2023-12-04 10:13:03
U.S. crude oil production hit a record high for the second straight month in September, highlighting the challenge facing Saudi Arabia and its OPEC partners, who are cutting their own output to push prices back up.
OPEC’s repeated production cuts since the fourth quarter of 2022 have saved U.S. producers, avoided a bigger collapse in prices and conceded more market share to them.
U.S. crude and condensate production increased 224,000 barrels per day (bpd) to 13.24 million bpd in September from August, according to the U.S. Energy Information Administration .
Crude and condensate production had increased by 342,000 b/d over the previous three months (11% annualized growth) and was 750,000 b/d higher than a year earlier (7% increase) .
Chart: U.S. oil and gas production
The sharp increase in domestic production has contributed to the accumulation of crude inventories and the weakening of prices since the start of the fourth quarter.
Over the past month, production increased in the federal waters of the Gulf of Mexico (+108,000 b/d) and Alaska (+19,000), as well as in the lower 48 states (+97,000).
Lower 48 production reached a record 10.8 million b/d, surpassing the pre-pandemic peak of 10.5 million b/d in December 2019.
Lower 48 production increased by 210,000 b/d over the previous three months (an annualized rate of +8%) and by 750,000 b/d over the previous year (an increase of +7 %).
IMPROVING DRILLING EFFICIENCY
There are few signs of slowing Lower 48 production growth despite collapsing prices and falling numbers of active drilling rigs over the past year.
Inflation-adjusted U.S. crude oil futures prices fell from an average of $121 per barrel in June 2022 to $90 in September 2023 and then to $77 in November 2023.
Drilling activity typically declines 4 to 5 months following the price drop and production declines 10 to 12 months following the price drop.
Along the same lines, the number of oil drilling rigs increased from an average of 623 in December 2022 to 510 in September 2023 and to 498 in November 2023.
Nonetheless, production has continued to increase as drillers improve efficiency by focusing on the most promising sites and drilling longer horizontal well sections to maximize contact with oil-bearing rock.
U.S. producers also benefited from repeated OPEC cuts that stabilized prices at a relatively high level and dampened the price signal to further reduce drilling.
First-month prices averaged $90 in September 2023, up slightly from $87 in the same month the previous year, following accounting for inflation.
By November, prices had fallen to $77 on average, but that was almost exactly the inflation-adjusted average since the turn of the century.
The market is rebalanced by OPEC cuts and increases in the groups’ collective reserve capacity rather than by changes in prices and U.S. production.
ADOPTING RIVAL PRODUCERS
Saudi Arabia, with its closest OPEC partners, has reluctantly resumed its traditional role as a backup producer balancing the market with its own production.
Meanwhile, US shale companies and other non-OPEC (NON) shale producers have played the same free-rider role as North Sea producers in the 1980s.
Free riders have been the main beneficiaries of the determination of Saudi Arabia and its allies to avoid a build-up of crude stocks and to raise prices.
Saudi Arabia and OPEC have always favored the expansion of the control group to fight once morest parasitism.
In the 1980s there was an (unsuccessful) attempt to reach out to the UK and other North Sea producers to share the burden of price support.
Since the 1990s, repeated attempts have been made to integrate Russia and other former Soviet states, culminating in the Vienna Agreement and Declaration of Cooperation in 2016.
U.S. antitrust laws prevent U.S. shale producers from being part of a formal cooperation agreement with OPEC.
But OPEC has already made contact with other non-OPEC shale producers, such as Brazil, in an attempt to integrate them officially or unofficially into the coordination system.
The opening to Brazil, and probably eventually to Guyana and other non-shale-producing countries, is part of the historical trend to welcome fast-growing rival producers.
For a production control agreement to work, it must control a sufficient share of global production, with free riders playing only a moderate role.
If rising prices lead to too much free growth outside the cartel, either a volume war and a fall in prices must be triggered to restrict uncontrolled producers, or they must be integrated into the control system.
For now, Saudi Arabia and its OPEC partners have chosen to try to integrate their rivals into the system rather than launch a new volume war.
GAS PRODUCTION IN THE UNITED STATES
Like crude, U.S. gas production hit a seasonal record in September, at 3,126 billion cubic feet (bcf), according to the Energy Information Administration.
But unlike crude, there are pronounced signs of slowing production growth in response to very low prices and the absence of an alternative producer to keep them higher.
Gas production increased by only 55 billion cubic feet (+1.8%) in September 2023 compared to the same month of the previous year.
Production growth has steadily slowed since mid-2022 in response to the sharp decline in prices.
Actual prices fell from an average of over $9 per million British thermal units (79th percentile) in August 2022 to just $2.23 (2nd percentile) in April 2023 and were now just $3. 06 dollars (12th percentile) in November 2023.
As growth slows, the necessary delays have allowed excess inventory to accumulate.
Working inventories in underground warehouses reached 3.836 billion cubic feet on November 24, the highest level for this time of year since 2020 and, before that, 2016.
Inventories were 186 billion cubic feet (+5% or +0.67 standard deviation) above the 10-year seasonal average and the surplus has shown no sign of disappearing since the start of the year .
In the central and eastern Pacific Ocean, El Niño conditions are strengthening, with the current episode on track to become one of the strongest in 40 years.
A strong El Niño is associated with above-normal temperatures in the northern states of the United States between December and February and an approximately 7% reduction in heating demand nationally.
So, although the rebalancing of the gas market is well underway, prices may have to remain very low for a few more months to ensure excess stocks are exhausted.
Related topics:
– US oil production hits record high as producers improve drilling efficiency (November 1, 2023)
– US oil producers spared by Saudi production cut
John Kemp is a market analyst at Archyde.com. The opinions expressed are his own. Follow all his comments on X: (Editing by Barbara Lewis)
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