The Fuse

US Crude Production Continuing to Fall? Not Necessarily

by Matt Piotrowski | October 01, 2015

U.S. crude output continues to defy expectations, with the latest government data showing that output actually rebounded in July. It has remained resilient despite low oil prices and high debt among shale producers.

There’s been a twist in the narrative of falling U.S. oil production. U.S. crude output continues to defy expectations, with the latest government data showing that output actually rebounded in July. It has remained resilient despite low oil prices and high debt among shale producers. The latest revised data from the Energy Information Administration (EIA) pegs July’s output at 9.36 million barrels per day, a .094 mbd increase versus June and a reversal after two months of declines. The new data comes as many market observers forecast output to fall through the rest of the year and crude prices lost 24 percent during the most recent quarter.

EIAproduction

It is uncertain whether the rebound will be a one-off or the beginning of another upward trend, but it’s clear that the day of reckoning for high-cost shale is yet to come. Independent shale producers have been able to keep output elevated by taking out a lot of debt, along with technological and efficiency improvements. “Production can still increase even where the market is now,” Carl Larry, consultant with Frost & Sullivan, told The Fuse. “Technology, efficiency and producers’ margins matter more so than oil prices.”

According to the latest Petroleum Supply Monthly from the EIA, released Wednesday, output in North Dakota at the heart of the shale boom has been steady for most of this year, averaging just under 1.2 mbd in July—flat versus the previous month. In Texas, the other epicenter of U.S. shale, production averaged 3.45 mbd in July, a slight drop versus June and down .2 mbd from the peak in March, but by no means a collapse.

Overall, onshore production declined just modestly and was offset by a strong rebound in Gulf of Mexico (GOM) production, to the tune of .147 mbd. “We expect GOM output to remain strong as maintenance finishes and as several large projects either come online or continue to ramp up,” said Barclays analysts in a note.

The most recent weekly data from EIA put U.S. crude production at 9.1 mbd, but preliminary numbers have not been an accurate guide for changes in supply as the agency’s numbers have been substantially revised throughout this year. The EIA sees U.S. production falling to below 9 mbd for the fourth quarter.

If U.S. production fails to crack with prices at current levels, OPEC producers will come under more pressure amid growing strains on their budgets and increased competition for market share.

Although U.S. production has not faltered, its stagnation is slowing gains in energy security.

Although U.S. production has not faltered, its stagnation is slowing gains in energy security. After falling sharply for years after the 2008 financial crisis, U.S. crude imports have held steady lately, with their year-on-year drop a modest .3 mbd for this past July. The graphic below from Barclays shows how improvements in production and import independence are eroding on an annual basis.

barclays

Gasoline demand adjusted downward

U.S. motorists didn’t consume as much as originally thought this past summer. EIA adjusted its gasoline demand numbers downward by more than .1 mbd for July, but the annual increase is still relatively sharp, a reflection of how lower pump prices have indeed spurred more consumption. In the latest Petroleum Supply Monthly, the EIA said U.S. total fuel consumption averaged 19.8 mbd, down a hefty .36 mbd from initial estimates, but still up almost .7 mbd, or 3.6 percent, annually.

gasolinedemand

For gasoline, the average was 9.44 mbd, a .19 increase compared to the same month a year ago, making it the highest July average since 2007, the year before the financial crisis occurred. A mix of higher sales of less fuel-efficient vehicles, an improved employment outlook, increased disposable income, along with lower retail gasoline prices, has increased fuel consumption, and will continue to do so even though the peak summer driving season has ended.

Product Exports Soar

U.S. refiners, with their competitive advantage of low feedstock and weak natural gas prices, continue to send large volumes of petroleum products overseas.

U.S. refiners, with their competitive advantage of low feedstock and weak natural gas prices, continue to send large volumes of petroleum products overseas. In July, the U.S. exported some 4.4 mbd of refined products to foreign sources, a .4 mbd, or 10 percent, increase compared to the same month in 2014 and up by roughly 3 mbd in the past decade, another sign of the growing abundance of oil supply in the U.S.

Distillate fuel—which includes diesel and heating oil—is the main fuel being exported, with the average coming in at 1.332 mbd in July, up .125 mbd year-on-year and one of the highest monthly averages ever.

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While Latin America is the biggest outlet for U.S. distillate fuel, a good bit heads to Europe, too. The U.S. shipped a combined total of .358 mbd to France, the Netherlands and the UK. Even with the Volkswagen scandal, diesel will continue to be the fuel of choice for Europeans, at least in the medium term. The continent has gone through a dieselization of its vehicle fleet for decades and will therefore continue to consume the fuel despite its poor reputation. Entrenched demand, along with shuttered European refining capacity over the years, mean U.S. refiners will still supply customers in Europe.

There was also interesting data in the latest monthly EIA numbers regarding crude exports. Exports rose by a sharp .95 mbd versus June to .526 mbd, but still down on April-May levels. Most still went to Canada, but .21 mbd was exported to Brazil and .14 to the Netherlands.

One major shift that occurred in July was the U.S. becoming a net oil exporter to Mexico for the first time in decades. The U.S. sent .8 mbd of refined products to its southern neighbor, while importing .69 mbd of crude and .06 mbd of products. The energy relationship between the two countries has reversed relatively quickly: the U.S. imported as much as 1.77 mbd of crude and refined products in early 2006 from Mexico, but rising output in the U.S. and Canada, along with high refinery runs, has occurred at the same time Mexico’s crude production has declined rapidly. The U.S. Commerce Department in August approved approved a crude oil swap agreement between the two countries.  U.S. producers will send about one hundred thousand barrels per day of light crude to Mexico’s state-run Pemex in exchange for the same volumes of heavy grades for U.S. refiners.