The EIA just revised down its forecast for U.S. oil production growth for 2018, an acknowledgement that pipeline constraints are slowing output gains in the Permian basin.
The EIA believes the U.S. will average 10.68 million barrels per day (mb/d) this year, down 0.11 mb/d from last month’s estimate. It also revised down its forecast for next year’s average output to 11.7 mb/d, down from 11.8 mb/d previously.
The downward revision comes after recently released data from the agency suggested that output growth during this past spring was not as robust as previously thought. The EIA, at the time, thought shale production continued to grow at a blistering rate, with production rising by over 200,000 bpd between the beginning of April and the end of May. But more recent data suggests that production actually dipped a bit over that period.
It may seem like an insignificant revision, but it points to broader problems, particularly in the Permian basin, which could cause the U.S. to undershoot expectations going forward.
Recent movements in the rig count lend a little more weight to this notion. While the number of rigs bounces around from week to week, the overall number is essentially unchanged since May. And in the Permian, where all the drilling action has been concentrated, the rig count stood at 480 at the start of August, no higher than it was in early June.
“The lower forecast for output this year reflects slightly slower than expected growth in middle quarters of this year, possibly related to pipeline constraints out of the Permian basin that have reduced wellhead prices in the region,” Tim Hess, a product manager for the EIA’s Short-Term Energy Outlook said, according to Bloomberg.
The tone is not one of alarm, to be sure. In the short run, the EIA is much more sanguine about global supplies than other analysts. While a series of investment banks, including Goldman Sachs and Bank of America Merrill Lynch, predict that the outages from Iran could cause supplies to tighten significantly, the EIA says that OPEC+ production should keep the market adequately supplied. “We continue to expect Brent crude oil spot prices to fall towards $70 per barrel by the end of 2018, as the market appears to be fairly balanced in the coming months,” said Linda Capuano, EIA Administrator.
But the revisions to data from months ago raise questions about the production figures coming out on a weekly basis. Right now, that weekly data says that the U.S. is producing a little less than 11 mb/d. But because those weekly figures are repeatedly revised down as time passes, there is a good chance that U.S. production is not actually that high right now.
Other analysts say the challenges facing Permian drillers are larger than just an overestimation of output. In addition to pipeline constraints, drillers face other operational problems. “Escalating costs, logistical constraints decreasing cash flows, and the intensity of operations forcing a downwards move in geological quality from Tier 1 to Tier 2 locations, may be just a few of the reasons for initial well productivity in the Permian reaching a plateau over the past few months,” Standard Chartered wrote in a note.
“In the latest round of Q2 results presentations, several operators including EOG Resources and Noble Energy announced intentions to move capex from the Permian to other assets where possible in the short term.”
However, even though the EIA downgraded its forecast for this year, it still sees a significant increase in supply – production is set to jump by 1.31 mb/d this year compared to 2017 levels. Moreover, the EIA estimates that U.S. production could average 11.7 mb/d in 2019, an increase of 1 mb/d from this year. Next year’s increase will be smaller than this year’s, but it is still a very large jump in output. By the end of 2019, the EIA thinks that the U.S. will be sitting just shy of 12 mb/d.
Forecasting 12 to 18 months into the future is always tricky, so there will be plenty more revisions to the production figures going forward. But the latest downward revisions suggest that the array of challenges facing the shale industry, which have been discussed in the media for some time, are starting to show up in the data.