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Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

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The U.S. Oil Production “Mirage”

Oil rig dusk

Some of the surge in U.S. oil production this past spring might have been “a mirage.”

On July 31, the EIA released monthly data on U.S. oil production, which revealed a decline in U.S. output of 30,000 bpd in May, compared to a month earlier. The dip is a surprise, given the widespread assumption that U.S. shale production was continuing to grow at a blistering pace.

To be sure, a big reason for the decline in overall output was the 75,000-bpd decline in production from offshore Gulf of Mexico. But Texas production only rose by 20,000 bpd, a disappointing figure that likely came in far below what most analysts had expected.

Moreover, the monthly total of 10.442 million barrels per day (mb/d) for May is sharply lower than what EIA itself thought at the time. Here are the weekly estimates for U.S. oil production that the EIA put out back then:

April 6: 10.525 mb/d
April 13: 10.540 mb/d
April 20: 10.586 mb/d
April 27: 10.619 mb/d
May 4: 10.703 mb/d
May 11: 10.723 mb/d
May 18: 10.725 mb/d
May 25: 10.769 mb/d

The weekly estimates tend to be less accurate than the retrospective monthly numbers. That is not a new dynamic, and estimating on a weekly basis inherently involves a lot of guesswork, so this is not a knock on the EIA.

Yet the discrepancy is rather striking. Not only did the EIA estimate that production in April and May was much higher than it actually was, but the agency also thought production was rising quickly.

If the weekly estimates were to be believed at the time, production would have climbed from 10.525 mb/d in early April to 10.769 mb/d by the end of May, an increase of 244,000 bpd over a roughly eight-week period.

Not only was production lower than that, but it didn’t actually increase at all. The EIA’s more accurate monthly figures show a slight decline in output, falling from 10.472 mb/d in April to just 10.442 mb/d in May.

“Weekly data had shown a strong 324kb/d output rise from March to May. The revised data shows that this rise was a mirage: output actually fell 19kb/d over the period,” Paul Horsnell, head of commodities research at Standard Chartered, wrote in a note. Related: U.S. Oil Production Isn’t Growing As Fast As Expected

This is a rather significant development, and it has implications for more recent data releases. “It is time to deal with the statistical gorilla on the oil trading floor,” Horsnell of Standard Chartered wrote, along with analyst Emily Ashford. “We think US crude oil production has not reached the 11 million barrels per day (mb/d) shown in recent weeks in the Energy Information Administration (EIA) weekly data, and that it is significantly below 11mb/d, with growth slowing.”

That is a reasonable conclusion, given the roughly 300,000-bpd difference between the two surveys for May. The EIA has since switched its reporting for the weekly surveys by rounding off to the nearest 100,000 bpd, but data points from the last few weeks look like this:

July 6: 10.900 mb/d
July 13: 11.000 mb/d
July 20: 11.000 mb/d
July 27: 10.900 mb/d Related: Exxon’s Shocking Supply And Demand Predictions

It’s a little tricky trying to discern patterns from that data given the rounding off, but a few things jump out. First, production dipped at the end of July, a rather surprising move. Output from Alaska fell 150,000 bpd over the last two weeks, which likely explains much of the move. However, production from the Lower 48 has only increased 100,000 bpd since the week of June 22, which suggests that the Permian basin is starting to run into production constraints because of pipeline bottlenecks.

It is a little early to really get a sense of how much the Permian is slowing down. Most analysts have been assuming an overall slowdown over the next 12 months because of pipeline constraints. However, the EIA figures might suggest that the problem has already started to bite. In April, the EIA predicted in its Drilling Productivity Report that Permian production would jump by 73,000 bpd in May. But the monthly data just released finds only modest gains in Texas (+20,000 bpd) and New Mexico (+3,000 bpd).

Second, the EIA thinks output broke 11 mb/d in July, an all-time high. But judging by the overly-optimistic monthly data from April and May, perhaps the agency is also overstating July figures, which raises the possibility that production is not nearly as high as we currently think.

In the coming months, if monthly U.S. production figures continue to show output undershooting expectations, that would have global ramifications. Most analysts still are baking in strong U.S. shale growth figures into their forecasts. If that additional output fails to materialize, the oil market could end up being a lot tighter than we all expected it to be.

By Nick Cunningham of Oilprice.com

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  • Brett Ingham on August 02 2018 said:
    I love NC's work. Always reading between the lines and finding what no one is talking about. A great asset for op.com!
  • Neil Dusseault on August 02 2018 said:
    Perhaps we should be talking about the demand "mirage".

    I mean, what about all of the floating storage off the coast of Europe?

    What ever happened to the tens of millions of barrels of oil that Nigeria recently couldn't sell?

    "Market tightness". Sounds more like jawboning.

    Just remember--with Russia, Saudi Arabia, Kuwait, and the U.A.E. now at or near record levels, combined with more barrels from Norwegian oil worker strikes ending and Canadian barrels coming back online, not to mention Mexico and elsewhere (e.g., Brazil), there is plenty of oil.

    I for one am not worried about EIA "discrepancies". Think I'm wrong? Just remember:

    Due to prices at THIS level, India (the world's 2nd most populated nation) cancelled oil shipments from Iran because of LOW DEMAND.

    Watch what happens if "market tightness" affects U.S. oil--activity in the Permian and all across America ramps up production while major cities like Phoenix sit back and don't drive.
  • Mamdouh G Salameh on August 03 2018 said:
    Since I started making comments on articles posted by the oilprice.com in early December 2017 and long before that in my own research, I have reached the conclusion that US oil production has been greatly hyped and also used as a tool to depress global oil prices. We know that the US has been manipulating oil prices by claims about rising US oil production and a huge build-up in crude oil and products inventories and also by altering the value of the petrodollar.

    My reading of the US Energy Information Administration’s (EIA) weekly and monthly figures show a variance of some 600,000 barrels a day (b/d). Weekly figures were on average 600,000 b/d higher than monthly figures.

    The EIA was in cahoots with the International Energy Agency (IEA), BP Statistical Review of World Energy and the Financial Times in peddling these exaggerated figures to give the impression that US oil output is expanding so fast that before the end of this year the US will overtake Russia and Saudi Arabia respectively as the world’s number one producer in the world. They even were also hyping that US foreign oil imports have declined to around 2 million barrels a day (mbd) that the US is on the verge of oil independence. All were a pack of lies.

    In 2017 the US imported 10.08 mbd according to the 2018 BP Statistical Review of World Energy. While it is true that the US has been exporting some ultra-light tight oil and refined products, it has also been importing equivalent amounts of medium and heavy crudes for its refineries which are tooled to handle such crudes.

    Deducting 600,000 b/d from US oil production figures will bring total US production to 9.60 mbd in 2018. And even this figure is still very hyped.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Paul Farrell on August 03 2018 said:
    Surely a pipeline bottleneck woukd result in an output plateau abd not a reduction. If a reduxtion occurs then there must other reasons that output is dropping. Time will tell......
  • Frank on August 03 2018 said:
    US commercial supplies are still higher than at and point in history prior to 2015. Saudi Arabia sent us less oil last week than the combined e port efforts of Evuador and Angola. We are producing a lot of oil and US demand is flat.
  • Randy Verret on August 03 2018 said:
    Well, not only is shale oil production a "mirage," we seem to be totally fixated on production in the energy debate. No discussion about conservation, sensible environmental policies, collaboration between industry & environmental interests, government involvement in proper research & development. All of these are CRITICAL to the upcoming U.S and worldwide transition in the decades to come away from fossil fuels to REAL energy alternatives. Continued focus on weekly oil production is misguided & shortsighted. In the oil & gas industry, we need more VISION and leadership about changing the conversation in the energy arena. Relying on politicians & environmental activists to set the agenda will be continued "folly"....
  • Jeffrey J. Brown on August 03 2018 said:
    Of course, the real elephant in the room is the volumetric decline from existing US wells, which is probably around 2 million bpd per year.

    In other words, US operators more or less need to put on line the productive equivalent of all of Mexico's oil production every year, just to maintain current US production.
  • Matthew Biddick on August 03 2018 said:
    When a person/entity that needs physical, "wet" barrels has to make a second or even third call to secure its needs, then we'll see the true value of a barrel of oil. I think that day is coming in the not-too-distant future.

    See Enno Peters' work on ShaleProfile for detail on what Jeff Brown is talking about. If that doesn't convince you, nothing will.

    Neil, demand is not a mirage. It goes up about 1.0 to 1.5 million barrels per day per year, and has been for about 30 years. It will continue to do so, unless some new paradigm shows up, and by that I don't mean renewables. Millions upon millions of people are coming out of poverty each year (as defined by the UN) and they want, need, and deserve to utilize more energy in improving their life's situation. That's a good thing. There's enough energy to go around but it will require a price that's commensurate with the incentive to go get it out of the ground.

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