U.S. Oil Production Response to Market Prices is Changing, EIA finds

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Written by Daniel Graeber for Industrial Info Resources (Sugar Land, Texas)--Despite an increase in crude oil prices over a three-year forecast period to 2024, U.S. crude oil production gains are slowing as firms rethink their capital programs, the federal government reported.

The U.S. Energy Information Administration (EIA), the data arm of the Department of Energy, raised its forecast for the yearly average for crude oil production this year by 0.6% from its previous monthly report.

EIA expects total U.S. crude oil production will average 12.6 million barrels per day (BBL/d) this year and increase again to 12.8 million BBL/d in 2024.

U.S. crude oil production shattered records recently on a yearly basis. The EIA's monthly market report in June 2019, before the start of the pandemic, stated that the 11 million BBL/d for the prior-year average was a record. That record was broken again and forecasts pointed to even further gains.

But a forecast for 13.3 million BBL/d for 2020 never materialized and the pace of year-on-year gains is on the decline.

"Although we expect U.S. crude oil production to set annual records in 2023 and 2024, growth in crude oil production is slowing," the EIA's monthly market report for June stated.

Rumors of shale oil's death, however, are somewhat exaggerated. Even with the slowing rate of growth, the U.S. has a million or so barrels per day to play with before it loses its status as a global leader.

The EIA estimates that the Permian Basin alone will churn out some 5.7 million BBL/d on average this month. That's 1.6 million BBL/d more than what secondary sources reported to OPEC economists in May for all of Iraq. Only Saudi Arabia is producing more.

Saudi Arabia during the weekend opted to trim its own production levels by around 1 million BBL/d come July, tacitly working to bring oil prices back to the $80 range it needs to balance its books. The EIA said that price point won't happen this year.

Shale players, however, should be enjoying the current market as crude oil prices are nearly $20 per barrel over the average break-even for drillers. A changing mindset for producers, however, means less capital is going to exploration and production, the EIA finds.

Over the three-year period to 2019, the EIA put the average price for WTI at $58 per barrel and U.S. crude oil production growth increased by 1.1 million BBL/d. Over the three years to 2024, however, WTI should average $83 per barrel, but annual growth is only expected at 400,000 BBL/d over that period.

"The changing response to crude oil prices by U.S. producers may reflect a combination of the use of capital to increase dividends and repurchase shares instead of investing in new production, the effects of tighter labor markets and higher costs, and increased pressure on oilfield supply chains," the EIA said.

Shareholder returns are indeed in vogue. Commodity trader Trafigura (Singapore) on Wednesday said it paid out $3 billion to its limited group of shareholders.

During a late-May meeting, Mike Wirth, the chief executive officer at Chevron Corporation (NYSE:CVX) (San Ramon, California), said its investments last year were 75% more than 2021 levels, though the focus seemed to be on shareholder returns.

"Our financial priorities have remained consistent, as we aim to reward stockholders with dividend growth, invest for long-term returns, maintain a strong balance sheet to mitigate commodity price risk and return surplus cash via share buy-backs through the cycle," Wirth said.

A separate concern would be capital spending on targets in the energy transition. The world still needs fossil fuels, but investments are migrating toward alternatives such as hydrogen instead.

These, however, are relative arguments compared with past production trends in the U.S. Total U.S. crude oil production growth topped 17% from 2013 to 2014, but production was some 3.8 million BBL/d less than what's expected this year.

"(W)e still expect U.S. crude oil production to continue growing to record levels, driven primarily by production growth in the Permian Basin," the EIA's market report for June stated.

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