US oil production is ramping up so much that existing infrastructure can't keep up

Greg A. Syverson/Getty Images
  • The US is likely to become the world’s largest crude producer at some point this year.
  • The number of oil rigs deployed sits at the highest level since early 2015 and there’s a record number of wells that only require fracking to begin adding to output.
  • While there is an abundance of current and potential supply, infrastructure constraints could limit growth in US production over the couple of years.

The United States is one one of the biggest oil producers globally, and is expected to become the largest in the not too distant future.

According to the US Energy Information Administration (EIA), it expects US oil production will lift 15.4% to 10.79 million barrels per day this year before rising another 9.3% to 11.8 million barrels per day in 2019, putting it on track to overtake Saudi Arabia and Russia in terms of daily production.

As seen in the chart below from the Commonwealth Bank, those forecasts are underpinned by an expectation that output at major US shale oil basins will continue to lift, adding to the supply gains achieved since 2016.

Commonwealth Bank

“These basins include the Permian, Bakken, Eagle Ford, Niobrara, Anadarko and Appalachia basins. The Haynesville basin, which is predominantly a gas producer, is expected to see oil output remain stable,” says Vivek Dhar, Mining and Energy Analyst at the Commonwealth Bank.

“These seven basins have accounted for nearly all of the growth in US oil output in recent years.”

Thanks to higher crude oil price allowing producers further out the cost curve to become profitable, the number of oil rigs in use have risen back at levels last seen in early 2015.

And there’s no shortage of potential US crude supply waiting in the wings, Dhar says.

“The backlog of oil wells to be completed continues to keep rising too,” he says.

“The EIA reported that drilled but uncompleted (DUC) wells have increased to a multi-year high of 7,943 at the end of June.

“These DUC wells just require fracking to bring oil to the market. And since these wells require less labour to bring online, they are a source of low cost production.”

Given the sheer number of wells still waiting to be tapped, Dhar says that stronger US oil production remains the key oversupply risk in the global oil market.

However, there’s just one catch.

While there is seemingly no shortage of current or potential supply, transporting it to refiners is becoming problematic.

“Our growing concern with US oil supply is pipeline infrastructure constraints,” Dhar says, adding that current estimates of US supply growth of 1.7-2.1 million barrels per day this year are likely too optimistic already.

“The main reason for the variance is Permian pipeline infrastructure, which is not expected to keep up with supply forecasts,” he says.

“The Permian basin is the largest shale oil basin in the US, and infrastructure constraints could start weighing on Permian supply growth from August and extend until end-2019.”

For the moment, that could limit US production growth until new pipeline infrastructure is likely to be completed in 2020.

NOW READ: The US’s biggest shale basin hit pipeline bottlenecks at the worst possible time — and they’re about to get worse

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