U.S. crude oil production increased again in July and neared the pre-pandemic record, showing output has remained more resilient than expected in the face of a steep downturn in drilling.
Total production of crude oil and condensates increased to 12.99 million barrels per day (bpd) in July 2023, which was not statistically different from the record of 13.00 million bpd set in November 2019.
Output from the Lower 48 states excluding federal waters in the Gulf of Mexico increased to a record 10.7 million bpd, according to the U.S. Energy Information Administration.
Lower 48 production had increased by 990,000 bpd (+10%) since the same month a year earlier, though growth had slowed modestly to just 185,000 bpd (an annualised rate of +7%) in the most recent three months.
Oil drilling and production growth has slowed in a delayed response to the sharp drop in oil prices since the middle of 2022.
Inflation-adjusted U.S. crude futures prices averaged $71 per barrel (43rd percentile for all months since the turn of the century) in June 2023 down from $120 (82nd percentile) in June 2022.
In response, the number of rigs drilling for oil fell to an average of just 510 in September 2023 down from a recent peak of 623 in December 2022.
But production has continued to increase partly because of the delays in the system – it takes on average about 12 months for a change in prices to filter through into a change in output.
Shale firms have also tried to eke out extra output by concentrating the smaller number of rigs on only the most promising well sites and boring much longer laterals.
Longer horizontal sections ensure each well is in contact with more reservoir rock and can bring more oil to the surface, boosting productivity per well.
Nonetheless, it is likely output would have levelled off or even started to fall from the third quarter onwards in response to lower prices and less drilling.
Since the start of the third quarter, however, futures prices have risen strongly in response to extra production cuts announced by Saudi Arabia and Russia, relieving pressure on the U.S. industry.
Front-month prices averaged more than $89 per barrel in September, in the 60th percentile for all prices since the start of the century in real terms.
Higher prices have boosted cash flow and improved confidence in the short and medium term outlook for shale producers.
Production cuts by Saudi Arabia and Russia have thrown a lifeline to the U.S. shale firms, helping them avoid a much deeper downturn.
U.S. crude output is now more likely to stabilise than decline through the end of 2023 and the first half of 2024 as a result of the restraint of the OPEC+ producer group, which includes Saudi Arabia and Russia.
In turn, the largest U.S. shale producers have indicated they have no intention of raising output in response to the recent rise in prices.
U.S. GAS PRODUCTION
Like U.S. oil production, gas output has also continued to increase, a lagged response to high prices in 2022, but the subsequent slump in prices has been more severe and is causing a more pronounced slowdown in output growth.
Dry production amounted to 3,222 billion cubic feet in July 2023, an increase of less than 4% compared with the same month a year earlier.
Growth has decelerated from almost 7% a year ago as the industry adapts to some of the lowest futures prices in decades in real terms.
Real front-month prices averaged just $2.22 per million British thermal units (2nd percentile for all months since 2000) in April 2023 down from $9.16 (78th percentile) in August 2022.
Since then, prices have risen, but only modestly, averaging $2.70 (8th percentile) in September 2023, which has not been high enough to relieve the pressure on producers.
With no equivalent of Saudi Arabia, Russia and OPEC+ to accelerate the rebalancing, U.S. gas producers have experienced prices lower for longer than their oil counterparts.
The number of rigs drilling primarily for gas averaged just 116 in September 2023 down from a cyclical peak of 162 in September 2022.
The combination of fewer drilling rigs, slower production growth, faster exports, and ultra-low prices stimulating consumption by power generators has helped eliminate surplus inventories carried over from 2022.
Working gas inventories were just 75 billion cubic feet (+2% or +0.27 standard deviations) above the prior ten-year seasonal average near the end of September.
The surplus had narrowed progressively from 299 billion cubic feet (+12% or +0.81 standard deviations) at the end of June.
In other circumstances, prices would probably have moved significantly higher in response to the erosion of the surplus.
For the moment, however, prices are being kept very low by forecasts for warmer-than-normal weather and lower gas consumption through the first part of winter 2023/24.
John Kemp is a Reuters market analyst. The views expressed are his own
(Editing by Mark Potter)