U.S. Oil Production Is Set To Soar Past 12 Million Bpd

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Rising shale production is putting the United States on track to hit the 12 million bpd oil production mark sooner than previously forecast, the Energy Information Administration (EIA) said in its November Short-Term Energy Outlook (STEO).

Next year’s U.S. crude oil output is now expected to average 12.1 million bpd, up from a forecast of 11.8 million bpd just a month ago in the October STEO.

U.S. crude oil production reached a new monthly record of 11.3 million bpd in August 2018, exceeding 11 million bpd for the first time. Production in August was 290,000 bpd higher than expected in the October STEO, and it was this higher level that raised the baseline for the EIA’s forecast for production in 2019.

Comparing the forecasts in the latest STEO with the October estimates, the EIA now sees U.S. crude oil production hitting the 12-million-bpd mark in the second quarter of 2019 rather than the fourth quarter.

The EIA raised its 2018 production forecast by 1.5 percent compared to the October STEO, to 10.9 million bpd, and the 2019 forecast by 2.6 percent from 11.76 million bpd to 12.06 million bpd.

While the EIA lifted its projections for U.S. oil production, it revised down its forecasts for oil prices in 2019. In the November outlook, it forecasts Brent Crude prices of $72 per barrel in 2019 on average, which is $3 a barrel lower than previously forecast. The EIA sees WTI Crude prices to average $65/b next year, down by $5/b from the previous estimate.

“The lower crude oil price forecasts are partly the result of higher expected crude oil production in the United States in the second half of 2018 and in 2019, which is expected to contribute to growth in global oil inventory and put downward pressure on crude oil prices,” the EIA said.

U.S. production will be growing despite the current capacity constraints in the Permian, which have started to slow down growth and increase the discount for Permian WTI at Midland to WTI at Cushing. Yet, the majority of oil executives and analysts see those constraints as temporary and likely starting to ease in the second half next year.

The World Bank said at the end of October that oil price increases in 2019 will be modest as U.S. production constraints ease. Brent prices are expected to increase to $74 a barrel next year from a projected $72 per barrel this year, before easing to $69 in 2020, the World Bank said in its October Commodity Markets Outlook. Permian bottlenecks “are likely to endure through 2019 until new pipeline capacity comes on line towards the end of next year, although progress on some new pipelines has been faster than expected,” according to the World Bank.

Pipeline shortage in the Permian is expected to limit exploration and production (E&P) volumes and weaken realized prices until late next year, when most of the new pipelines come online, Moody’s Investors Service said in a report last month.

“Pipeline capacity to transport oil and natural gas to markets outside the Permian is unlikely to be sufficient in early 2019, given the strong increase in production in the region,” James Wilkins, a Moody’s VP-Senior Analyst, said.

“New pipelines will likely go into service at various times in the second half of next year, alleviating the bottleneck, but until then capacity constraints will likely limit producers’ activity,” Wilkins noted.

Jeff Miller, CEO at Halliburton, the leading fracking services provider in the United States, said last month that the current softening of demand in North America—a combination of offtake capacity constraints and customers’ budget exhaustion—is a temporary issue. Permian constraints will be overcome by the end next year, Miller told Bloomberg TV earlier this week.

Permian oil production will continue to rise, alongside production at Eagle Ford and the Bakken, the EIA’s Drilling Productivity Report shows, driving total U.S. production higher. Increased production from the United States, however, will cap oil prices next year. If global oil demand growth falters significantly below current expectations while supply grows, oil prices could slip further.

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