In the past 18 months, the decline in oil prices has prompted a slowdown in U.S. oil and gas drilling. However, this has not translated into a reduction in production, maintaining pressure on prices. Exploration and production companies have adapted by increasing output despite drilling fewer wells. This is achieved by focusing on optimal sites, accelerating drilling processes, and extending the horizontal sections of each well.
Efficiency gains in the oil market have posed challenges for Saudi Arabia and OPEC+ in their efforts to deplete global oil inventories and elevate prices. Meanwhile, in the gas sector, continuous production growth, without an equivalent of OPEC+, has kept prices near three-decade lows when adjusted for inflation.
The crucial question is how long efficiency gains can sustain substantial output growth without a corresponding increase in prices and drilling activities.
U.S. Oil Production Dynamics:
In November 2023, front-month U.S. crude futures averaged $77 per barrel, down from a high of $121 in June 2022 after adjusting for inflation. Despite the decline in oil futures, drilling activity experienced a slowdown, with the number of active rigs drilling for oil decreasing to an average of 498 in November 2023.
However, production continued to rise, reaching a new monthly record of 13.3 million barrels per day (b/d) in November 2023, according to the U.S. Energy Information Administration (EIA). Notably, production from the Lower 48 states, excluding federal waters in the Gulf of Mexico, surpassed 11.0 million b/d for the first time.
Lower 48 output increased by 873,000 b/d (9%) compared to the same month a year earlier, with no apparent sign of significant growth deceleration. Total production from the Lower 48 and other regions saw a rise of 28 million barrels in November 2023 compared to the same month in 2022.
Challenges for OPEC+:
The efficiency gains in the U.S. oil and gas sector pose challenges for OPEC+ as they aim to stabilize and increase global oil prices. Despite a slowdown in drilling activities, production has continued to rise, undermining efforts to reduce inventories and support prices. The adaptability of U.S. companies in focusing on high-yield wells and streamlining drilling processes complicates OPEC+’s strategy to balance the global oil market.
Efforts by OPEC+ to navigate these challenges will require a careful reassessment of their production policies, considering the resilience of U.S. production to drilling slowdowns. The effectiveness of OPEC+’s decisions in influencing global oil prices remains uncertain in the face of ongoing efficiency improvements in the U.S. oil and gas sector.