Oil: Saudis Are Cutting? Well, U.S. Is Producing More and More

Of all the news that caught the interest of oil traders this week, the one that really hit home was probably the EIA’s revelation that U.S. crude production had reached three-year highs — for a second week in a row.

It was quite astounding that the Energy Information Administration would say that, when the number of rigs drilling for oil in the country had tumbled double-digits this year. 

​​From a 2023 high of 623 on Jan 13, the U.S. oil rig count had dwindled to just 520 as of Aug 18 — down 15%. 

Even so, the EIA estimated domestic crude production at 12.7 million barrels per day for the week ended Aug 11, overwriting its previous daily projection of 12.6M during the prior week to Aug 4.

Before these back-to-back weeks, the agency had never projected such a high number for U.S. oil production, which it had maintained at between 12M and 12.2M barrels per day over the past year, since output began recovering from the 9.7M low seen in the aftermath of the coronavirus outbreak. Production was at a record high of 13.1M barrels daily in March 2020, just as the pandemic was setting in.

The oil output estimate contained in the EIA’s Weekly Petroleum Status Report isn’t the only one by the agency that gives an idea of what the world’s largest driller of the commodity is doing in terms of output. Those following the oil market must also stay on top of the Drilling Productivity Report (obliquely known as the DPR) and the Short-Term Energy Outlook (or STEO) to get a holistic picture of what’s going on.

According to the latest issue of the DPR on Aug 14, output in the Permian, the largest shale oil producing basin in the United States, is projected to be at 5.799M barrels per day in  September, down 13,000 from August. That decline would come on top of the previous month’s estimated daily decline of 9,500 barrels, putting Permian output at its lowest since February, historical DPR data suggests. 

The same DPR report, however, says that output in the Bakken, the second-largest U.S. shale play, is expected to reach its highest since November 2020 by next month, with an estimated output of 1.21M barrels daily in September. That would be 3,600 barrels per day more than in August and July’s increase of 5,200.

That’s not all.

Oil production in new U.S. wells is projected to reach 1,694 barrels per day for each rig in the Bakken, up from 1,686 previously. For the Permian too, this is seen rising — despite the overall production drop — and has been forecast to be marginally higher at 1,079 barrels daily for each rig compared with a previous 1,073. At Eagle Ford (NYSE:F), originally the second-largest U.S. oil-producing region, new oil well production per rig is also seen rising to 1,453 barrels daily from 1,439.

The STEO takes the EIA’s high estimates for U.S. oil production even higher. The latest version of this, published Aug 15 (a day after the DPR), says output is expected to average 12.81M barrels per day in the third quarter of this year and 12.93M by the fourth. Even more startling, by the second quarter of 2024, U.S. production is seen rising to 13.01M per day, before reaching 13.08M in the third and 13.27M by the fourth. Essentially, it means U.S. production will be at a new record high by the end of next year.

Efficiency Over Volume in U.S. Oil Drilling

Anyone who read about the tumbling U.S. rig count at the outset of this story and now looking at this production estimate will probably gasp. How the hell is this possible, any person of average intelligence would ask. Unsurprisingly, the same person would likely have the answer, too: higher production efficiency. 

It’s true that U.S. drillers are at their most disciplined ever when it comes to production, not putting to work a single rig more than needed to keep capital expenditure at the lowest possible and maximize bottomline per barrel. It’s all in an effort to return as much cash as they can to shareholders. It’s an incredible shift in attitude since the heyday of the U.S. boom in oil fracking, which is shorthand for the hydraulic fracturing process and horizontal drilling versus vertical that made the country a bigger oil producer than Saudi Arabia and Russia. 

Back in 2014, when prodigious amounts of new oil was first spurting out of the Permian, Eagle Ford and Bakken, drillers, who included Mom-and-Pops jumping into the scene akin to a gold rush, stuck rigs everywhere, with nary a care about supply-demand balance. “Drill baby, drill!” epitomized the industry. Banks, excited at the prospect of what was virtually a “blue ocean” within the oil game, did little diligence too in lending. It took three price collapses and countless shale bankruptcies — in 2014-2016, then 2018 and finally, the pandemic-induced 2020 — to change that.

Today, the shale patch consists of majors such as Exxon Mobil (NYSE:XOM), Royal Dutch Shell (LON:RDSa) and Chevron (NYSE:CVX) and established drillers like Devon (NYSE:DVN), Pioneer (NYSE:PXD) and Continental.

The days of carefree production are over and U.S. oil drillers, in fact, are squeezing output wherever possible, like the rest of their brethren in the Organization of the Petroleum Exporting Countries — much to the delight of the Saudis, who lead that so-called OPEC cartel. Hostility apparently shown towards the U.S. oil community by the fossil-fuel-discouraging Biden administration — and returned with a wilful lowering of production — is another source of delight for the Saudis. But more than these, the new-age American driller is more concerned about lifting a barrel at the lowest cost possible than the U.S. pride of being the largest oil producer.

Therein, comes the phenomenon in drilling efficiency that we have today — and why U.S. oil production continues to climb despite the continued drop in rig count.

Global Impacts

In June, Exxon Mobil Chief Executive Darren Woods said he aims to double the amount of oil produced from the company's U.S. shale holdings over a five-year period using new technologies.

In December 2022, the oil major introduced a five-year technology development program for drilling after postponing for two years — until 2027 — its goal of pumping up to 1 million barrels per day in the Permian, citing legacy pandemic-related delays. 

Also in the Permian, Pioneer’s lateral lengths in drilling have grown from a previous benchmark of just 5,000 feet to average 10,000 feet, some even reaching as much as 20,000, say those in the know. 

Enhanced completion designs have been a factor in lowering breakeven costs for the Permian, which is about $19 a barrel for Pioneer, including drilling and development costs. Back in 2018, it was as high as $28.

The company has seen increased drilling efficiencies recently as well. Reports from Pioneer, which is the largest acreage holder in the Midland Basin, says it takes the company 15 days now to drill a vertical well at between 10,000 and 20,000 feet. That compares with the 2015 span of almost 20 days to drill a horizontal well to 10,000 feet. The lifting of a U.S. export ban on pad drilling designs, which include increasing the numbers of wells on a pad, also have contributed to low breakevens in the Permian.

John Kilduff, partner at New York energy hedge fund Again Capital, sums it up:  

“This explains why Permian Basin production declines are leading the way with the largest decrease through time due to increased activity. Other areas are failing but have at least stabilized decline rates.”

Nick Dole, a retired shale drilling engineer, cites data from Enverus, an oil gas and services firm, that says the drop in output from U.S. shale wells is “forcing oil drillers to work harder to keep production from slipping”.

Added Dole in comments to Investing.com:

“The premium areas that are considered the top tier acreage are getting drilled up faster than anticipated. However, the industry is always one new technology away from doing better in the tier 2 and 3 areas. They invest a lot in R&D to keep that oil flowing.

When I first got into the industry the U.S. was on a steady oil decline and the US producers worked very hard and spent tons of money on shale technology, which I was a part of. We had many ‘train wrecks’ that were extremely costly. If it wasn’t for those things, the Saudis/OPEC would have us begging about now. Sometimes that is forgotten.”

The unspoken truth about U.S. oil production and drilling efficiency: While companies want to do less in terms of output, they are actually cranking out more economically by being razor-focused on getting the most out of a barrel, at the lowest cost possible. And since they’re competing with one another, they don’t reveal their innermost trade secrets, often leaving uncontested public opinion that they’re driven more by their hostility towards Biden than bottomline (that’s the bull that oil bulls like to believe in). 

Those long oil begrudgingly acknowledge the efficiency of American drillers — a notion that doesn’t help the narrative that additional Saudi production cuts of a million barrels per day since July would leave the U.S. high and dry of oil most needed in the coming months.

Phil Flynn, energy analyst at Chicago’s Price Futures Group who’s closely followed by oil bulls, questioned the methodology used by the EIA:

“What is more concerning … is that the increase in oil production might not be actual barrels of new oil but due to what the EIA said last week was a ‘crude oil production re-benchmarking'. That changes the way the EIA calculates its weekly production estimates.”

It’s interesting that those long oil, who spend much of their energy debunking the EIA’s higher production estimates, do not talk much about U.S. crude exports which are making greater and greater inroads in the very same markets that the Saudis consider as sacred to them.

Flynn, whom I follow, too, for contrary insights to what I write, noted to his credit that U.S. oil exports surged by 2.2 million barrels per day in the latest week to Aug 11, the largest weekly rise since August 2022, or in a year. U.S. crude exports, at just shy of 4.6M per day in the week were what caused a drop of 1.76 million barrels daily in net imports, Flynn reasoned. 

Epilogue

Last week’s export number was just part of a broader story about U.S. oil shipments.

Surging U.S. crude exports in 2023 are pushing down oil prices in Europe and Asia, proving a key source of supply as producers cut output and sanctions on Russian crude disrupt trade flows, according to a Reuters report from Aug 6.

The introduction in June of U.S. crude grade WTI Midland to set the price of the dated Brent benchmark assessed by S&P Global Commodity Insights has not only spurred the rising exports but also helped to cap Brent and the European, African, Brazilian and Asian oil that are priced off the benchmark, traders and analysts said in the report. 

U.S. crude exports have averaged 4.08 million barrels per day so far in 2023, up from an average of 3.53 million bpd in 2022, the report noted.

Most importantly, it cited these:

“U.S. crude exports are also easing the loss of supply after Saudi Arabia deepened output cuts from July, above what major producers agreed to in June.”

The widening exports illustrate the increasing influence of crude from the U.S., the world's biggest oil producer, in the global market. It further cements the role of U.S. supplies in balancing the market, especially as outlets for sanctioned Russian crude are limited.”

Epilogue: The Saudis are cutting, but the U.S. is producing more and more. 

***

Disclaimer: The content of this article is purely to inform and does not in any way represent an inducement or recommendation to buy or sell any commodity or its related securities. The author Barani Krishnan does not hold a position in the commodities and securities he writes about. He typically uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables.