Growth in U.S. Oil and Gas Production Begins to Slow Down
U.S. oil and gas production increased in October, with oil production from the Lower 48 states reaching a record 10.9 million barrels per day (b/d).
However, there were signs of a flattening and downturn in production, likely influenced by lower prices since mid-2022.
The growth in production slowed compared to earlier in 2023, marking a delayed response to the decline in prices following concerns about the Russia-Ukraine conflict and associated sanctions.
In October 2023, front-month U.S. crude futures prices were down 29% from the post-invasion peak in June 2022. Despite this decline, the number of rigs drilling for oil only decreased by 20% from the peak in December 2022.
The rig count typically follows prices lower with an average lag of four to five months. Production, however, held up more strongly than usual, setting new records in the third quarter and the beginning of the fourth, which is different from the historical pattern.
Some of this resilience may be attributed to the temporary spike in prices in the third quarter, encouraging producers to maximize short-term production.
Additionally, increased drilling efficiency and efforts by privately-owned firms to boost production could have contributed to this trend.
But all these are likely to be transitory production increases. If prices remain subdued, production growth will eventually decelerate further.
Front-month U.S. crude futures averaged $72 per barrel in December 2023 and so far in January 2024, which is in only the 43rd percentile for all months since the start of the century in real terms.
U.S. production growth seized market share from Saudi Arabia and its OPEC⁺ allies and made it harder for them to lift prices in 2023.
But if prices remain at current levels, or perhaps fall another $10 per barrel, putting them in only the 33rd percentile, U.S. production growth is likely to halt and restore some of the OPEC⁺ market power.
NATURAL GAS
U.S. gas production hit a record high in October, but signs of output starting to turn lower were much more evident than for oil.
Dry gas production reached 3,240 billion cubic feet (bcf) which was 71 bcf (+2%) higher than in the same month in the prior year (“Natural gas monthly”, EIA, December 29).
But production growth had decelerated progressively from 176 bcf (+6%) in the 12 months to January 2023 and 200 bcf (+7%) in the year to September 2022.
Like oil, gas production had responded to the fall in prices since the middle of 2022 as Europe reoriented itself away from Russian pipeline gas.
Unlike oil, however, the gas market has no equivalent of OPEC⁺ to smooth the adjustment of production and prices.
Front-month U.S. gas futures prices had fallen by $6 per million British thermal units (-66%) by October 2023 from the peak in August 2022 after adjusting for inflation.
Real prices averaged a little over $3 (12th percentile for all months since 2000) in October 2023, down from $9 (79th percentile) in August 2022.
The number of rigs drilling primarily for gas had fallen by 44 (-27%) since September 2022 in response to the collapse in prices.
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Prices have since fallen further to an average of just $2.54 (5th percentile) in December 2023 as an unusually mild start to winter ensured inventories remained much higher than average for the time of year.
But the price-driven adjustment process is well underway, with production likely to flatten (temporarily) in the first half of 2024 and excess inventories to be eliminated by the middle of the year.
