U.S. Oil Production Growth’s Path Is Clear

How much will U.S. oil production grow this year-this is the question on a lot of minds, both in the United States itself, and across the world.

After proving it could become a game-changer for the global oil market a decade ago, the U.S. shale patch is once again the focus of attention but this time because it is not growing the way it used to. Instead, U.S. shale drillers are being cautious for the first time since the shale boom began.

Forecasts about U.S. oil production, then, have been largely cautious, too, when analysts saw that shale producers really have no plans to return to growth-at-all-costs mode, no matter the price of oil. Except when they come from the EIA.

In its latest Short-Term Energy Outlook, the Energy Information Administration forecast that oil production in the United States will rise from 11.86 million barrels daily last year to 12.4 million barrels daily this year. It will also rise further to 12.81 million barrels daily in 2024, the EIA said.

What's perhaps more interesting than the growth projection itself is the fact that the EIA expects oil prices to decline over this two-year period. In other words, it expects U.S. shale drillers to ramp up production amid declining prices.

This is in the world of forecasts. Meanwhile, in the world of reality, despite forecasts seeing production growth of some 1 million bpd this year, U.S. producers added just 620,000 bpd to the total national output figure last year. On top of that, production growth slowed towards the end of the year. And it is going to slow down further this year, according to the industry itself.

"Most companies are drilling tier two and tier three inventories now," Pioneer Natural Resources' chief executive Scott Sheffield told Reuters at the end of 2022. "Less quality production is coming out of the Permian, out of the Bakken."

The latest Dallas Fed energy survey revealed that although many oil companies are planning to increase their spending this year, the increase will be moderate for the majority. The survey also suggested there was optimism in the industry as cost inflation subsides somewhat. At the same time, uncertainty about the future remains rife, which is hardly conducive to strong production growth ambitions.

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What's more, there are indications that the oil industry likes its new cautious approach to handling money. And a lot of shale drillers that had been in the red for years are now paying down debt-instead of spending money on production growth.

The Wall Street Journal reported this week that between mid-2019 and mid-2022, the ten largest U.S. shale independents paid down 17 percent of their collective debt, reducing it to $84 billion. The best performers were Occidental Petroleum, which cut its debt load by half, and Marathon Oil Corp, which reduced it by about a quarter over the period.

According to the EIA, U.S. oil production this year will grow by 550,000 barrels daily. According to Pioneer's Sheffield, it would add between 300,000 and 400,000 bpd. Some analysts expect even stronger growth than the EIA, and some expect it to be smaller than Sheffield's forecast.

One could say the mystery remains, but that's only true if one follows official government forecasts, even though they are supposed to be based on industry input. If one follows what the industry itself says, the mystery disappears. Because what the industry has been saying for a while now is that production growth is no priority, even if demand for oil is set to grow.

Demand for oil, according to the EIA, just as according to OPEC, is indeed set to grow this year and next. In response, the EIA expects both non-OPEC and OPEC producers to contribute by boosting their production-an assumption that is questionable in OPEC's case. The cartel has made it quite clear that it is in no rush to balance the oil market if that balancing would be taking place at a price that OPEC's leaders consider not high enough.

Meanwhile, production in the United States almost reached 12.4 million bpd at the end of last year-the forecast average for 2023. The EIA reported at the end of last December that actual oil production for October that year averaged 12.38 million barrels daily, up from 12.31 million barrels daily a month earlier. In other words, what the STEO forecast suggests is that U.S. producers could keep production at around October 2022 levels throughout 2023.

It may indeed turn out that way, too. Over the past two years, U.S. oil producers have become quite sensitive to their shareholders' sentiments and have prioritized them over production growth. And their shareholders have signaled they are happier when they get cash returns rather than reports about record-breaking production.

The climate change and emission reduction narrative is not encouraging more investment in new production, either. It is encouraging emission-reduction pledges and Scope 1, 2, and 3 reduction plans that are, in essence, incompatible with production growth. What all of this means is that U.S. oil producers are probably preparing for another cautious year of moderate production growth.

By Irina Slav for Oilprice.com

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