U.S. oil and gas drilling has slowed in response to the fall in prices over the last 18 months, but that has not yet translated into slower production, keeping prices under pressure.
Exploration and production firms have continued to increase output despite drilling fewer wells, by concentrating on the best sites, accelerating drilling times and boring longer horizontal sections for each well.
In the oil market, efficiency gains have frustrated efforts by Saudi Arabia and its allies in OPEC⁺ to drain global oil inventories and boost prices.
In gas, where there is no equivalent of OPEC⁺, continued production growth has kept prices close to three-decade lows in real terms.
The critical question is how much longer efficiency gains can keep driving significant output growth without an increase in prices and drilling.
U.S. OIL PRODUCTION
Front-month U.S. crude futures averaged $77 per barrel (49th percentile for all months since the start of the century) in November 2023, down from a high of $121 (82nd percentile) in June 2022, after adjusting for inflation.
The slide in oil futures resulted in a slowdown in drilling activity with the expected delay of around five months, reflecting the time taken to finish drilling wells currently underway and for short-term contracts to expire.
The number of active rigs drilling for oil averaged 498 in November 2023 down from a high of 623 in December 2022, according to weekly counts published by oilfield services company Baker Hughes.
But production continued to increase and set a new monthly record of 13.3 million barrels per day (b/d) in November 2023, according to the U.S. Energy Information Administration (EIA).
Chartbook: U.S. oil and gas production
Production from the Lower 48 states excluding federal waters in the Gulf of Mexico hit 11.0 million b/d for the first time (“Petroleum supply monthly”, EIA, January 31, 2024).
Lower 48 output had increased by 873,000 b/d (9%) compared with the same month a year earlier and there was no sign of growth decelerating significantly.
Total production from the Lower 48 and other areas was up by 28 million barrels in November 2023 compared with the same month in 2022.
For the first 11 months of 2023, total production increased by 337 million barrels compared with the same period in 2022.
Persistent growth in U.S. production is one reason prices have remained around $70-80 despite multiple rounds of output cuts by Saudi Arabia and its allies.
U.S. GAS PRODUCTION
Front-month U.S. futures prices had fallen to an average of $3.06 per million British thermal units (12th percentile since 2000) in November 2023 down from $9.24 (79th percentile) in August 2022, after adjusting for inflation.
The number of active rigs declined to an average of 117 in November 2023 from a high of 162 in September 2022, according to Baker Hughes.
In contrast to oil, production growth has slowed, though not as much as might be expected given the sharp deceleration in drilling.
Dry gas production climbed to a seasonal record of 3,178 billion cubic feet (bcf) in November 2023, according to the Energy Information Administration (“Natural gas monthly”, EIA, January 31, 2024).
Production was 111 bcf (4%) higher than in the same month a year earlier but growth had slowed progressively from 168 bcf (6%) in February 2023.
With no equivalent of OPEC⁺ to act as swing producer and support prices, gas prices have fallen more heavily than oil, with price signals playing a much bigger role in rebalancing the market.
But like oil, persistent production growth has kept gas prices under pressure; they slid further to $2.54 (5th percentile) in December and $2.81 (9th percentile) in January 2024.
Ironically, OPEC output cuts have intensified the downward pressure on gas prices. By keeping oil prices artificially elevated it has kept U.S. oil output higher than it would otherwise have been and in turn boosted production of associated gas from oil wells.
Source: Reuters (Writing by John Kemp; Editing by Susan Fenton)