and another 375,000 b/d is expected from natural gas liquids. In 2026, US production could see an additional growth of 530,000 b/d.

US shale-sector capital spending is expected to decline 1.9%, compared to a 3.2% decline seen in 2024.

US producers will likely take significant budgetary measures if oil prices sustain below $58/b to $60/b for a month or longer.

“Budgets will be cut quickly if prices fall below our estimated US shale wellhead break-evens of $47 WTI, assuming zero return,” the analysts note.

Oil executives continued to express widespread angst at the uncertainty caused by US energy policy, according to the latest Dallas Federal Reserve Bank quarterly energy survey released July 2.
The survey’s business activity index, which the Dallas Fed says is its “broadest measure of the conditions energy firms face” in a wide swath of the southwestern US shale patch, turned negative, declining from 3.8 last quarter to minus 8.1 in Q2. The company outlook index remained negative, at minus 6.4, “suggesting slight pessimism among firms,” the Dallas Fed wrote in its report.

Asia to lead declines
All regions, except the Middle East, are expected to reduce capital allocation for oil and gas development in 2025, particularly in Asia, where capex is expected to decrease by 4.8%, JP Morgan analysts said.

The analysts noted that two of the three Chinese national oil companies—Petrochina and Sinopec—have announced reductions in their 2025 upstream capital expenditures.

The second largest regional decline is expected in Latin America. Mexico’s Pemex is “contending with a deepening debt crisis,” while in Colombia, the state oil firm Ecopetrol plans to reduce costs and expenses, according to the report.

Despite producers’ potentially conservative capital plans, global oil liquids supply is projected to increase by 2.3 million b/d in 2025.

“A key reason behind the stable production profile despite both investment and well activity levels dropping significantly since 2014, are the declining unit costs due to efficiency and productivity gains,” analysts said in the report. “In other words, the world today is capable of producing more oil with fewer investment dollars compared to the early 2010s.”
Source: Platts