In March, a robust surge in U.S. oil and gas production emerged, revealing the delayed effects of the considerable price highs experienced up until Q3 2022.
The U.S. Energy Information Administration’s latest ‘Petroleum supply monthly’ report showed an upswing in oil production by 171,000 barrels per day (b/d) in March compared to February. This upturn was predominantly driven by the Lower 48 states (+137,000 b/d) and the Gulf of Mexico (+45,000 b/d), counteracting the dip in Alaskan production (-11,000 b/d).
An almost 10% increase was recorded in the initial three months of 2023 relative to the same span the previous year, marking the second-highest production for that period, following 2020.
Simultaneously, dry gas production soared to a record 3,171 billion cubic feet in March, a 7% rise from the same month last year, as per the ‘Natural Gas Monthly’ report. Gas production also skyrocketed to an unprecedented 9,180 billion cubic feet in Q1, again up 7% from the previous year.
Shale production, often dubbed “short cycle” due to the swift decline rate of wells and the continuous need to drill new ones to replace the depleting yield from older wells, typically experiences a lag of up to 12 months between price alterations and recorded production changes.
However, the pandemic induced a rapid price-to-production transition in 2020, an unprecedented event precipitated by the crisis. Post inflation adjustment, U.S. crude prices reached an average of $119 per barrel in June 2022 (87th percentile for all months since 2000), driving a surge in drilling and output. Simultaneously, real gas prices hit an average of $9 per million British thermal units in August 2022 (82nd percentile for all months since 2000), further fueling production.
These peak prices eventually softened to $72 per barrel (45th percentile) and $2.30 per million British thermal units (2nd percentile), but the fallout of these steep prices during Q2 and Q3 of 2022 continued to propel production growth into Q1 of 2023.
The ripple effects of these past price peaks are expected to dissipate from Q3 onwards, and more notably in Q4. In May 2023, drilling rig count had already fallen by approximately 7% from its peak in December 2022, a slowdown which will ultimately result in decelerated production growth after a usual delay of up to 6 months.
Nonetheless, the current high production levels are sustaining significant inventories, especially for gas, thereby exerting pressure on prices. Despite the fact that U.S. commercial crude inventories were still 24 million barrels (+5% or +0.43 standard deviations) above the previous decade’s seasonal average at the end of March, they have now stabilized.
Meanwhile, U.S. gas reserves stood 214 billion cubic feet (+13% or +0.47 standard deviations) above the 10-year average at March end, and further rose to +270 billion cubic feet (+13% or +0.63 standard deviations) above the average by late May.
The discrepancy between average crude inventories and surplus gas reserves explains the relatively average oil prices post-2000 in real terms, while gas prices continue to trade near their lowest point.
