U.S. oil production remains near record high

U.S. crude production remained close to a record level in June but growth has slowed significantly since the end of last year in response to lower oil prices and the slowdown is set to extend into 2020.

Crude output averaged 12.1 million barrels per day (bpd) in June, essentially unchanged from record levels in May and April, according to data from the U.S. Energy Information Administration (EIA) published on Thursday.

Nevertheless, the shale boom is moderating in response to the decline in oil prices since the start of the fourth quarter of 2018, and the deceleration is expected to continue through the remainder of 2019 and 2020.

Output in the three months between April and June was up by almost 1.6 million bpd (15%) compared with a year earlier ("Petroleum supply monthly", EIA, September 2019).

But annual growth has slowed from a peak of 2.0 million bpd (21%) in August-October 2018, and production was broadly flat during the first six months of the year after strong growth throughout 2018 and 2017.

Record output in the first half of the year is the delayed response to the drilling boom and period of very high prices in the middle of 2018.

Prices typically affect production with a delay of about 12 months — given the time needed to contract rigs, move them to the site, drill and complete wells, and hook them up to pipeline gathering systems.

So current output reflects high prices last year, when WTI prices were above $65 and even $70 per barrel, rather than the much lower prices that are currently prevailing, with WTI trading at $55.

Lagged response
The persistence of high U.S. output in first half of 2019, when global consumption was growing at the slowest rate since 2014 and before that 2012, contributed to significant oversupply.

With production growth outstripping consumption through mid-year, inventories rose and prices have come under renewed pressure to enforce the required adjustments of consumption and especially production.

As the fall in prices since the fourth quarter of 2018 works it way through to lower drilling and completion rates, production growth should moderate towards the end of 2019 and especially in 2020.

The EIA forecasts output will rise by 880,000 bpd (7.3%) in the year to December 2019 and another 580,000 bpd (4.5%) in the year to December 2020.

But that would be significantly down from the increase of 2.1 million bpd (20.7%) in the year to December 2018 ("Short-Term Energy Outlook", EIA, September 2019).

Much slower growth in U.S. production, implying WTI prices in the $50-60 per barrel range, is likely to be an essential part of the global market rebalancing process.

Oil producers in the United States as well as the members of OPEC and its allies in the wider OPEC+ group show evident frustration with prices at current levels.

But lower prices are a necessary signal to slow production increases at a time when consumption growth is lacklustre owing to the poor performance of the global economy.

(Editing by David Evans)