U.S. production hits a downward slope as prices stay low

By Nathanial Gronewold | 09/17/2015 08:48 AM EDT

Crude oil production in the United States is finally starting to decline, according to statistics and experts.

After months of increases, even in the midst of falling oil prices, total output volumes have been trending downward as production growth in some areas is being outpaced by declines in major shale oil regions. The trend appears to be holding.

Government statistics also strongly suggest the United States will not reach record crude oil production figures last set in 1970 as a consequence of the collapse of crude prices.

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Earlier, it had been difficult to tell whether recorded output declines represented a steady trend or the occasional variance seen month to month. Output continues to expand in the Permian Basin of west Texas and southeastern New Mexico and in federal waters in the Gulf of Mexico.

But declines in the North Dakota Bakken Shale, in south Texas’ Eagle Ford Shale and from other fields appear to be outpacing growth elsewhere. Data suggest very slow growth is occurring offshore, while the pace of Permian crude production increases may be slowing.

"There is evidence now that production from the shale plays is declining, not at a rapid rate, but I just recently saw some data for the Eagle Ford and the Bakken which do show production declines over the last couple of weeks," said Bernard Weinstein, an energy economist and director at the Maguire Energy Institute at Southern Methodist University. Even accounting for the Permian Basin and conventional oil production, "you put it all together and we are at the point where production is declining," he added.

The same likely holds true for Texas, though the Railroad Commission of Texas, the state’s oil and gas regulator, had predicted that crude oil production in this state may hit a record volume not seen since the early 1970s.

"We expect to surpass all-time highs for oil production in Texas, breaking records set in 1972, proving once again the true might and resilience of an industry that continues to drive our state’s economy," said Railroad Commissioner Christi Craddick in a recent speech delivered at the North Texas Commission.

The United States hit peak crude output in November 1970, when monthly production averaged about 10 million barrels per day. The annual record for average daily output was also achieved in 1970, reaching about 9.6 million barrels per day for that year.

The shale oil revolution has driven the dramatic increases seen in less than a decade, but the crude price plunge is now putting the brakes on that.

Record almost hit

Data published by the U.S. Energy Information Administration show the U.S. oil and gas industry fell just shy of achieving a 1970 milestone again this year. This year’s monthly record was reached in April, when producers pumped around 9.61 million barrels of crude per day, 390,000 barrels a day off the November 1970 all-time high.

The figure published by EIA slid to 9.4 million barrels a day, and the trend is continuing. If the trend continues its downward trajectory, then the U.S. oil and gas industry won’t achieve the annual record, either, this year. For the first eight months of the year, the U.S. industry averaged daily output volumes of 9.355 million barrels a day, which is so far 245,000 barrels a day short of the 1970 record.

If output from the Eagle Ford continues to fall faster than growth in the Permian Basin, as it has been, then Texas won’t achieve a production record this year, either.

New statistics issued by EIA yesterday show the four-week average production estimate reverse and begin trending down in August, a further sign that total output from the United States peaked this summer and is now falling steadily. EIA sees a gradual decline continuing for the next year, with U.S. oil production forecast to reach 8.63 million barrels a day in August 2016, a drop of nearly 1 million barrels per day from the April 2015 high-water mark.

Indications of falling shale oil production and draws on stockpiles could be lifting the oil markets. But prices are still well below levels deemed safe for the industry as a whole, and further pain is expected. Yesterday, Moody’s Investor Services predicted that persistently low prices out to 2016 will force major vertically integrated oil companies to cut spending by another 20 percent.

Oil field services and equipment suppliers have been hammered by the collapse of oil prices. Manufacturing activity in Houston and across the oil patch is down, and layoffs continue.

"As of March from the services and supply sector, we had already lost 60,000 jobs, so you have to assume it’s probably up to 80,000 by now just in our sector," said Leslie Shockley Beyer, president of the Petroleum Equipment and Services Association, a trade group.

International Brent oil futures contracts for November delivery were trading at just below $50 per barrel yesterday. West Texas Intermediate oil futures for October were valued at just above $47 per barrel.

Moody’s doesn’t think prices will recover to $65 per barrel on average until 2017.

EIA predicts that U.S. production will start trending up again in late summer 2016 to hit 9 million barrels a day by December that year. This likely reflects additions from offshore drilling. Though crude production from the Gulf of Mexico dropped during the summer for maintenance, it is likely back up to 1.53 million barrels a day on average, and analysts think it will expand steadily to nearly 2 million barrels a day by 2017.

Weinstein said the industry’s only hope of avoiding even more pain is if the Organization of the Petroleum Exporting Countries takes the decline in the United States as an invitation to curb its own production. But there is little chance of that occurring if Iran is permitted to introduce huge volumes of crude to the market, as it has promised should an international agreement on its nuclear program hold.

"I don’t know what OPEC is going to do," Weinstein said. "You would think there’s a lot of pressure within OPEC to restrain production."

At its most recent meeting in June, OPEC voted to maintain its production target. The next meeting is in December.

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