Key Takeaways:
A record-low inventory of drilled-but-uncompleted wells is limiting U.S. shale producers' ability to replace crude stockpiles depleted by the Iran conflict.
U.S. shale producers held the lowest stock of drilled-but-uncompleted wells on record in May, constraining their ability to rapidly boost crude output as exports and refinery demand surged to fill supply lost to the U.S.-Israeli war on Iran.
"Oil inventories will hit dangerously low levels within weeks, forcing prices to shoot higher," Exxon said in a statement, as depleted stockpiles and constrained shale supply tighten the market.
WTI crude settled at $88.90 a barrel Thursday after retreating from an overnight high above $92.50, as traders weighed the supply constraints against a tentative U.S.-Iran ceasefire deal that still needs President Trump's approval. The S&P 500 rose 0.6% to 7,563.63, while the 10-year Treasury yield eased to 4.45% as oil gave back some of its gains.
The DUC backlog constraint means U.S. shale — typically the world's most responsive source of incremental supply — cannot quickly offset the roughly 3 million barrels a day of Iranian crude removed from global markets by the conflict. With the Strategic Petroleum Reserve near four-decade lows and the ceasefire deal uncertain, the supply buffer has rarely been thinner.
Drilled-but-uncompleted wells represent the fastest way for producers to bring new supply online, requiring only hydraulic fracturing and completion work rather than months of new drilling. The record-low inventory leaves operators with little spare capacity to respond to the supply shock from the Iran conflict, which pushed WTI above $90 intraday for the first time since 2024.
The constraint is particularly acute because U.S. crude exports have jumped to fill the gap left by Iranian barrels, while domestic refineries are processing at elevated rates ahead of summer driving season. The Energy Information Administration's weekly inventory report showed crude stockpiles declining faster than the five-year average, according to data published Wednesday.
The last time DUC inventories approached these levels was in early 2023, when producers prioritized shareholder returns over growth spending. That discipline — which kept the U.S. rig count flat even as WTI traded above $80 — has left the industry structurally less responsive to price spikes than in previous cycles.
The tentative 60-day ceasefire extension between the U.S. and Iran — which still requires Trump's signature — has capped some of the upside in crude prices, with WTI retreating from its overnight peak above $92.50. But traders remain skeptical that a durable resolution is near, given the complexity of reopening the Strait of Hormuz and restoring Iranian export flows. Any resumption of Iranian crude exports would require not only a political deal but also the demining of shipping lanes and the restoration of insurance coverage for tanker operators, a process that could take weeks even after a ceasefire is signed.
"If the deal falls through, we are looking at a supply crisis that shale simply cannot fill in the short term," said Omar Tariq, energy analyst at Edgen. "The DUC data confirms what the market has been pricing in — the U.S. supply response has a ceiling."
Energy sector stocks have rallied on the tighter fundamentals, with the S&P 500 energy index outperforming the broader market this month. Producers with the largest DUC inventories — including Exxon and Chevron — are best positioned to capture the higher price realizations, though the industry-wide backlog limits the magnitude of any near-term production surge.
The broader market has largely looked through the oil spike, with the S&P 500 climbing 0.6% to a record 7,563.63 on Thursday as corporate earnings continued to beat expectations. But the combination of rising energy costs and sticky inflation — a measure of U.S. inflation accelerated last month to its worst level in three years — poses a risk to the consumer-driven expansion if oil prices sustain above $90.
This article is for informational purposes only and does not constitute investment advice.
