The Strategist

Analytics: Growth in US oil production may weaken OPEC+ deal effect

09/01/2020 - 02:52

Oil production in the United States in June began to recover quickly after an unprecedented drop in May, increasing to 10.4 million barrels per day (bpd), follows from the report of the Department of Energy of the country. This is the first evidence of how the shale industry reacted to the rising oil prices in the summer. If this dynamic continues in the coming months, it could threaten the effectiveness of the OPEC+ deal to cut production. However, according to analysts, production growth in the US will remain weak and only by the end of the year will production volume approach the level of 11 million bpd.

Oil production in the United States in June increased by 4.2%, to 10.436 million bpd, compared to May, follows from a report published on August 31 by the US Energy Information Administration (EIA). The fall was 13.7% year-on-year.

This is the first data on actual production in June - it is compiled from the declarations filed by companies. The EIA also publishes weekly production estimates, which may differ significantly from subsequently collected actual data. In May, the initial estimates of the EIA assumed an average daily production of 11.45 million bpd, while the actual value for May was 10.02 million bpd. In May, amid the crisis of overproduction of oil in the world due to the coronavirus, oil production in the United States made the most serious drop in history: by 17% at once. This was also facilitated by the panic in the derivatives market after the price of a deliverable WTI oil futures fell to negative values for the first time in history on April 20.

By June, American oil production fell by 21% from 12.7 million bpd in March, which looked quite comparable to the contribution of OPEC + countries to balancing the market. However, after the OPEC + deal entered into force, oil prices recovered somewhat, which allowed oil production in the United States to grow too. In June, the average spot price for a barrel of WTI was $ 38.3 against $ 28.5 in May. In August, a barrel of WTI was already worth $ 42, which probably should have contributed to an increase in oil production during the summer. So far, EIA's weekly estimates show the opposite: according to them, production was declining slowly during the summer to about 10.8 million bpd by the end of August.

An indirect sign indicating at least stabilization of drilling performance is the end of the decline in the number of drilling rigs in the United States. According to the Baker Hughes calculation, the number of oil and gas rigs reached a minimum in mid-August, falling to 244 units from 728 units at the end of March. Over the past week, the number of drilling rigs has not changed, remaining at around 254, including 180 for oil. Given the specifics of shale deposits, US production is directly related to the number of new wells. In June, Rystad Energy analysts had expected US production to reach 10.9-11 million bpd by the end of the summer.