The War on Us Oil Production Is Taking Its Toll

As the energy crisis envelops the globe, there are more signs that the war on US oil production is taking its toll, states Phil Flynn of PRICE Futures Group.

As we pointed out this week, drilled but non-producing wells are at an all-time low signaling a potential sharp drop in US oil production. Now we have the Energy Information Administration (EIA) lowering the outlook for US oil production. While the EIA touts that, “US crude oil production will average 11.7 million barrels per day (b/d) in 2022 and 12.4 million b/d in 2023, which would surpass the record high set in 2019” yet that shows that US production growth is faltering.

The EIA cut oil production growth by half a million barrels a day this year and even more next year. The EIA says that 2023 was cut to 610,000 barrels a day, down from 840,000 barrels a day from the September report and down from 1.05 million barrels in June. The 2022 growth forecast was cut too, to just 500.000 barrels a day.

David Asman from the Fox Business Network pointed out, "Congressman Ro Khanna on FNC today: 'US Oil production is up to almost 12.8 million BPD, which is almost at the record levels of 2019.” Not true. US oil production is now 11.8 million BPD. Dems are adding one million BPD that Biden’s draining from our oil reserves as new oil production.'"

Yet the Biden policies that have reduced US oil and gas production that has tightened global supply are now being blamed on the OPEC production cuts. It is that lack of production growth from the United States that is really creating a void in the global oil marketplace. Killing the Keystone Pipeline, and federal drilling moratoriums discouraging investment are all partly responsible for the fact that the EIA says that US consumers will pay 28% more this winter for gas to heat their homes and 27% more on diesel. Those numbers may be conservative if we get a cold winter.

While there is a lot of gnashing and grinding of teeth over the OPEC two million barrel-a-day production cut from Washington, the reality is that at least 1.2 million barrels of that production cut with just an admission by the cartel that most of those countries do not have the ability to produce oil up to their quota. That inability is one of the reasons why the OPEC cartel has yet to hit its stated production targets for the last couple of years. The Wall Street Journal pointed out that the Biden administration pressured Saudi Arabia and the cartel to at least delay their production cuts by one month which shows that the administration is really only interested in lowering prices to try to influence the US midterm elections.

There are also threats by the administration to release even more oil from the Strategic Petroleum Reserve after the already approved number of barrels released ends at the end of October. Yet because they’re increasing their adversarial position with Saudi Arabia and the Middle East, more than likely those releases are going to be met with additional cuts from Saudi Arabia.

The Biden administration’s tougher line on Saudi Arabia, the country they vowed to make a pariah state, comes because Saudi Arabia failed to use its oil production to try to influence the outcome of the US election. Saudi Arabia from their point also might wonder why the Biden administration wanted to negotiate with its enemy Iran using Russia as a proxy for those talks. This is probably an important point because it was reported that Iran drones were used by Russia in an attack on Ukrainian civilians.

The International Energy for their point is trying to blame the OPEC production cut for a possible coming recession. No talk from the International Energy Agency about the fact that governments around the globe, especially in the United States, we're printing money like it was going out of style and failed to realize the increasing inflation threat calling and it transitory. The IEA maybe should take into account that speakers from the Federal Reserve are threatening now to reverse their errors by raising interest rates even if it causes a major global recession. Reuters reported, “A decision by the OPEC+ oil producer group last week to rein in output has driven up prices and could push the global economy into recession, the International Energy Agency said on Thursday. “The relentless deterioration of the economy and higher prices sparked by an OPEC+ plan to cut supply is slowing world oil demand,” the Paris-based agency, which includes the United States and other top consumer countries, said.

Now it appears that the Biden administration is going to blame Saudi Arabia for the reason why their ill-fated oil price cap fantasy will not work. Bloomberg News reports, “Some Biden administration officials are growing concerned that their plan to cap the price of oil purchased from Russia may backfire after the OPEC+ alliance’s surprise production cut last week, according to people familiar with the matter. I can tell the Biden administration officials not to worry about the OPEC production cut sinking the oil price. It was going to fail anyway.

Yet unless the economy totally collapses, the reality is that demand is still exceeding supply which seems to be very clear from last night’s American Petroleum Institute (API) report. The API did report a huge 7.054 million barrel increase in crude supplies, but that entire increase could be attributed to the third largest strategic petroleum reserve release in history. What the market really should be worried about is another whopping 4.560 million barrel drop in distillate inventories. At least gasoline supplies rose by a modest 2.08 million barrels.

Yet with Strategic Petroleum Reserve releases coming to an end, we’re going to start to see substantial drops in crude supply in the coming months. That will cause the market to go higher eventually. In the short term, we are being held back by inflation fears and Federal Reserve rate hike fears.

Yesterday’s market action was driven by the fact that the producer price index came in hotter than expected. That weighed on crude oil, but we saw ultra-low sulfur diesel stay incredibly strong throughout most of the trading session. They gave up those gains on the assumption that somebody had an inkling that we were going to see a big drawdown on supplies and chose to take their profits before the report came out.

On the other hand, the EIA reported that US dry natural gas production set an annual record in 2021, increasing by 3.5% from 2020, according to our recently released Natural Gas Annual. In 2020, production dipped because of reduced economic activity during the Covid-19 pandemic. In 2021, dry natural gas production exceeded the previous record set in 2019, and our Short-Term Energy Outlook forecasts that production will continue to grow through 2023. Driven by elevated natural gas prices, US production in the largest resource basins has been increasing. Texas and Pennsylvania have driven this increase; production grew by nearly 1.5 billion cubic feet per day (Bcf/d) in both states between 2020 and 2021. Texas overlays the Permian Basin and Haynesville Basin, both major production growth sources in 2021. Similarly, Pennsylvania overlays the Appalachian Basin, which now accounts for nearly one-third of all US dry natural gas production.

Historically, the Federal Offshore Gulf of Mexico has been an important region for natural gas production, representing 9% of dry natural gas production in 2010. Natural gas production in the Gulf of Mexico, however, has been trending downward in more recent years.

Learn more about Phil Flynn by visiting Price Futures Group.