The question of whether US oil production has peaked is becoming increasingly important as global markets face increased volatility and supply concerns.
According to analysts at BCA Research, US crude oil production has not yet peaked and is expected to continue its upward trend, albeit at a slower pace than in previous years.
In August 2024, US crude oil production reached a record high of 13.4 million barrels per day (b/d), up 3% from a year earlier.
The increase underscores the resilience of the US oil industry despite a broad global slowdown in production expansion. However, the growth rate has slowed compared to the 8% annual growth seen in 2023.
The continued expansion is largely attributed to the Permian Basin, a key driver of US production, which accounts for 48% of the country’s output and 8% of global supply.
“On a 6- to 12-month horizon, the path of least resistance for oil prices is to the downside,” the analysts said.
First, energy companies are showing capital discipline, with large, publicly traded companies focusing more on returning value to shareholders than rapidly expanding production.
This trend is reinforced by consolidation in the energy sector, which reduces the number of small producers who are more likely to respond quickly to market fluctuations.
In addition, subdued oil prices reduce incentives for US producers to significantly increase supplies. Analysts estimate that prices need to rise significantly – between $64 and $89 per barrel – to make new drilling particularly profitable.
Current prices, hovering around $70 per barrel, do not offer strong incentives for increased drilling activity. This momentum is reflected in the reduced number of new wells being drilled and completed, which signals that producers are prioritizing increasing efficiency over new wells.
In fact, despite falling rig counts and shrinking drilled but uncompleted (DUC) inventories, US production continues to expand due to improved well productivity.
Infrastructure developments, particularly in the Permian Basin, will also play a role in sustaining US oil production. The expansion of natural gas pipeline capacity, which is set to ease current constraints in the Permian, is expected to enable continued growth in crude production.
Natural gas, a byproduct of oil drilling, has been hampered by limited pipeline capacity, with prices at the Waha Hub in West Texas even dipping below zero for most of the year.
The completion of new pipelines, such as the Matterhorn Express, is likely to reduce these pressures and support continued production expansion.
Despite these positive signs, a significant restart of US oil production is unlikely without a significant increase in prices, possibly driven by geopolitical events.
The current slowdown in the business cycle and slowing global demand are creating headwinds for oil prices.
“Hence, over a 6- to 12-month horizon, the path of least resistance for oil prices is to the downside,” the analysts said.
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Reference;
Acharya, N. (2024) Has US oil output reached a peak? By Investing.com, Investing.com. Investing.com. Available at: https://www.investing.com/news/commodities-news/has-us-oil-output-reached-a-peak-3634262 (Accessed: 29 September 2024).
