The current slowdown in both drilling rates and deceleration in production growth reflects the decline in oil prices from their peak in the middle of 2022 and especially since the middle of 2023. — Reuters
US oil and gas production shows further signs of flattening out or turning down, a delayed response to the decline in prices over the last two years after the initial shock caused by Russia’s invasion of Ukraine in early 2022.
Total crude and condensate production from the lower 48 states, excluding federal waters in the Gulf of Mexico, averaged 11 million barrels per day (b/d) in May up from 10.6 million b/d in the same month a year earlier.
The seasonal increase was the smallest since the first wave of the coronavirus pandemic in 2020 and before that the aftermath of the volume war fought between US shale producers and Saudi Arabia in the mid-2010s.
Production growth compared with the prior year slowed to just 0.4 million b/d from as much as 0.8 million to one million b/d in early 2023, according to data from the US Energy Information Administration (EIA).
Drilling activity typically responds to a change in prices with a delay of four to five months reflecting the time needed to contract rigs, move them to the drilling site, set up the equipment and start boring.
Production typically responds with an additional lag of seven to eight months reflecting the time needed to hydraulically fracture and complete wells, connect them to the pipeline gathering system and start commercial oil flows.
So the current slowdown in both drilling rates and deceleration in production growth reflects the decline in oil prices from their peak in the middle of 2022 and especially since the middle of 2023.
After adjusting for inflation, front-month US crude futures prices have fallen to an average of US$74 per barrel so far in August 2024 from US$84 in August 2023 and a high of US$124 in June 2022.
In real terms, prices have retreated to only the 44th percentile for all months since the turn of the century from the 82nd percentile just over two years ago.
Lower prices have removed much of the incentive to increase output and encouraged exploration and production firms to focus on improving efficiency instead.
The number of rigs drilling for oil averaged just 479 in July 2024 down from 534 a year earlier and a peak of 623 in December 2022.
Over the same period, the number of rigs drilling primarily for gas has declined even more sharply, reducing growth in condensates recovered from gas wells.
As a result, lower prices and slower growth in US shale production have created conditions for Saudi Arabia and its Organisation of the Petroleum Exporting Countries and its allies (Opec+) to increase their own output by rescinding previous cuts and regain some market share.
Instead, however, prices have tumbled even further recently.
This is on traders becoming increasingly concerned about an economic slowdown in the major economies and associated deceleration in oil consumption growth.
If the consumption slowdown fails to materialise, however, the deceleration in shale production has created conditions for Opec+ to enjoy some combination of higher production and/or prices later in 2024 and in 2025.
With no equivalent of Opec+ to coordinate a cut in production and support prices, US gas futures prices, drilling activity and output have fallen much more sharply than for oil. — Reuters
John Kemp is a Reuters market analyst. The views expressed here are the writer’s own.
