US oil keeps flooding the market -- and it's increasingly coming from the Gulf of Mexico

US shale production is starting to decline amid lower oil prices.

But overall oil production in the states has remained pretty steady (so far).

And it’s because of one reason: the Gulf of Mexico.

The US Energy Information Administration (EIA)’s Petroleum Supply Monthly figures have stayed around 9.3 million barrels per day in the months leading up to November, after falling from their April peak of 9.7 million, according to data cited by RBC Capital Markets.

“The major and often overlooked reason behind the buoyant nature of US production, particularly in the back half of last year, stems from offshore fields in the Gulf of Mexico (GoM) that have offset slowing onshore growth,” RBC Capital Markets’ Michael Tran wrote in a recent note to clients.

“The bottom line is that US production would have fallen much more quickly had it not been for growth in the Gulf of Mexico,” Tran added.

Although onshore shale has been the dominant growth force in American oil over the last few years, things have started to change.

“[Shale] regions typically have high initial production rates followed by steep declines, meaning that it is natural to assume that production will taper significantly given the low price environment and the lack of additional investment,” observes Tran.

On the flip side, the 2015 year-to-date data (which goes through November) from the EIA shows Gulf of Mexico production increasing by 142,000 barrels per day. “And the pipeline of projects suggests that we will see a similar amount of growth again this year,” he argued.

The growth is even more noticeable in the data from the latest three months, where the average was over 200 kb/d, Tran added.

As for what this means in the larger scheme of US oil and how it’s impacting global markets, Tran wrote:

“The offshore Gulf accounted for virtually all of the growth in November, where GoM production increased by 160 kb/d, while the rest of the country saw production contract by 42 kb/d YoY. This marks the first month in which US production ex-GoM contracted during this price pullback. In other words, the tide is coming out and has taken shale with it, while GoM production remains standing. We expect this trend to continue even as Lower 48 production begins to show significant YoY declines in the coming months, given that many of these long lead-time offshore projects had previously reached final investment decisions during a much higher price environment … the GoM has and will continue to grow while production in the rest of the country has and will continue to fall.”

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