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Gregory Brew

Gregory Brew

Gregory Brew is a researcher and analyst based in Washington D.C. He is currently pursuing a PhD at Georgetown University in oil history and American…

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U.S. Oil Production, Imports Rise Faster Than Expected

Oil rig

The EIA’s short-term energy outlook, released on April 11, predicted increases in American energy production, along with an increase in imports. The agency’s forward predictions on the outlook of U.S. oil and gas production are mostly bullish, despite earlier reports that total energy production in the U.S. had fallen by 4 percent, a change driven largely by declining demand for coal and low oil and gas prices. However, while the agency expects natural gas prices to climb, there are only moderate expectations for future increases in the price of oil, a sign that the EIA doesn’t expect demand to seriously outstrip supply in the short-term.

The EIA report estimated the average U.S. oil production in 2016 to have been 8.9 million bpd. Looking ahead, the EIA estimates the average for 2017 to hover around 9.2 million bpd and 9.9 million the following year, an increase of 11 percent in two years.

While natural gas production declined in 2016, the agency expects this trend to be reversed in 2017, with natural gas production increasing by 0.8 billion cubic feet per day. The forecast for 2018 predicts an additional increase of 4 bcf/d.

Higher prices in natural gas, expected to rise from the March level of $2.88 to an average of $3.10 in 2017, with a further increase to $3.45 in 2018, will likely contributed to a decline in the share of electricity supplied by natural gas in the coming years, as gas loses its competitive edge. Surprisingly, the EIA predicts that natural gas’ share will fall from 34 percent to 32 percent by 2018, while that of coal will increase from 30 percent to 31 percent. Non-hydropower renewable energy (solar and wind) will see a modest increase from 9 percent to 10 percent.

While bullish on the Henry Hub price for natural gas, the EIA estimate is decidedly more cautious on crude oil prices. The report predicts WTI to hover around $52 for 2017, increasing to $55.10 the following year. The WTI-Brent spread will diminish, with Brent at $54.23 and $57.10 for 2017 and 2018.

Finally, U.S. domestic gas prices will rise to $2.46/gallon this summer, up from $2.23 last year. Overall, the year’s national average (which, of course, varies considerably from region to region) will be around $2.39/gallon, resulting in increased gasoline spending of $200 per household.

The EIA also reported activity in the Gulf of Mexico (GOM) which set an annual high of 1.6 million bpd in 2016, surpassing the high set in 2009. GOM oil production, which because of long development times is less sensitive to short-term market fluctuations, is expected to increase in 2018, averaging 1.7 million bpd in 2017 and 1.9 million bpd in 2018. While the short-term outlook is positive, a major fall in the exploration/development rig count likely portends a decline in GOM production by 2020.

An interesting corollary to the short-term report on supplies and prices is the EIA’s report on total U.S. crude oil imports, which rose by a significant margin for the first time in several years. Imports increased by 514 million barrels of oil equivalent/day, reaching 7.9 mmbop/d, which is still a ways off from the 2005 peak of 10.1 mmbop/d. Most U.S. crude oil imports come via pipeline from Canada, while Mexican imports continued their six-year decline. Imports from OPEC countries increased as well, particularly Nigerian and Iraqi crude.

(Click to enlarge)

Data from EIA

Higher imports doesn’t necessarily mean a commensurate decline in U.S. production, of course. Particular varieties of overseas crude are in high demand in the U.S. The increase in Nigerian light crude imports is due to its similarity to Bakken output. As production from that region declined in 2016, refiners looked to Nigeria to pick up the slack. That’s good news for the Niger River Delta, which had a rough year, but the outlook for the country’s future exports isn’t all rosy, with reports indicating that it’s losing export markets to the United States.

Many analysts and traders don’t find much to be confident about in the EIA’s regular predictions, which are variable and sometimes pretty wide off the mark. The rise in imports, after years of stagnation or relative declines, reflect changes in refinery patterns and the drop in energy production for the year. That decline was due, in part, to the low price of oil that endured for most of 2016.

Despite the expectation that coal’s share will go up in the coming years, the EIA still doesn’t believe total coal production in 2018 (785.2 million short tons) will rival the level reached in 2015 (897 million short tons). The increase will likely be a short-term development.

An increase in prices, which may be stronger than the EIA predicts, will spur additional growth in output in 2017-2020. The agency prediction that coal consumption will increase at the expense of natural gas seems hard to parse out, given the wide belief that the U.S. coal industry is in the midst of the long-term crisis. It’s possible that natural gas production will increase and be fed into higher gas exports, with a number of new LNG export terminals scheduled to be constructed before 2020.

The ramifications of political action in support of higher energy production will likely touch on coal, natural gas and oil together, but opening up federal lands and reducing restrictions are bound to aid oil and gas more than coal, which remains at a competitive disadvantage.

So, overall, the EIA offers an interesting picture of the future of U.S. energy, but one that offers only possibilities, not certainties.

By Gregory Brew for Oilprice.com

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