Somewhat to its own surprise, the U.S. Energy Information Administration (EIA) estimates that U.S. crude oil production averaged 12.0 MMbpd in January, up 90,000 bpd from December 2018’s level, and setting yet another all-time U.S. oil output record. This breaks the previous record of 11.91 MMbopd set in December.
The rapidity with which U.S. oil output has grown seems to have caught EIA by surprise. Last November, EIA had estimated that U.S. production would exceed the 12-MMbopd mark during second-quarter 2019. And, in fact, even-earlier EIA forecasts had called for the 12-MMbopd threshold to be surpassed only in the fourth quarter of this year.
A new set of output forecasts. Now, with three additional months of track record available, EIA now forecasts U.S. crude oil production to average 12.4 MMbpd in 2019 and 13.2 MMbpd in 2020, with most of the growth coming from the Permian region of Texas and New Mexico. If realized, both of these forecast levels would easily surpass the record-high annual average of 11.0 MMbpd set in 2018, ensuring that the U.S. remains the world’s largest crude oil producer. Overall, U.S. oil production increases are largely the result of continued production growth in the tight-oil formations of the Permian region, as well as the expectation that 19 new projects will start during 2019 and 2020 in the federal offshore Gulf of Mexico (GOM).
“Favorable geology, combined with technological improvements, has contributed to the Permian region becoming one of the more economic regions for crude oil production in the United States,” explained the agency. EIA forecasts that Permian production will average 4.2 MMbopd in 2019, a 750,000-bopd increase from 2018, and 4.7 MMbopd in 2020, a 530,000-bopd gain over 2019’s level. Despite pipeline capacity constraints, the Permian region’s month-over-month growth averaged nearly 100,000 bopd for nearly all of 2018, exceeding EIA’s expectations, as expressed in monthly Short-Term Energy Outlook (STEO) revisions.
Furthermore, said EIA, its “STEO forecast for the Permian region experienced many revisions in 2018, as prices changed in response to evolving market expectations. Production in the Permian region exceeded EIA’s expectations, despite large price spreads that likely put downward pressure on production. As historical data filled in with a two-month lag, and forecast prices were revised, significant upward revisions were repeatedly made to the Permian production forecast.”
Pipelines can’t slow the flow. Even West Texas pipeline constraints could not completely slow down the U.S. oil output juggernaut. Starting in second-quarter 2018, pipeline capacity constraints contributed to West Texas Intermediate (WTI)-Midland crude oil averaging more than a $14/bbl discount to WTI-Cushing from July through September, and reaching a $16/bbl discount in August. In response to the increasing WTI-Midland price discount, Permian-region production growth was expected to start to slow until more pipeline capacity was built, noted EIA. However, from July to September 2018, when the Midland-Cushing spread was at its widest, the Permian basin production rate grew by more than 290,000 bopd and continued to grow by more than 170,000 bopd from September to November.,
Permian growth rates. Permian producers were able to increase output despite major regional price discounts, “largely because of operational efficiencies in trucking and rail and higher overall WTI-Cushing prices.” Although the Midland-Cushing discount reached $16/bbl in August 2018, WTI-Cushing prices that month averaged $68/bbl, which translated to an average price of $52/bbl for Permian producers, supporting production growth.
EIA’s February STEO forecasts that WTI-Cushing prices will average $55/bbl in 2019 and $58/bbl in 2020, lower than the 2018 average of $65/bbl. As new pipeline projects are completed during 2019 and 2020, EIA expects the Midland-Cushing spread to narrow significantly, allowing the Permian basin to continue to lead U.S. oil production.
Contributions from an offshore rebound. The second-largest source of forecast growth, says EIA, is the GOM, where production reached a record-high 1.9 MMbopd in November 2018. EIA expects that GOM output will average 2.0 MMbopd in 2019, a 280,000-bopd increase from 2018, followed by an additional increase of 310,000 bopd during 2020. The forecast for continued GOM growth is driven by increased production from 11 new fields that started producing in 2018, seven new fields planned to go onstream during 2019, and 12 new fields expected to go operational during 2020. EIA forecasts that these 30 new fields will contribute a 554,000-bopd share of the total 2.3 MMbopd of GOM production in 2020.
EIA expects production in all other major regions to remain fairly flat or decline slightly through 2020 in response to lower forecast WTI-Cushing crude oil spot prices, which leads to reduced growth in expected future rig counts.