US energy firms are looking to ramp up crude oil production, encouraged by higher prices and lower production costs.
And that means total US crude production is likely to hit a record high this year, a scenario that may not only see the US take market share away from other crude producers but also keep a lid on prices.
According to recent data released by energy services firm Baker Hughes, the number of oil rigs deployed in the US rose by a further eight to 720 last week, taking the increase from late November last year — when OPEC and non-OPEC producers agreed to cut production levels by around 1.8 million barrels per day — to over 50%.
This chart from the Commonwealth Bank shows the number of US oil rigs overlaid against US oil output. Both have rebounded sharply over the past year, helped primarily by a recovery in prices.
Given the continued increase in oil rigs that have been deployed, and the lag time it takes for them to enter production, that means that US production levels are likely to lift significantly this year and next, says Vivek Dhar, mining and energy analyst at the Commonwealth Bank, creating a headache for other producers attempting to rebalance the crude market.
The Energy Information Administration (EIA) estimates that US crude oil production will lift 4.9% to 9.31 mb/d [million barrels per day] in 2017 and a further 7 % next year. The rising US oil production profile is consistent with higher US oil rigs. Rig counts have increased just over 50% since the deal brokered between OPEC and 11 other producers to cut oil supply late last year. US producers are unlikely to replace all the proposed 1.8m/d cut to global oil supply in 1H17. But it is inevitable that the market share and influence of US oil producers will grow. In fact, the rapid response by the US shale sector to the OPEC deal helps explain why oil prices retreated earlier this month. Now, OPEC and other oil producers are in the difficult position of extending their 1.8mb/d output cut in order to keep markets balanced. Any deal extension will inevitably cede more market share to the US shale oil sector. The most likely meeting outcome is a 9-month extension to the existing deal, which was reaffirmed again this weekend by Saudi Arabia’s energy minister.
Given the combination of higher US production levels and a reluctance from other OPEC and non-OPEC nations to cut production further, Dhar says that oil prices could average $US50-60 per barrel this year, although he admits that prices are likely to see “upside pressure ahead of the OPEC meeting on May 25”.
That’s already being seen with front-month Brent crude futures — the global benchmark — rising above its 100-day moving average for the first time since April 19 in early Asian trade on Monday.
It’s put on over 15% since hitting a multi-month low of $US46.64 a barrel in early May, currently trading at $53.91 a barrel.