The No.1 Reason Why Oil Isn’t Trading Over $100

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By Robert Rapier

One of the most important questions in the global oil markets revolves around U.S. oil production. There is probably nothing OPEC would like to know more than when U.S. oil production will begin to decline.

The resurgence of U.S. oil production over the past decade diminished OPEC’s control of the global oil markets. In less than eight years, U.S. oil production climbed from under 6 million barrels per day (BPD) to more than 12 million BPD. This surge is arguably the only reason oil prices today aren’t above $100/barrel (bbl).

U.S. oil production growth 2005 to 2019.

OPEC’s current strategy seems to be to wait for U.S. production to begin declining so they can begin to regain control of the oil markets.

They may not have to wait all that long.

In last week’s article, I covered the slowdown in oil production growth in the Permian Basin. This is the most important oil-producing region in the U.S., but of course it isn’t the only one. And while most of the coverage of the resurgence of U.S. oil production has been primarily focused on shale oil and tight oil, U.S. offshore oil production has also made a big jump. Over the past decade, Gulf Coast oil production in the U.S. rose from about 1.2 million BPD to about 2.0 million BPD.

Thus, I thought today it might be instructive to look at the trends in total U.S. oil production. Note that in the previous graphic, it looks like production may be starting to turn down right at the end of the time frame. In fact, the Energy Information Administration (EIA) has reported a slight downward trend in U.S. oil production since May. The key question is whether this is an anomaly, or the beginning of a sustained trend.

Applying the same analysis that I did last week to Permian Basin production — which looked at year-over-year production changes — it becomes clear that overall U.S. production growth is declining even faster than Permian Basin production growth.

Year-over-year change in U.S. oil production.

From this graphic, production growth has been slowing since January, and the slowdown has accelerated in recent months. Production growth is falling so fast that at the current pace, it would fall below zero before the end of the year. The steep decline from the most recent EIA report was influenced by offshore production shutting in ahead of Hurricane Barry. But, even if we assume the slower rate of decline from earlier in the year, it looks like growth will fall below zero within a year. Once growth falls below zero, that represents a year-over-year decline in U.S. production.

It’s hard to say whether the current decline will be permanent. Note that there was a similar decline that began in 2015, but that reversed direction in 2017 as oil prices recovered from the $30/bbl level back up to over $50/bbl.

It’s doubtful that the current decline will see the same sort of sharp reversal, as the previous decline was a result of sharp cuts in capital spending as oil prices fell from the $100/bbl level to below $30/bbl. The current production decline is taking place during a period of a smaller decline in oil prices.

Regardless, probably the only thing that can arrest the current slowdown is a spike in oil prices from current levels. And unless that slowdown is arrested, total U.S. oil production will likely once again be in decline within one year — and possibly by year-end.

This is the outcome OPEC is hoping for. It is clear that their strategy is to keep oil prices propped up until U.S. oil production begins its decline, at which point they can reassert control over the global oil markets.

Crude Oil

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