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COMMENTARY: U.S. Oil and Gas Production Growth Starts to Decelerate: Kemp


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U.S. oil and gas production continued to climb in October, but there were indications of both starting to flatten and turn down in response to lower prices since the middle of 2022.

Oil production from the Lower 48 states excluding Alaska and federal waters in the Gulf of Mexico rose to a record 10.9 million barrels per day (b/d), according to the U.S. Energy Information Administration (EIA).

Production had increased by 0.7 million b/d compared with the same month a year earlier, but growth had slowed from 0.9-1.1 million b/d earlier in 2023 (‚ÄúPetroleum supply monthly‚ÄĚ, EIA, December 29).

The slowdown was a delayed response to the sharp retreat in prices, after the spike in the middle of 2022, amid fears about the impact of Russia’s invasion of Ukraine and the U.S. and European Union sanctions imposed on Moscow in response.

Front-month U.S. crude futures prices were down $36 per barrel (-29%) in October 2023 from the post-invasion peak in June 2022, after adjusting for inflation.

In response, the number of rigs drilling for oil was down by 122 (-20%) in October 2023 from the peak in December 2022.

The rig count followed prices lower with an average lag of four to five months, consistent with the historic pattern since 1990.

By contrast, production held up more strongly than usual, setting a string of new records in the third quarter and the start of the fourth, rather than following prices down with a typical lag of 10 to 12 months.

Some of the resilience may have been due to the temporary spike in prices in the third quarter, which encouraged producers to squeeze out as many extra barrels as possible in the short term.

Owners of stripper wells and other mature wells had a strong incentive to maximise production to benefit from the price spike.

Drilling has continued to become more efficient with longer horizontal sections making contact with more reservoir rock and capturing more oil from each well.

Some privately-owned producers may also have accelerated drilling and well completions to boost production and secure higher company valuations.

Research has shown much of the increase in production during the third quarter came from a small number of privately-owned firms.

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.

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U.S. production growth seized market share from Saudi Arabia and its OPEC‚Āļ 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‚Āļ 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 (‚ÄúNatural gas monthly‚ÄĚ, 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‚Āļ 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.

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.

John Kemp is a Reuters market analyst. The views expressed are his own. Follow his commentary on X

(Editing by Paul Simao)



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