US Shale Booms and Depresses Oil Prices Again

After a devastating slump in 2015 and 2016, the U.S. oil industry has returned to strong growth, with drilling and output rising rapidly.

U.S. production is now forecast to grow by an average of 440,000 barrels per day (bpd) in 2017 and another 650,000 bpd in 2018, according to the U.S. Energy Information Administration (EIA).

U.S. crude and condensates output rose by 62,000 bpd month-on-month to almost 9.1 million bpd in March (“Petroleum Supply Monthly”, EIA, May 2017).

Production has increased by more than 530,000 bpd from its recent low of less than 8.6 million bpd in September, adding to an already well-supplied global market and delaying a drawdown in stocks.

Weekly estimates prepared by the agency indicate output continued to increase in April and May and now stands at around 9.3 million bpd (“Weekly Petroleum Status Report”, EIA, May 19).

While the weekly estimates are considered less reliable than the more comprehensive monthly numbers, they have generally provided a good guide to trends in the monthly data.

Most of the extra output between September and March came from oilfields in the Gulf of Mexico, where production increased by 257,000 bpd, and Alaska, where output was up by 74,000 bpd.

But production from fields in the Lower 48 states excluding the Gulf of Mexico, most of which comes from onshore shale plays, also rose, by 200,000 bpd.

In March alone, production in the Lower 48 states excluding the Gulf of Mexico rose by 35,000 bpd to its highest level in nearly a year.

Back to Boom
U.S. shale output will almost certainly rise substantially in the rest of 2017 and into 2018 given the typical six-month lag between spudding new wells and the beginning of their commercial production.

Reported output for March mostly reflects wells started before the end of September 2016, when there were fewer than 425 rigs drilling for oil in the United States, according to oilfield services company Baker Hughes.

The number of active oil rigs has now increased to 722, and thousands of extra wells have been drilled in the meantime, with many still waiting on completion services before starting to flow.

As these wells are hydraulically fractured and connected to gathering systems, production will increase further in the remaining months of 2017 and into early 2018.

The speed and scale of the surge in U.S. production has surprised most within the oil industry, even top forecasters.

The EIA predicts U.S. production will hit 9.74 million bpd by the end of 2017 and 10.35 million bpd by the end of 2018 (“Short-Term Energy Outlook”, EIA, May 2017).

As recently as the start of the year, the agency was forecasting output of just 9.22 million bpd by the end of 2017 and 9.44 million bpd by the end of 2018 (“Short-Term Energy Outlook”, EIA, January 2017).

The EIA has revised its predictions for average production in 2017 up by 310,000 bpd and its forecast for the average in 2018 up by 660,000 bpd since January.

With output also rising in Brazil, Norway and several other non-OPEC countries, the scale of the U.S. boom explains why OPEC and its allies are struggling to engineer a deficit in the global oil market and push stocks down to their five-year average.

OPEC and non-OPEC are making slow progress despite reported high levels of compliance with output cuts implemented from the start of 2017 and recently extended to the end of March 2018.

Ultimately, prices rather than planned cuts will rebalance the market, which will most likely require a period of flat or lower prices to curb shale growth and ensure U.S. output does not outstrip demand.