Low prices are squeezing U.S. oil and gas production

By John Kemp, Energy Analyst

U.S. oil production growth continues to decline in response to falling prices as the initial shock from Russia’s invasion of Ukraine and sanctions imposed in response more than two years ago fades.

Crude oil and condensate production from the lower 48 states, excluding federal waters in the Gulf of Mexico, averaged 11.0 million barrels per day (b/d) in July 2024, according to the latest data from the Administration of US Energy Information.

Production increased by less than 0.4 million b/d compared to the same month last yearthe smallest increase for the period of the year since the first waves of the coronavirus pandemic in 2020/21.

Following the invasion, oil prices peaked in June 2022, but have since retreated and production growth has slowed with a lag of about twelve months, typical of the lag between a change in prices and production.

First-month inflation-adjusted US futures prices fell to an average of $79 per barrel in July 2023 (48th percentile for all months since 2000) from $124 (82nd percentile) in June 2022.

Twelve months later, production growth has halved to 0.4 million b/d in July 2024 from 0.8 million b/d in June 2023.

By July 2024, there had been no net growth for eight months since November 2023 as sector expansion stalled.

Since then, prices have fallen further to an average of just $69 (38th percentile) in September 2024, which is likely to ensure that production remains fairly stable until mid-2025.

If prices remain around current levels, production growth in the Lower 48 will likely decline to near zero by late 2024 or early 2025.

By reducing US shale producers’ willingness to boost drilling and forcing Saudi Arabia and OPEC? partners at postpone plans to increase productionlower prices move towards an early surplus later in 2024 and 2025.

USA GAS PRODUCTION

Dry gas production averaged 104.3 billion cubic feet per day (bcf/d) in July 2024, up from 103.3 bcf/d last year, but the seasonal increase was the smallest since the 2020 pandemic.

Output growth slowed as prices fell from post-invasion highs in the third quarter of 2022 to record lows in the first months of 2024.

Between February and April 2024, front-month futures fell to around $1.80 per million British thermal units, the lowest in three decades after adjusting for inflation.

Fewer than 100 rigs drilled for gas on average in the third quarter of 2024, down from an average of nearly 160 in the third quarter of 2022.

Even more than oil, gas has been hit by overproduction, and unlike crude oil, hasn’t there been an OPEC equivalent? to limit the accumulation of excess inventory by coordinating production cuts.

Exceptionally mild temperatures reduced heating and power production in the winter of 2023/24, leaving the industry with near-record stocks at the end of the heating season and intensifying the crisis.

By February 2024, the decline in prices had become so severe that several major US producers announced plans to cut drilling and production.

Since then, however, ultra-low prices have encouraged record gas consumption by power generators throughout the summer and gradually brought inventories back to more normal levels.

By the end of September 2024, working gas stocks were within ±1 standard deviation of the previous ten-year seasonal average.

In response, first-month prices climbed to an average of $2.40 last month, still only in the 3rd percentile for all months since 2000, but a significant increase from multi-decade lows six months earlier .

If gas production remains low, the remaining surplus is likely to be phased out during the winter of 2024/25.

Once the surplus disappears, prices and production will need to rise significantly in 2025 to meet growing demand from generators and exporters.

By Zerohedge.com

More top reads from Oilprice.com