One of mine Energy predictions for 2023 was that the US would set a new annual record for oil production this year. As we approach the halfway point of the year, this prediction is still on track to be accurate.
Last Weekly Oil State Report from the Energy Information Administration (EIA) shows current US oil production at 12.4 million barrels per day (bpd). That’s an increase of 400,000 barrels per day, but still short of the 13.0 million barrels per day level reached in November 2019. However, year-to-date oil production has surpassed the record level of 12.3 million barrels per day for all of 2019.
Tight oil and shale gas fields continue to be the main driver of growing US oil and gas production. The Permian Basin reached an all-time high of 5.8 million barrels per day, surpassing even Saudi Arabia’s massive Ghawar oil field. But production growth in the Permian has slowed in recent months, with new wells just offsetting declines in production from older wells.
According to Number of Baker Hughes setsThe number of oil rigs in the US has decreased by 5% since last year. However, the inventory of previously drilled but not completed (DUC) wells also continues to decline. DUC stocks are down 8% over the past year, but down a whopping 45% over the past three years. For perspective, DUC inventory is now at its lowest level in about a decade.
This means that the increase in production is mainly driven by the completion of previously drilled wells. Production may be able to rise a little more as DUC inventories continue to decline, but the number of rigs will likely need to increase soon to increase oil production significantly from current levels.
The Strategic Petroleum Reserve (SPR) remains a concern as current inventories are at their lowest level since 1983. Over the past year, the SPR level has been depleted by 31% in an effort to combat rising oil prices. That probably helped stem the rise in oil prices last year, but it removed a substantial cushion the US had in case of a real emergency.
Much of this activity is, of course, driven by price. Oil prices have fallen from $120 per barrel (bbl) this time last year to just under $70 a barrel today. On the other hand, average retail gasoline prices fell from $5.11 per gallon a year ago to $3.71 per gallon currently. Gasoline prices have returned to roughly the level they were at before the Russian invasion of Ukraine.
What happens in the second half of the year will largely depend on Saudi Arabia and OPEC. They are already signaling that they feel that price power has shifted back in their favor. With reduced SPR supplies, the US doesn’t have many tools at its disposal to combat a spike in oil prices if Saudi Arabia’s production cuts continue.
All this suggests that oil prices are likely to rise during the second half of the year.