First oil

Somewhat to its own surprise, the U.S. Energy Information Administration (EIA) estimates that U.S. crude oil production averaged 12.0 MMbpd in January, up 90,000 bpd from December 2018’s level, and setting yet another all-time U.S. oil output record. This breaks the previous record of 11.91 MMbopd, set in December.

The rapidity with which U.S. oil output has grown seems to have caught EIA by surprise. Last November, EIA had estimated that U.S. production would exceed 12.0 MMbopd during second-quarter 2019. And, even-earlier EIA forecasts had called for that threshold to be surpassed only in fourth-quarter 2019.

A new set of output forecasts. Now, with three additional months of data available, EIA forecasts U.S. oil production to average 12.4 MMbpd in 2019 and 13.2 MMbpd in 2020, with most growth coming from the Permian region of Texas and New Mexico. If realized, both levels would easily surpass the record-high annual average of 11.0 MMbpd during 2018, ensuring that the U.S. remains the world’s largest crude oil producer. Overall, U.S. production increases largely result from continued growth in the tight-oil formations of the Permian, as well as expectations that 19 new projects will start during 2019 and 2020 in the federal Gulf of Mexico (GOM).

“Favorable geology, combined with technological improvements, has contributed to the Permian becoming one of the more economic regions for crude oil production in the United States,” explained the agency. EIA forecasts that Permian production will average 4.2 MMbopd in 2019, a 750,000-bopd increase from 2018, and 4.7 MMbopd in 2020, a 530,000-bopd gain over 2019’s level. Despite pipeline capacity constraints, the Permian region’s month-over-month growth averaged nearly 100,000 bopd for nearly all of 2018, exceeding EIA’s expectations, as expressed in monthly Short-Term Energy Outlook (STEO) revisions.

Furthermore, said EIA, its “STEO forecast for the Permian region experienced many revisions in 2018, as prices changed in response to evolving market expectations. Production in the Permian region exceeded EIA’s expectations, despite large price spreads that likely put downward pressure on production.”

Pipelines can’t slow the flow. Even West Texas pipeline constraints could not completely slow the U.S. output juggernaut. Starting in second-quarter 2018, pipeline capacity constraints contributed to West Texas Intermediate (WTI)-Midland crude oil averaging more than a $14/bbl discount to WTI-Cushing from July through September, and reaching a $16/bbl discount in August. In response to the increasing WTI-Midland price discount, Permian production growth was expected to start to slow until more pipeline capacity was built, noted EIA. However, from July to September 2018, when the Midland-Cushing spread was at its widest, the Permian production rate grew more than 290,000 bopd, and then grew more than 170,000 bopd from September to November.

Permian growth rates. Permian producers increased output despite major regional price discounts, “largely because of operational efficiencies in trucking and rail, and higher overall WTI-Cushing prices.” Although the Midland-Cushing discount reached $16/bbl in August 2018, WTI-Cushing prices that month averaged $68/bbl, which translated to an average price of $52/bbl for Permian producers, supporting production growth.

Contributions from an offshore rebound. The second-largest source of forecast growth, says EIA, is the GOM, where production reached a record-high 1.9 MMbopd last November. EIA expects GOM output to average 2.0 MMbopd in 2019, up 280,000 bopd from 2018, followed by an additional 310,000-bopd increase during 2020. The forecast for continued GOM growth is driven by increased production from 30 new fields going onstream during 2018, 2019 and 2020.

About the Authors

Kurt Abraham

World Oil

Kurt Abraham kurt.abraham@worldoil.com