LONDON (Reuters) – U.S. crude oil production is rising at the fastest rate on record as the increase in prices over the last year boosts drilling and completion activity and energy firms employ more horsepower to fracture larger wells.
Crude and condensates output hit a record 11.35 million barrels per day in August, up from 10.93 million bpd in July, according to the U.S. Energy Information Administration (“Petroleum Supply Monthly”, EIA, Oct. 31).
Crude output has increased by more than 2 million barrels per day over the past 12 months, an absolute increase that is unparalleled in the history of the U.S. oil industry (tmsnrt.rs/2P1FGR7).
In percentage terms, output is up by nearly 25 percent over the last year, the fastest increase since the 1950s (excluding the recovery from hurricanes).
U.S. oil production is now rising faster than at the height of the last drilling and fracking boom before prices slumped in the second half of 2014.
Most of the increase is coming from onshore shale fields, where output has risen by more than 1.9 million bpd over the last year, with a smaller contribution from the Gulf of Mexico, where output is up 200,000 bpd.
In the first nine months of the year, the number of wells drilled in the United States was up by 26 percent while well completions were up by 24 percent (“Drilling productivity report”, EIA, Oct. 15).
Increasing U.S. output has helped alleviate earlier concerns about a possible crude shortage following the re-imposition of U.S. sanctions on Iran with effect from Nov. 5.
Surging domestic output coupled with increased production from Russia, Saudi Arabia and a number of other OPEC countries has pushed oil prices lower and driven the futures markets back towards contango.
Spot prices and calendar spreads for WTI have weakened rapidly since July, much further and faster than for Brent, in response to the improved availability of crude in the midcontinent of the United States.
Six-month WTI calendar spreads are trading around 70 cents contango compared with a backwardation of more than $3 per barrel in July as traders become more confident about availability.
But the accompanying increase in domestic inventories and crude exports has ensured weakness in inland WTI has begun to bleed into the seaborne crude market and started to pull down Brent prices too.
Experience suggests there is an average delay of around 3-4 months between a change in futures prices and the number of rigs drilling for oil.
Completions take an extra six months or so, giving a total lag from futures price changes to production of roughly 9-12 months.
The surge in production reported in the first eight months of the year is therefore the lagged effect of the sharp rise in oil prices during the second half of 2017 and early 2018.
But benchmark futures prices have leveled off since April and wellhead prices have softened significantly as a result of insufficient pipeline takeaway capacity in west Texas.
The number of rigs drilling for oil was basically flat between the end of May and the end of September, which is likely to lead to a slowdown in production growth by the second and third quarters of 2019.
The U.S. Energy Information Administration forecasts average crude and condensates production will rise by just over 1 million b/d in 2019 after increasing by almost 1.4 million b/d in 2018.
Production in the lower 48 states excluding federal waters in the Gulf of Mexico, most of it from shale plays, is predicted to rise by 900,000 b/d next year down from 1.4 million b/d in 2018.
Provided they are sustained, lower prices should help bring an unsustainable production boom back under control and keep domestic and international markets closer to balance.
(John Kemp is a Reuters market analyst. The views expressed are his own)