Oil: Production Constraints Mean Keeping Up With Demand Remains Difficult

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Concerns are growing over the state of US oil production, particularly as the fate nears for implementation of the US and EU sanctions against Russian oil. Unless the US and EU reverse their policies, sanctions on Russian oil will begin on Dec. 5. As a result, the demand for US oil exports has increased.

Can US production keep up with demand? Here is a look at the current state and some issues impacting production in the near future.

The Energy Information Administration's (EIA) current forecast predicts that US crude oil production will average 11.8 million bpd in 2022. Production recently surpassed the 12 million bpd mark and has ranged from 11.9 million bpd to 12.2 million bpd between mid-May and mid-September 2022. This is close to the record production rate of 12.3 million bpd the US set in early 2020. Even though production has finally reached the 12 million bpd mark, average US oil production for 2022 is still down by about a fifth, compared to 2019 rates.

A recent article in the Wall Street Journal highlighted that many private oil companies operating in the Permian Basin are nearing the end of a period of high growth. These producers are responsible for much of the post-pandemic production growth and are currently operating almost half of the drilling rigs in that region. They also hold about one-fifth of the most valuable acreage in the Permian.

The Wall Street Journal analysis, based on data from Enverus, shows that drilling activity in the Permian is already slowing. In fact, according to the analysis, “they tapped many of their best drilling spots, and will have to ease their rapid pace of drilling as their inventory shrinks.” As a result, the analysis argues, these producers are not likely to produce enough to satisfy US demand and global demand in the long term.

The EIA currently projects that US production will grow to an average of 12.6 million bpd in 2023. This would be an all-time record. However, this prediction is based on continued production growth in the Permian Basin. If production growth in the Permian is curtailed, it is unlikely that the US will hit this lofty number.

However, according to API’s chief economist, Dr. Dean Foreman, quality drilling acreage is not lacking. In an interview with him this past Monday on the Energy Week podcast, which I co-host, he explained that “we have the resources, the rocks are good. There is no shortage of sweet spot good geology rocks to go drill.” Rather, the primary issues holding back production growth are workforce constraints, supply chain delays, financial issues, and energy policies.

Access to capital markets remains an issue for companies that cannot or do not want to self-fund drilling projects. Drilled but uncompleted wells (DUCs) are starting to accumulate in some regions due to a dearth of drilling crews. Despite vocal support for increased domestic energy production from the White House, there has been no material change in policies that have hampered infrastructure construction and the permitting process. In addition, steel tariffs from the Trump administration remain in place and continue to make it difficult for energy producers to obtain steel.

The takeaway for traders is that the EIA forecast for 2023 is probably overly optimistic given the limitations facing producers in the most productive region of the US. But the issue is not a lack of accessible oil, but rather a litany of constraints on producers that are creating an environment in which growth is harder than ever.

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