After Russia's invasion of
Ukraine in the middle of 2022, U.S. oil and gas production continued to trend
upward through April as a delayed response to extremely high prices. Yet, the
fall in costs and boring rates since late 2022 is set to diminish yield in the
final part of 2023 and fix markets for both oil and gas in the not-so-distant
future and into 2024. When compared to April, crude and condensates production
from the Lower 48 states in the Gulf of Mexico, excluding federal waters,
increased by 37,000 barrels per day (bpd) in May.
According to data from the
U.S. Energy Information Administration (EIA), production increased by 986,000
bpd (+10%) in comparison to the same month a year earlier. The Lower 48
creation was running at the second-quickest rate on record and just 70,000 bpd
underneath the past pinnacle of 10.52 million bpd in November and December
2019. The near-record output in April 2023 reflects extremely high prices in
the second quarter of 2022, as experience demonstrates that U.S. production
responds to price changes with an average lag of approximately 12 months. U.S.
crude futures prices averaged USD108 per barrel in April 2022 (the 74th
percentile for all months since 2000) after accounting for inflation, reaching
a peak of USD120 in June 2022 (the 82nd percentile). Prices for front-month
futures have decreased since then, reaching just USD70 in June 2023 (43rd
percentile) and USD78 in December 2022 (51st percentile).
According to information
provided by the oilfield services company Baker Hughes, the average number of
rigs drilling for oil and gas has decreased from 780 in December 2022 to 687 in
June 2023 as a direct result of the decline in prices. Lower 48 production
should decrease in the third quarter of 2023 and continue to do so until at
least the first quarter of 2024 due to the reduced number of rigs. If there is
no worldwide downturn, more slow or negative development from the Lower 48
joined with cuts reported by Saudi Arabia and its partners in OPEC+ are
probably going to lessen worldwide inventories later in 2023 and mid-2024.
Ironically, OPEC+ cuts are
likely to stabilize crude prices at a higher level than would otherwise be the
case, easing some of the pressure on producers in the Lower 48 and stabilizing
their output at a slightly higher level. In terms of gas, dry production
reached 3,063 billion cubic feet (bcf) in April 2023, representing a nearly 6%
increase over April 2022. In the first four months of the year, total
production reached a record 12,239 bcf, an increase of 7% from the previous
year. Similar to oil, gas production has increased slowly in the second and
third quarters of 2022 in response to extremely high prices.
In real terms, monthly
average futures prices peaked at over USD9 per million British thermal units in
August 2022, which was in the 78th percentile for all months since 2000.
However, they fell to less than USD2.50 in June 2023, which was in the fourth
percentile. In the second half of 2023 and the first half of 2024, gas
production growth is expected to sharply slow, which should reduce excess
inventories during the winter of 2023/24.
At the end of April 2023, gas
stocks in the United States were 261 billion cubic feet (+14%, or +0.58
standard deviations) higher than the average for the previous ten years. By the
end of June 2023, the EIA's data indicated that the surplus had increased to
290 billion cubic feet, an increase of 12%, or +0.76 standard deviations. However,
the surplus should be eliminated during the winter of 2023/24 if winter
temperatures remain roughly in line with the recent average.