U.S. Oil Production Forecasts Improve, But Headwinds Remain

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Written by Daniel Graeber for Industrial Info Resources (Sugar Land, Texas)--The employment situation and upstream activity have both improved in the southern U.S. oil patch, though many trends are still below pre-pandemic levels, the Federal Reserve Bank of Dallas finds.

The quarterly performance for upstream players such as Baker Hughes (NYSE:BKR) (Houston, Texas) and SLB (NYSE:SLB) (Houston, Texas, and Paris, France) suggests operations in North America are starting to improve. Headwinds remain, however, as essential goods like steel are becoming increasingly more expensive.

That said, the market itself is supportive to upstream growth. West Texas Intermediate (WTI) is trading much higher than the break-even price for most shale players and forecasts suggest that cushion could grow even further by next year.

Click on the image at right for a Dallas Fed chart showing WTI, producer price index and break-even prices.

The latest report on sector performance from the Dallas Fed finds that energy firms across the board performed well. Those same companies, however, are bowing to investor pressure by returning some of the capital gained from higher crude oil prices in the form of dividends rather than investing more in upstream.

Elsewhere, the report finds that companies are having to pay more to lure employees into the sector while at the same time facing additional cost pressures from steel, frac sand and chemicals. New equipment and machinery, meanwhile, are hard to come by due to long lead times. Rig counts are up, but they're not increasing as fast as they were before the pandemic. For related information, see October 13, 2022, article - Tech Marches Forward to Boost Productivity in Permian.

On costs, contracts told the Dallas Fed that inflation in the sector was up more than 20%, with drilling and oilfield services alone accounting for the bulk of that increase. That suggests that break-evens may actually be closer to $60 per barrel rather than the consensus estimate that's closer to $50 per barrel for regional shale producers.

The U.S. Department of Energy nonetheless is expecting a banner year for crude production in general. The latest estimate puts the average for total U.S. crude oil production at 11.7 million barrels per day (BBL/d) for 2022. That improves to 12.4 million BBL/d and, should the forecast prove accurate, it would mark the highest level of U.S. crude oil production since 2019.

The Dallas Fed is even more optimistic. It sees crude oil production at 12.7 million BBL/d by the fourth quarter, a 500,000-BBL/d improvement over year-ago levels. By 2023, production levels could be some 600,000 BBL/d higher than fourth-quarter 2022.

Click on the image at right for a Dallas Fed chart showing a consensus of projections for U.S. crude oil production.

That serves as something of an indicator of the hyperbole tied to the political discussions over U.S. energy policy. Both sides of the debate say the other is to blame for headwinds.

But it may be the pace of acceleration that's the real concern. Despite the growth trends for production, the Dallas Fed said its forecast for production gains has changed little since the beginning of the year when things like global inflation and the war in Ukraine were not yet in the picture.

Looking ahead, and despite its own forecast for growth, the Dallas Fed seems anything but optimistic about the future.

"The challenge of growing production amid tight labor markets, rising costs and extended lead times for new equipment orders was already becoming apparent, though not as acutely as now," its report read. "The drop in oil prices over the past four months, the U.S. monetary tightening, softening economic data out of China and a likely recession in Europe have all soured expectations for what U.S. producers will be able to achieve over the next year."

Industrial Info Resources (IIR) is the leading provider of industrial market intelligence. Since 1983, IIR has provided comprehensive research, news and analysis on the industrial process, manufacturing and energy related industries. IIR's Global Market Intelligence (GMI) helps companies identify and pursue trends across multiple markets with access to real, qualified and validated plant and project opportunities. Across the world, IIR is tracking over 200,000 current and future projects worth $17.8 Trillion (USD).