Record US oil output challenges Saudi mastery

The market is being rebalanced through Opec cuts and increases in the group’s collective spare capacity rather than changes in prices and US production. — Reuters

US crude oil production set a record for the second month running in September, highlighting the challenge to Saudi Arabia and its Opec+ partners as they cut their own production to boost prices.

Repeated Organisation of the Petroleum Exporting Countries and allies (Opec+) output cuts since the fourth quarter of 2022 have thrown a lifeline to US producers, averting a deeper slump in prices and conceding more market share to them.

US crude and condensate production increased by 224,000 barrels per day (bpd) to 13.24 million bpd in September from August, according to the US Energy Information Administration.Crude and condensate production had increased by 342,000 bpd over the previous three months (annualised growth of 11%) and was 750,000 bpd higher than a year earlier (an increase of 7%).The large increase in domestic production has contributed to the accumulation of crude inventories and softening of prices since the start of the fourth quarter.In the most recent month, production increased in the federal waters of the Gulf of Mexico (up 108,000 bpd) and Alaska (up 19,000) as well as in the Lower 48 states (up 97,000).

Lower 48 production climbed to a record of 10.8 million bpd, surpassing the pre-pandemic peak of 10.5 million bpd set in December 2019.

Lower 48 output had increased by 210,000 bpd over the previous three months (an annualised rate of up 8%) and 750,000 bpd over the previous year (an increase of 7%).There are few signs Lower 48 production growth is slowing despite the slump in prices and fall in the number of active drilling rigs over the last year.

Inflation-adjusted front-month US crude futures prices have fallen from an average of US$121 per barrel in June 2022 to US$90 in September 2023 and further to US$77 in November 2023. Drilling activity usually turns down around four to five months after prices and production turns down 10 to 12 months after prices fall.Roughly in line with this, the number of rigs drilling for oil dropped from an average of 623 in December 2022 to 510 in September 2023 and 498 in November 2023.

Nonetheless output has continued to increase as drillers boost efficiency by focusing on the most prospective sites and boring longer horizontal well sections to maximise contact with oil-bearing rock.

US producers have also benefited from repeated Opec+ cuts that have stabilised prices at a relatively high level and blunted the price signal to cut drilling further.

Front-month prices averaged US$90 in September 2023, which was slightly higher than US$87 the same month a year earlier after taking inflation into account.

By November, prices had fallen to average of US$77 but that was almost exactly in line with the inflation-adjusted average since the start of the century.

The market is being rebalanced through Opec+ cuts and increases in the group’s collective spare capacity rather than changes in prices and US production.

Embracing rival producers

Saudi Arabia, together with its closest Opec+ partners, has reluctantly resumed its traditional role of swing producer balancing the market by its own output.

Meanwhile, US shale firms and other non-Opec non-shale producers have stepped into the same role as free riders as North Sea producers in the 1980s.

Free riders have been the primary beneficiaries from Saudi Arabia and its allies’ determination to avert an accumulation of crude inventories and lift prices.

Enlarging the control group has always been Saudi Arabia and Opec’s preferred strategy for dealing with free riding.

In the 1980s, there was a (failed) attempt to reach out to the United Kingdom and other North Sea producers to share the burden of supporting prices.

Since the 1990s, there have been repeated attempts to bring in Russia and other former Soviet states, culminating in the Vienna Agreement and Declaration of Cooperation in 2016.

US antitrust laws prevent US shale producers from being part of any formal cooperation arrangement with Opec+. — Reuters

John Kemp is a Reuters market analyst. The views expressed are his own.

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