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U.S. oil output continues to climb despite lower prices

U.S. crude production rose again in September, confounding sceptics who have long been predicting that output is poised to begin declining because of lower oil prices.

Crude output increased by 66,000 barrels per day (bpd) to a record 12.46 million bpd, U.S. Energy Information Administration (EIA) data showed on Friday.

Production has risen by more than 950,000 bpd since the same point last year, though the year-on-year growth rate has been decelerating gently (“Petroleum Supply Monthly”, EIA, Nov. 29).

Output increased by million bpd in 2018 and the EIA predicts it will rise by another 1.3 million bpd in 2019 and 1 million bpd in 2020 (“Short-Term Energy Outlook”, EIA, Nov. 13).

U.S. producers have attacked the credibility of these forecasts, arguing that they exaggerate the production outlook, depressing prices and harming the industry.

Industry insiders and analysts have been arguing for months that such rapid growth is impossible given the slump in prices and sharp slowdown in drilling activity.

The number of rigs drilling for oil has fallen by a quarter since this time last year, says oilfield services company Baker Hughes .

Industry insiders say that output cannot be sustained, let alone increase, while well-head prices languish below $60 a barrel. With oil consumption still on the rise, prices need to be closer to $70 to persuade producers to raise output to the level needed to meet that demand, they say.

Domestic producers have criticised the EIA’s forecasts in the past when the industry was under pressure.

In September 2017, with WTI at $45-50 a barrel, Continental Resources CEO Harold Hamm attacked the EIA’s production forecasts for being too optimistic and distorting the market.

Hamm blamed the EIA for creating a false sense the market would be oversupplied and thereby depressing WTI prices relative to Brent (“Continental CEO says EIA forecast caps WTI”, Argus, Sept. 27, 2017).

“They need to get it right. If they don’t, we see distortion happen. And we are seeing distortion happen right now,” Hamm said in an interview with Argus.

In the event, the EIA was closer to being right and Hamm was wrong (“Oil drillers, not forecasters, are responsible for WTI weakness”, Reuters, Oct. 2, 2017).

In September 2017, when Hamm was criticising the agency, the EIA predicted domestic production would average 9.66 million bpd one year later, an increase of 150,000 bpd.

In the event, output surged strongly and averaged 11.5 million bpd in September 2018, an increase of 2 million bpd.

When prices are low, producers have an obvious incentive to play down future growth in the hope of raising futures prices and boosting revenues.

But the EIA’s production forecasts have been reasonably accurate throughout the past five years and they have usually captured the trend and identified turning points fairly quickly.

If anything, the EIA’s forecasts have tended to be on the conservative side, more often underestimating rather than overestimating production growth.

Since 2014 the EIA’s year-ahead forecast has underestimated realised output by an average of about 0.5 million bpd, or 0.5%.

The underestimate has arisen because U.S. producers have been even more successful in cutting costs and boosting average well productivity than the agency expected.

Since the beginning of 2019 realised production has continued to rise – even as the agency’s critics have said it should be falling based on a reduced rig count.

The EIA’s weekly production estimates, which have proved a reasonably accurate predictor for actual production in the past, indicate monthly output continued to climb in October and November.

With front-month U.S. oil futures prices up by almost $6 a barrel (11%) since early August, easing some pressure on domestic producers, it seems likely that output will continue rising at least into early 2020.

The agency’s forecast of continued, albeit slower, production growth next year seems reasonable, unless prices sink again.
Source: Reuters (Editing by David Goodman)

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