Repeated OPEC⁺ output cuts since the fourth quarter of 2022
have thrown a lifeline to U.S. producers, averting a deeper slump in prices and
conceding more market share to them.
U.S. crude and condensate production increased by 224,000
barrels per day (b/d) to 13.24 million b/d in September from August, according
to the U.S. Energy Information Administration.
Crude and condensate production had increased by 342,000 b/d over the previous three months (annualised growth of 11%) and was 750,000 b/d 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 (+108,000 b/d) and Alaska (+19,000) as
well as in the Lower 48 states (+97,000).
Lower 48 production climbed to a record of 10.8 million b/d,
surpassing the pre-pandemic peak of 10.5 million b/d set in December 2019.
Lower 48 output had increased by 210,000 b/d over the
previous three months (an annualised rate of +8%) and 750,000 b/d over the
previous year (an increase of +7%).
BOOSTING DRILLING EFFICIENCY
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 U.S. crude futures prices
have fallen from an average of $121 per barrel in June 2022 to $90 in September
2023 and further to $77 in November 2023.
Drilling activity usually turns down around 4-5 months after
prices and production turns down 10-12 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.
U.S. 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 $90 in September 2023, which was
slightly higher than $87 the same month a year earlier after taking inflation
into account.
By November, prices had fallen to average of $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 U.S. 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, U.S. shale firms and other non-OPEC non-shale
(NONS) 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.
U.S. antitrust laws prevent U.S. shale producers from being
part of any formal cooperation arrangement with OPEC⁺.
But OPEC has already reached out to other non-OPEC non-shale
producers such as Brazil to try to bring them formally or informally into the
coordination system.
The outreach to Brazil, and probably eventually to Guyana
and the other NONS, fits with the historic pattern of embracing fast-growing
rival producers.
For a production-control arrangement to work, it must
control a sufficient share of global production, with free riders playing only
a moderate role.
If lifting prices causes too much unrestricted growth
outside the cartel, there must either be a volume war and price slump to
restrict uncontrolled producers, or they must be brought inside the control
system.
For now, Saudi Arabia and its OPEC⁺ partners have opted to
try to get rivals into the system rather than launch another volume war.
U.S. GAS PRODUCTION
Like crude, U.S. gas production hit a record seasonal high
in September of 3,126 billion cubic feet (bcf), according to the Energy
Information Administration.
But unlike crude, there are pronounced signs production
growth is decelerating in response to very low prices and in the absence of a
swing producer to hold them higher.
Gas production had increased by only 55 billion cubic feet
(+1.8%) in September 2023 compared with the same month a year earlier.
Production growth has slowed consistently since the middle
of 2022 in response to the sharp fall in prices.
Real prices have fallen from an average of more than $9 per
million British thermal units (79th percentile) in August 2022 to just $2.23
(2nd percentile) in April 2023 and were only $3.06 (12th percentile) in
November 2023.
While growth is slowing, the lags involved have ensured
surplus inventories have accumulated.
Working inventories in underground storage had climbed to
3,836 bcf on Nov. 24, the highest for the time of year since 2020 and before
that 2016.
Inventories were 186 bcf (+5% or +0.67 standard deviations)
above the prior 10-year seasonal average and the surplus has shown no signs of
disappearing so far this year.
In the central and eastern Pacific Ocean, El Niño conditions
are strengthening, with the current episode on track to be one of the strongest
in the last 40 years.
A strong El Niño is associated with warmer-than-normal
temperatures across the northern tier of U.S. states between December and
February and a reduction in nationwide heating demand of around 7%.
So although rebalancing of the gas market is well underway,
prices may have to remain very low for a few more months to ensure excess
inventories are depleted. -Reuters