Oil: Production limitations make it difficult to maintain demand

Concerns are growing about the state of oil production in the United States, especially as the fate of the application of the sanctions of the United States and the European Union against Russian oil approaches. Unless the United States and the EU reverse their policies, sanctions on Russian oil will begin on December 5. As a result, the demand for US oil exports has increased.

Will US production be able to keep pace with demand? Here’s a look at the current situation and some issues that will affect production in the near future.

The current forecast from the Energy Information Administration estimates that U.S. crude oil production will average 11.8 million barrels a day in 2022. Production recently topped the 12 million barrels a day mark and has ranged from 11.9 and 12.2 million barrels per day between mid-May and mid-September 2022. This figure is close to the production record of 12.3 million barrels per day that the United States set in early 2020. Even though production has finally reached the 12 million barrels a day mark, average US oil production for 2022 is still about a fifth lower than in 2019.

A recent Wall Street Journal article highlights that many private oil companies operating in the Permian Basin are nearing the end of a period of high growth. These producers are responsible for much of the post-pandemic production growth and currently operate almost half of the drilling rigs in that region. They also hold a fifth of the most valuable Permian acreage.

The Wall Street Journal analysis, based on data from Enverus, shows that drilling activity in the Permian is already slowing down. In fact, according to the analysis, “they have exploited many of their best drilling spots, and they will have to ease their rapid pace of drilling as reserves are reduced.” As a result, according to the analysis, these producers will likely not produce enough to meet long-term US and global demand.

The Energy Information Administration currently forecasts that US production will grow to an average of 12.6 million barrels per day in 2023, record highs. However, this prediction is based on continued growth in production from the Permian Basin. If production growth in the Permian Basin slows, the United States is unlikely to reach this lofty figure.

However, according to API Chief Economist Dr. Dean Foreman, there is no shortage of quality drilling surfaces. In an interview last Monday on the Energy Week podcast, which I co-host, he explained that “we have the resources, the rocks are good. There is no shortage of rocks with good geology to drill through.” Rather, the main issues holding back production growth are labor constraints, supply chain delays, financial issues, and energy policies.

Access to capital markets remains a problem for companies that are unable or unwilling to self-finance drilling projects. Drilled but uncompleted wells are starting to pile up in some regions due to a shortage of drilling crews. Although the White House has expressed support for increasing domestic energy production, there has been no substantive policy change that has hampered infrastructure construction and the licensing process. In addition, the Trump Administration’s tariffs remain in place and continue to make it difficult for energy producers to obtain steel.

The bottom line for traders is that the 2023 Energy Information Administration forecast is likely overly optimistic given the constraints faced by producers in the most productive region of the United States. But the issue is not a lack of accessible oil, but a litany of constraints on producers that are creating an environment in which growth is more difficult than ever.

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