The Carlyle Group's Philadelphia Energy Solutions oil refinery in Philadelphia, US. Picture: REUTERS/DAVID M PARROT
The Carlyle Group's Philadelphia Energy Solutions oil refinery in Philadelphia, US. Picture: REUTERS/DAVID M PARROT

London — US crude production rose again in September, confounding sceptics who have long been predicting that output is poised to begin declining because of lower oil prices.

Crude output increased by 66,000 barrels per day (bpd) to a record 12.46-million barrels, US energy information administration (EIA) data showed.

Production has risen by more than 950,000bpd since the same point last year, though the year-on-year growth rate has been decelerating gently.

Output increased by 1-million barrels per day in 2018 and the EIA predicts it will rise by another 1.3 million in 2019 and 1-million in 2020.

US producers have attacked the credibility of these forecasts, arguing that they exaggerate the production outlook, depressing prices and harming the industry.

Industry insiders and analysts have been arguing for months that such rapid growth is impossible given the slump in prices and a sharp slowdown in drilling activity. The number of rigs drilling for oil has fallen by a quarter since this time last year, says oilfield services company Baker Hughes

Industry insiders say that output cannot be sustained, let alone increase, while wellhead prices languish below $60 a barrel. With oil consumption still on the rise, prices need to be closer to $70 to persuade producers to raise output to the level needed to meet that demand, they say.

Industry criticism

Domestic producers have criticised the EIA’s forecasts in the past when the industry was under pressure.

In September 2017, with WTI at $45-$50 a barrel, Continental Resources CEO Harold Hamm attacked the EIA’s production forecasts for being too optimistic and distorting the market. Hamm blamed the EIA for creating a false sense the market would be oversupplied and thereby depressing WTI prices relative to Brent.

“They need to get it right. If they don’t, we see distortion happen. And we are seeing distortion happen right now,” Hamm said.

In the event, the EIA was closer to being right and Hamm was wrong.

In September 2017, when Hamm was criticising the agency, the EIA predicted domestic production would average 9.66-million barrels per day one year later, an increase of 150,000bpd. In the event, output surged strongly and averaged 11.5-million barrels per day in September 2018, an increase of 2-million.

Forecast accuracy

When prices are low, producers have an obvious incentive to play down future growth in the hope of raising futures prices and boosting revenues.

But the EIA’s production forecasts have been reasonably accurate throughout the past five years and they have usually captured the trend and identified turning points quickly.

If anything, the EIA’s forecasts have tended to be on the conservative side, more often underestimating rather than overestimating production growth.

Since 2014 the EIA’s year-ahead forecast has underestimated realised output by an average of about 0.5-million barrels per day, or 0.5%. The underestimate has arisen because US producers have been even more successful in cutting costs and boosting average well productivity than the agency expected.

Further growth

Since the beginning of 2019 realised production has continued to rise, even as the agency’s critics have said it should be falling based on a reduced rig count.

The EIA’s weekly production estimates, which have proved a reasonably accurate predictor for actual production in the past, indicate monthly output continued to climb in October and November.

With front-month US oil futures prices up by almost $6 a barrel (11%) since early August, easing pressure on domestic producers, it seems likely that output will continue rising at least into early 2020.

The agency’s forecast of continued, albeit slower, production growth next year seems reasonable, unless prices sink again.

Reuters