Over the past three years, the U.S. energy sector has enjoyed an oil price boom that has been accompanied by soaring crude production. According to data by the U.S. Energy Information Administration (EIA), crude production climbed from 11.0 mb/d in July to 2020 to an all-time high of 13.3 mb/d in December 2023 as producers ramped up output to meet heightened demand as well as take advantage of high prices in the post-pandemic period.
According to commodity analysts at Standard Chartered, the U.S. shale patch did much of the heavy lifting, with the horizontal rig count (a proxy for shale oil activity and a leading indicator of output trends) rising for three straight years at a time when an output gap remained, with supply still below its pre-pandemic peak. Given these tailwinds, output hit an all-time high in the final two months of 2023 with year-over-year growth clocking in at over 1 million barrels per day.
However, it appears that the U.S. shale patch will not be able to sustain that clip much longer. High decline rates for shale wells usually set in soon after commissioning, meaning extra well completions are required to offset declines from existing wells if output is to be maintained. Unfortunately, StanChart has reported that the horizontal rig count started to decline sharply in early 2023, and is currently 20% below its post-pandemic peak after flatlining for the past six months.
The analysts point out that whereas the completion of previously drilled wells and technical change provide an offset, a significant fall in activity, more often than not, leads to a lagged decline in growth. The analysts have predicted that U.S. crude output will clock in 300 kb/d lower than the pre-pandemic peak by the end of the year. Related: Orlen Trading Switzerland Investigated for Possible Sanctions Breach
This thesis appears to be playing out, with the EIA reporting that U.S. crude output declined from 13.3 mb/d in December 2023 to 12.5 mb/d in January 2024. The EIA agrees with StanChart’s assessment and has predicted that production will continue to fall in the second and third quarters of 2024 before rebounding in 2025.
Source: EIA
Source: Standard Chartered Research
Bullish Demand Growth
Luckily for the oil bulls, most experts have predicted that global oil demand will continue to grow in the coming years. OPEC Secretariat has forecast demand growth of 2.247 mb/d in 2024, StanChart at 1.719 mb/d, the EIA’s forecast is 1.43 mb/d while Paris-based International Energy Agency (IEA) currently has the lowest 2024 demand growth forecast at 1.33 mb/d. For 2025, the OPEC Secretariat forecast is 1.847 mb/d; StanChart's at 1.424mb/d while EIA 2025 demand growth forecast is 1.379mb/d. The IEA will report its first demand growth forecast for 2025 when it releases its latest Oil Market Report (OMR) on 12th April.
Interestingly, demand growth might even surpass those predictions due to an unsuspected factor: the war in the Middle East. Last month, the IEA made a 110,000 barrels per day (bpd) upward revision of its global oil demand from its previous forecast saying shipping disruptions on the Red Sea caused by Hamas attacks would lead to higher fuel consumption as ships take the 4,000-mile detour around the African continent.
“Disruptions to international trade routes in the wake of turmoil in the Red Sea are lengthening shipping distances and leading to faster vessel speeds, increasing bunker demand,” the agency said, using a term for the fuel needs of ships.
Brent crude recently broke out above USD 90/bbl even as volatility remains subdued.
According to StanChart, the realized 30-trading day volatility stood at a six-month low of 17.5% at settlement on 8 April, quite unusual given the significant geopolitical uncertainty as well as low and falling inventories. StanChart says this implies the oil market is being pushed higher by tightening fundamentals rather than speculative action. Last week, front-month Brent climbed USD 2.96/bbl w/w to settle at USD 90.38/bbl on 8 April, briefly hitting a five-month high of USD 91.91/bbl intra-day on 5 April.
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The same can, however, not be said about natural gas markets. Last week, European gas futures rose 5% toward €29/MWh, driven by fears of attacks on Ukrainian gas storage facilities and escalating geopolitical tensions in the Middle East. However, there’s not much scope for a big rally at the moment with Europe flush with gas. The European gas injection season has already begun, with inventories building for seven consecutive days.
According to Gas Infrastructure Europe (GIE) data, inventories stood at 69.58 billion cubic meters (bcm) on 7 April, good for a 5.54 bcm Y/Y increase and 21.27 bcm above the five-year average. StanChart has pointed out that the current inventory level was not attained until early May last year and the five-year average reached the same level in early June. StanChart has also predicted that lower prices may be needed early in the 2024 season to prevent maximum storage being reached prematurely in the current year.
By Alex Kimani for Oilprice.com
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However, US production is still inflated by an estimated 5.2 mbd being the volumes of condensate and natural gas liquids which are included in the production figures. These neither qualify as crude according to petroleum exchanges nor are they sold as crude . They are sold as diluents for blending with heavier crudes.
Therefore, the more realistic size of US production is 7.3 mbd.
Dr Mamdouh G Salameh
International Oil Economist
Global Energy Expert