LONDON, Sept 1 (Reuters) – U.S. crude oil production rose again in June and is near record highs set before the pandemic, but the industry is slowing growth in response to falling prices from mid-2022.
Total crude and condensate production rose to 12.8 million barrels per day (bpd) in June, up from 12.6 million bpd in May, and near the record 13.0 million bpd set in November 2019.
According to the US Energy Information Administration, output in the lower 48 states excluding federal waters in the Gulf of Mexico rose to a record 10.6 million bpd (“Monthly Petroleum Supply”, August 31).
Production in the Lower 48 increased by 0.9 million b/d (about 10%) from a year ago, but output rose by just 0.1 million b/d (an annualized rate of just 4%) in the most recent three months.
Production is still rising in delayed response to a period of high prices in the second and third quarters of 2022 following Russia’s invasion of Ukraine and the US and EU imposing sanctions in response.
Since then, however, inflation-adjusted prices have fallen by 35-40% and returned to pre-attack levels, removing much of the incentive to increase production.
Based on historical records, it takes an average of 5 months for drilling to decline and 12 months for production to decline after prices peak.
After prices peaked in June 2022, the number of rigs drilling for oil peaked in December 2022 and fell 16% in August 2023, according to field services company Baker Hughes.
Following the drilling peak, Lower 48 output is likely to peak in the third quarter of 2023, as exploration and production companies work their way through the inventory of drilled but incomplete oil wells.
Flat or lower 48 output in the final four months of 2023 will contribute to tightening global oil markets, especially as Saudi Arabia and Russia look set to maintain their own production cuts.
But prices have already started to rise in response to Saudi and Russian cuts, easing some pressure on U.S. producers.
Additional cuts announced by Saudi Arabia and its OPEC+ partners have thrown a lifeline to US shale firms, ensuring that any slowdown in US output is smaller and shallower than otherwise.
Chartbook: US oil and gas production
On the gas side, dry production in June was 3,082 billion cubic feet, up 4% from the same month a year ago (“Natural gas monthly”, EIA, August 31).
But there hasn’t been much growth since the end of last year, consistent with a slowdown in prices and a slowdown in drilling from the fourth quarter of 2022.
Inflation-adjusted gas futures prices were down 75% from their 2022 peak in April 2023, and although they have rebounded slightly since then, they were still down more than 70% in August 2023.
In real terms, average gas prices in April 2023 were in the 2nd percentile for all months since the turn of the century and were still only in the 7th percentile in August 2023, down from the 78th percentile in August 2022.
The number of rigs drilling for gas fell to an average of 121 in August 2023 from a peak of 159 in April 2023 as the industry belatedly reacted to the price slump.
A prolonged heat wave this summer and LNG exports starting to deplete surplus gas inventories have slowed output growth with strong costs to power producers.
Working gas inventories in underground storage were still 132 billion cubic feet (4% or 0.44 standard deviation) below the previous ten-year seasonal average as of August 25.
But the surplus has more than halved to 299 billion cubic feet (+12% or +0.81 standard deviation) on June 30.
As with oil, though perhaps a few months later, gas production may peak and fall before the end of 2023 due to lower prices and slower drilling filtering through.
Related Columns:
– Oil market to tighten moderately in late 2023 (August 17, 2023)
– US Oil and Gas Production Begins to Flatten (August 4, 2023)
– US Oil and Gas Production to End After 2023 (July 5, 2023)
– US oil and gas production still rising in response to higher prices last year (June 1, 2023)
John Kemp is a market analyst at Reuters. Opinions expressed are his own
Editing by Kirsten Donovan
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