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Tim Daiss

Tim Daiss

I'm an oil markets analyst, journalist and author that has been working out of the Asia-Pacific region for 12 years. I’ve covered oil, energy markets…

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Soaring Permian Output To Cap Oil Rally

The U.S. crude oil production juggernaut continues to move forward. In 2018, U.S. production increased 17 percent over the previous year in a dynamic that is impacting both geopolitics as well as setting a new course for American global diplomacy.

Annual U.S. crude oil production reached a record level of 10.96 million barrels per day (b/d) in 2018, 1.6 million b/d higher than 2017 levels. In December 2018, monthly U.S. crude oil production reached 11.96 million b/d, the highest monthly level of crude oil production in U.S. history, the EIA said on Tuesday. Moreover, U.S. crude oil production has increased significantly over the past 10 years, driven mainly by production from tight rock formations using horizontal drilling and hydraulic fracturing, hence the U.S. shale oil revolution. The EIA now projects that U.S. crude oil production will continue to grow this year and in 2020, averaging 12.3 million b/d and 13.0 million b/d, respectively.

Lone Star state leads the pack

Not surprisingly, Texas is still leading U.S. production, similar to the lead it took up to the 1970s when the state was largely responsible for allowing the U.S. to play the then-role of global oil markets swing producer before ceding that role to a Saudi Arabia-led OPEC for the next four decades. Texas accounted for 40 percent of the national total oil production last year. The state has held the top position in nearly every year since 1970, the EIA added, with the brief exception of 1988, when Alaska produced more crude oil than Texas, and from 1999 through 2011, when production from the Federal Offshore Gulf of Mexico region was higher. Related: Is This The End Of The OPEC Deal?

Crude oil production in Texas averaged 4.4 million b/d in 2018 and reached a record-high monthly production level of 4.9 million b/d in December. Texas’s 2018 annual production increased almost 950,000 b/d. This growth has been largely driven by output in the Permian region in west Texas. For its part, Permian production represented nearly 60 percent of the total increase in overall U.S. oil output last year.

Latest data

Oil production increases in the Permian region, which spans parts of Texas and New Mexico, also drove a 215,000 b/d, or 45 percent production increase in New Mexico in 2018. This level was the second-largest state-level growth in 2018 and accounted for 13 percent of the total U.S. increase, setting a new annual record production level in New Mexico.

The EIA in its most recent Short Term Energy Outlook said yesterday that U.S. crude oil production averaged 12.1 million barrels per day (b/d) in March this year, up 0.3 million b/d from the February average. EIA also forecasts that U.S. crude oil production will average 12.4 million b/d in 2019 and 13.1 million b/d in 2020, with most of the growth coming from the Permian region of Texas and New Mexico.

Gathering oil markets headwinds

U.S. oil production for its part, is the main factor, along with global economic growth concerns, that is keeping global oil prices from spiking even higher than they have so far this year. Both global oil benchmark, London-traded Brent and U.S. benchmark, NYMEX-traded West Texas Intermediate (WTI) futures are hitting highs amid growing geopolitical turmoil as well as Saudi Arabia and the OPEC+ group of producers continuing to trim oil output in an effort to reduce global supplies further and keep upward pressure on prices. Oil prices hit a five-month high on Monday, with WTI surging above $64 per barrel and Brent topping $71 per barrel.

Counterweight

Stellar U.S. production is acting as a counterweight on the supply side of the global oil markets equation, offsetting, at least to a degree, geopolitical problems and more output reductions in Libya as that country is embroiled in fighting around Tripoli, as well as U.S. sanctions against Iran and Venezuela. Without strong U.S. oil production, prices would likely have maxed out north of $100/barrel by now, similar to 2008 when prices hit a record high above $140/barrel. Related: Shale Jobs In Jeopardy Despite Oil Price Rally

No win situation for Trump

On Monday, the Trump administration, in a move that pleased Saudi Arabia, labeled the Iranian Revolutionary Guards as a terror group, further increasing tensions between Washington and Tehran. "This unprecedented step, led by the Department of State, recognizes the reality that Iran is not only a State Sponsor of Terrorism, but that the IRGC actively participates in, finances, and promotes terrorism as a tool of statecraft,” President Trump declared in a statement. “The IRGC is the Iranian government’s primary means of directing and implementing its global terrorist campaign." On Tuesday, Iran responded in kind. Iranian President Hassan Rouhani denounced the U.S. as the actual “head of global terrorism,” while labeling U.S. forces in the Middle East as a terror group.

What now remains to be seen for global oil markets is whether Trump will extend waivers for customers of Iranian oil. The president, however, has put himself in a no-win situation. If he grants more waivers as he did last fall, he will continue to create problems in his once cozy relations with Saudi Arabia, who was taken back last year when he granted the first set of waivers. However, in doing so he will add more barrels to global oil supply and help keep a lid on prices. If the president removes waivers for Iranian oil, then more barrels will be removed from global oil markets, with the knock-on effect of increasing both oil prices and gasoline prices at home just as the 2020 presidential election cycle kicks in.

By Tim Daiss for Oilprice.com

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  • Mamdouh Salameh on April 12 2019 said:
    It is delusional and wishful thinking for the author to claim that Permian oil output will cap the oil rally at a time when unquestionable and authoritative sources have been confirming a slowdown in US oil production particularly the Permian which accounts for some 60% of total US production.

    Furthermore, these sources have been projecting a decline US 1-2 million barrels a day (mbd) in US oil production mostly from US shale oil production by 2020 which could translate into a production of 10.0-11.0 mbd in 2019 and 10.0 mbd or less in 2020. This contrasts significantly with projections by the US Energy Information Administration’s (EIA) of 12.3 mbd and 13.00 mbd in 2019 and 2020 respectively.

    It is also ludicrous for the author to claim that U.S. oil production is the main factor, along with global economic growth concerns, that is keeping global oil prices from spiking even higher than they have so far this year.

    In 2018 US production amounted to 10.96 mbd with US consumption reaching 20.5 mbd thus necessitating net oil imports of 9.54 mbd. Meanwhile the US oil exports during the same year amounted to 2.5 mbd. Such a relatively small volume of exports is eclipsed by the 9.54 mbd of imports. Therefore, US oil production could in no way keep oil prices from spiking higher. US production failed in 2017 to cap oil prices at $60, and failed again in 2018 to cap them at $70 and it will fail to cap them at $80 this year.

    Oil prices will hit $80 a barrel or higher this year because the global oil demand is very strong and China’s oil demand is rock solid.

    And despite claims to the contrary, US sanctions against Iran have so far failed to cost Iran’s oil exports the loss of even a single barrel of oil. That is why the Trump administration has no alternative but to renew the sanction waivers it issued last year to the eight biggest buyers of Iranian crude when they expire in May or issue new ones for no other reason than to use them as a fig leaf to mask the fiasco that US sanctions have failed and also the fact that the zero exports option is a bridge too far.

    Meanwhile, Venezuela has managed to keep its oil production steady despite US sanctions.

    The impact of the political turmoil in Libya on oil prices will be negligible since the global oil market has already factored in Libya’s oil production disruptions as a result of continued instability in the country.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Guy Minton on April 12 2019 said:
    Two ends of the spectrum of pure speculation. EIA is mostly pretty imaginative, but usually way off base. While “unquestionable and authoritative sources” are non-existent, and the expectation of a 1 to 2 million barrel drop would take some pretty low oil prices, which is in contrast to the replier’s statements.

    Completions and permits are on a slight decline, according to the Texas RRC site. And, that is happening when the price of oil is going up. Reading statements by independent oil companies, the reason for the decline probably originated from investor concerns. Production is likely to be flat for awhile. Not down, or up by any large amount.
    Neither viewpoint has much validity, especially the statement of Venezuela production remaining steady.
    I have read some good viewpoints by the Professor, but this is not one of them.

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