Has US oil production peaked? Via Investing.com

Investing.com — The question of whether U.S. oil production has peaked is increasingly important as global markets grapple with increased volatility and supply concerns.

According to analysts at BCA Research, US oil production has not yet peaked and is expected to continue its upward trend, albeit at a slower pace than in previous years.

In August 2024, US crude oil production reached a record 13.4 million barrels per day (b/d), marking a 3% increase from the previous year.

The increase underscores the resilience of the U.S. oil industry despite a global slowdown in production expansion. However, the growth rate has slowed compared to the 8% year-on-year growth seen in 2023.

The ongoing expansion is largely attributed to the Permian Basin, a key driver of US production, accounting for 48% of the country’s output and 8% of global supply.

“On a 6- to 12-month horizon, the path of least resistance for oil prices is to the downside,” the analysts said.

First, energy companies are showing capital discipline, with large, publicly traded firms focusing more on returning shareholder value than rapidly growing production.

This trend is reinforced by the consolidation of the energy sector, which reduces the number of small producers more likely to respond quickly to market fluctuations.

In addition, low oil prices reduce incentives for US producers to substantially increase supply. Analysts suggest that prices need to rise significantly – between $64 and $89 a barrel – for new drilling to be extremely profitable.

Current prices, hovering around $70 per barrel, do not provide a strong incentive for increased drilling activity. This dynamic is reflected in the decline in the number of new wells drilled and completed, signaling that producers are prioritizing efficiency gains over new drilling ventures.

In fact, despite declining rig counts and declining inventories of wells drilled but not completed (DUC), US production continues to expand due to improved well productivity.

Infrastructure development, particularly in the Permian Basin, will also play a role in supporting US oil production. The expansion of pipeline capacity, intended to alleviate current constraints in the Permian, is expected to enable continued growth in crude oil production.

Natural gas, a byproduct of oil drilling, has faced bottlenecks due to limited pipeline capacity, with prices at the Waha Hub in West Texas even falling below zero for most of the year.

The completion of new pipelines such as the Matterhorn Express will likely reduce these pressures and support continued production expansion.

Despite these positive indicators, a significant re-acceleration in US oil production is unlikely without a substantial increase in prices, potentially driven by geopolitical events.

The current economic slowdown and deceleration in global demand are creating headwinds for oil prices.

“Therefore, on a 6- to 12-month horizon, the path of least resistance for oil prices is to the downside,” the analysts said.