US oil production

Published at 21:40 27 Sep 2012 by . Last edited 09:29 20 Apr 2016.

US oil production continued on its strong upward trajectory, with total liquids production coming in at 9.474 mb/d, higher y/y by 0.874 mb/d (see Figure 1). Crude output rose to a record high of 6.267 mb/d, higher y/y by 0.832 mb/d. NGL volumes continued to climb as well, higher y/y by 0.117 mb/d to 2.323 mb/d. Biofuels production, however, fell for the second straight month, as droughts in the US Midwest weighed on the corn crop. By region, the most prolific y/y increase was seen in the Gulf Coast with a y/y increase of 0.58 mb/d, the highest growth rate in over three decades barring hurricane distortions (see Figure 2 and Figure 16). Overall production in PADD3 reached 3.716 mb/d, the highest levels since April 1988, brought about primarily by the surge in shale plays in south Texas (see Figure 11). With Petrobras starting up more production at the Gulf of Mexico Chinook field earlier this month, more production growth is in the offing. US Midwest output growth, however, slowed, as a sharp fall in prices over June and July curtailed drilling activity in some of the high cost shale plays. Output continued to increase in North Dakota and Bakken, although there too, y/y growth rates slowed slightly (see Figure 3). ​

Indeed, the price sensitivity of shale plays is increasingly becoming a key feature of the US oil production story, with breakeven prices required by companies significantly higher than the conventional basins. A breakeven price of $50-$75 per barrel (WTI) depending on the different shale wells makes production viable in theory. However, funding the upfront capital costs to hold acreage, to add infrastructure into plays, to do the science required to delineate sweet spots/completion and to drive growth makes the total variable cost far more expensive. Eventually, offsetting decline in the base also becomes an additional cost burden. The recent bout of hedging activity carried out by US oil producers above $95 per barrel in WTI is a further indication of the higher breakeven costs.

Nonetheless, with oil prices at elevated levels, oil shale production growth is likely to continue strongly. Moreover, with pipeline infrastructure remaining constrained, we expect WTI's weakness relative to other benchmarks to persist. Although increased volumes of railing and trucking activity do help to provide somewhat of a floor. Importantly, the increased movement of rail has benefitted regional grades like Bakken, as producers have resorted to sending additional volumes down to the Gulf Coast via this medium. Over Q4, with high refinery turnarounds scheduled, including BP's Whiting refinery conversion, and the chunky volume of refineries currently offline due to unplanned maintenance, the weakness in WTI time spreads is not only likely to persist in our view, it could widen still further, especially if US output growth continues at the current pace.

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