In April this year, OPEC surprised oil markets by announcing additional production cuts in a bid to stimulate prices to go higher.
Prices did go higher. There was nothing to stop them. U.S. drillers were busy returning cash to shareholders, supply growth was sluggish everywhere, and demand looked robust.
Fast forward to December, and the 1-million-bpd growth in U.S. oil production is the talk of the town, OPEC is running out of options, and the oil market is more unpredictable than ever.
It appears that along with the latest Middle Eastern war, the expansion in U.S. oil production was the surprise of the year. Back in April, analysts were confident that U.S. shale drillers would remain focused on shareholder returns and capital discipline and would not dare think about production growth too much.
“We’re now into several years of players like us running these businesses for returns and free cash flow, and that’s not going to change in the short term or the long term,” the chief executive of Ovintiv said at the time as quoted by Bloomberg.
“The OPEC cut was only possible because of the inability/unwillingness of the U.S. shale oil sector to grow at the same rate as it was in 2016-2020,” notorious oil trader John Arnold said in April.
The above pretty much illustrates the dominant opinion on U.S. oil for much of the year. On top of that, for much of the year, drillers were shedding rather than adding rigs, contributing to that dominant opinion.
And here was the why: “The U.S. is unlikely to fill in the OPEC gap anytime soon,” Peter McNally, global head of energy at Third Bridge, a market intelligence firm, told Bloomberg at the time.
“The stock market has punished those producers who have committed to more aggressive spending plans.”
In the mind of industry observers, drilling rig numbers and spending were the only indicators worth following for a glimpse into production trends. It turned out this was wrong. Because U.S. shale producers managed to boost production without spending more and without using more rigs, catching the market—and OPEC—by surprise.
Crude oil production in the U.S. hit 13.2 million barrels in September, according to the latest data from the EIA. A year ago, EIA forecasted production at 12.5 million bpd for the fourth quarter of the year. Of course, production could yet decline from the September record, but it is unlikely to decline this much. U.S. shale surprised everyone.
The reason it surprised everyone was well productivity. While everyone was watching the weekly rig count—which has declined by 20% overall this year—frackers worked on improving their drilling techniques and technology. And it paid off.
Back in August, no fewer than five large shale oil producers reported higher-than-expected well productivity. Pioneer Natural Resources, Ovintiv, Occidental Petroleum, Diamondback Energy, and Chevron all said their wells were producing more than previously expected. Apparently, the news was largely ignored, judging by the surprise that is gripping everyone right now.
Now, analysts are probably treating their fixation on the rig count and paying more attention to reports about well productivity improvements, and OPEC is running out of options. The cuts implemented earlier this year actually helped U.S. shale. They stabilized prices at relatively high levels, boosting returns and possibly even placating shareholders. And, because U.S. oil sells relatively cheaply, it helped drive the export surge.
The Energy Information Administration predicts that growth in U.S. oil production will slow significantly in 2024. It expects this growth at just 180,000 bpd, from an average of 12.93 million bpd this year to an average of 13.11 million bpd next year.
The EIA must have sound reasons for this prediction, just as it had sound reasons for last year’s prediction of this year’s production rate. Forecasts are not set in stone. They often turn out to be wrong because they necessarily make a number of assumptions, including the assumption of increasingly weaker oil demand growth.
Yet oil demand has repeatedly surprised forecasts, just like U.S. shale drillers. It should have peaked in 2019, per BP, and it was supposed to slow down considerably this year and next, per the IEA. Instead, this year, demand hit an all-time high, and the IEA recently updated its 2024 forecast, saying that demand was now expected to grow faster because of moderating prices.
While this happens, OPEC is busy expanding. This is the alternative to a price war, as it seeks to add more large oil producers that could participate in production control plans to make them more effective. If the expansion plan does not live up to expectations, however, a price war would be OPEC’s only option as U.S. drillers chug along with their longer laterals and shorter well-drilling times. The question is whether it is still a safe option.
By Irina Slav for Oilprice.com
- Oil Prices Poised to Bounce Back in 2024
- Putin Orders Asset Seizures From Austrian and German Energy Giants
- Clean Energy Bulls Finally Have Reason To Be Positive