U.S. oil production hits record as Israel-Hamas conflict stokes global supply fears

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As the global oil market focuses its attention on the oil-supply risks tied to the war between Israel and Hamas, U.S. production has climbed to its highest level on record and it’s expected to continue its rise next year.

That’s a “testament to the ingenuity of the U.S. oil-and-gas industry,” said Phil Flynn, senior market analyst at The Price Futures Group.

The industry has faced a “harsher regulatory environment” under the Biden administration, which has plans for three oil and gas lease sales over the next five years. That would be the smallest number of lease sales offered in U.S. history.

Total U.S. petroleum production climbed to 13.2 million barrels a day as of week ended Oct. 6, according to the Energy Information Administration — the highest figure based on data going back to 1983. The latest data released Wednesday showed output remained unchanged at that level for the week ended Oct. 13.

The U.S. energy industry has been able to “maximize wells by increasing drilling productivity rates,” said Flynn. “They are the best in the world in squeezing more blood out of the turnip.”

EIA methodology

A change in the EIA’s calculation methodology has also played a key role in the rise to record output.

The EIA said it periodically reviews its domestic oil production data and if it finds a large difference between its monthly Short-Term Energy Outlook report, trends in survey-based domestic output in its Petroleum Supply Monthly report, and other current data, it may “re-benchmark” the weekly production estimates.

For the week ended Oct. 6, the re-benchmarking resulted in estimated volumes increase of 370,000 barrels a day, or 2.8% of the week’s estimate production total.

So the higher output number is “reflective of an accounting or methodology change for EIA, which has generally underestimated crude-oil output,” Tom Kloza, global head of energy analysis at OPIS, a Dow Jones company, told MarketWatch. It also “speaks to the inaccuracy of judging crude-oil production via rig counts.”

The number of active U.S. rigs drilling for oil rose by 4 to 501 for the week ended Oct. 13, but it’s down from 610 a year ago, according to data from Baker Hughes

There was a sizable uptick in the oil-rig count last week, but those in the oil industry have been cutting back, said Flynn, because they don’t want to make a lot of longer-term decisions given the “erratic” U.S. energy policy.

U.S. crude-oil production is expected to average 12.92 million barrels a day this year, up from 11.91 million barrels in 2022, with output forecast to rise to 13.12 million barrels a day in 2024, according to the EIA’s latest monthly estimate.

Kloza pointed out that when U.S. output is added to Canadian and Mexican oil production, the total from the continent of North America would be “knocking on the door of 20 million barrels a day.”

“To me, that is a number that renders accusations of a low [U.S. Strategic Petroleum Reserve] and compromised energy security as silly anachronistic babble,” he said. The emergency oil reserve has fallen to a historically low level after the Biden administration last year announced the largest-ever release from the SPR to help combat high gasoline prices in the wake of Russia’s invasion of Ukraine.

U.S. and Canadian production can continue to rise, said Kloza.   

Oil risks

Meanwhile, investors fret over a potential escalation of the Israel-Hamas war.

If the conflict spreads to include Iran, which has been a backer of Hamas and of Hezbollah in Lebanon, Iran’s 3 million barrels a day of production could be at risk, said Stewart Glickman, energy equity analyst at CFRA Research.

Read Israel-Gaza war scenarios: Here’s what might lift oil prices to $95, $100 and $115 a barrel

Oil prices on Wednesday rose sharply as a deadly explosion at a Gaza City hospital raised tensions across the region.

Before the war began earlier this month, there was a strong reason to believe that as part of a potential cooperation agreement between Israel and Saudi Arabia, the Saudis would have been willing to increase its oil production in an effort to lower oil prices, said David Grumhaus, president and chief investment officer at Duff & Phelps Investment Management.

The agreement would have been helpful to take some of the momentum out of oil prices, but the loss of it is not a “game-changer,” he told MarketWatch.

Duff & Phelps believes the Saudis would like to see oil between $80 and $100 and that they will adjust their production to try to keep it there, Grumhaus said.

For now, oil is pricing in concerns about the possibility of the conflict spreading across the Middle East, which “could jeopardize Iranian supply and other Middle East oil infrastructure” and could also curtail traffic in the Strait of Hormuz, where one-third of seaborne oil passes through, he said.

The market is also “very torn about the likelihood of a recession,” would could push oil prices lower, though if the Israel and Middle East continue to deteriorate, oil prices could push up to $100, said Grumhaus.

Read: There’s less to oil-price spike than meets the eye as Israel-Hamas war worries rise

Near that triple-digit price level, the Saudis would likely try and manage prices down, he said, adding that the “higher oil goes the more likely an economic recession is to materialize.”

Incentive for shale plays

In the U.S., the risks to oil in the Middle East may provide incentive needed to boost production further.

Given the uncertainty surrounding Iranian output, investment in the Permian and other shale plays may move higher, said Kloza.

On Oct. 11, Exxon Mobil
announced plans to buy Pioneer Natural Resources Co.
for $64.5 billion, including debt.

Some may believe that if Exxon Mobil brings its portfolio of technology to Pioneer’s acreage, that would enable better resource recovery, said Glickman. However, the combination of the two companies would still be just 13% of total Permian production, on a barrels of oil equivalent per day basis, and the “industry by and large has followed a really disciplined path on new supply,” he said.

Given that, Glickman doesn’t anticipate a massive increase in U.S. crude production from the merger. Also, keep in mind that the Permian, a shale basin that spans parts of West Texas and southeastern New Mexico, has high production decline rates, “so just staying flat on production takes a fair bit of effort.”

Whether Saudi Arabia and Russia would be willing to accommodate a “massive loss of market share” to the likes of Exxon Mobil and Pioneer, is another question, said Glickman.

Oil prices reached notable highs on Sept. 27, when U.S. benchmark West Texas Intermediate oil
settled at $93.68 a barrel on the New York Mercantile Exchange, the highest in more than a year, while global benchmark Brent crude
ended at $96.55 a barrel on ICE Futures Europe, the highest since November.

If the U.S. oil community really did grow massively, helped by ExxonMobil’s technology applied to more acres, Glickman said he would expect the Saudis to “flood the market with oil, temporarily, to force prices lower and get some weaker hands to fold.”

The merger, meanwhile, also shows that the industry is betting against some predictions for a peak in oil demand.

The move “shows that the demand for fossil fuels is going to be with us for a long time, and Exxon Mobil has been right in betting against those who predicted that the demand for oil was going to top out or peak,” said The Price Futures Group’s Flynn.

Still, don’t expect U.S. production to save the day, said Duff & Phelps’s Grumhaus.

“ At this point, the world is really reliant on the Saudis and perhaps a handful of other OPEC producers to address the supply side of the equation.”

— David Grumhaus, Duff & Phelps Investment Management

“Producers remain very disciplined in their spending, and if you look at the rig count, production is likely to grow at best very slowly,” he said. “The Exxon/Pioneer deal and additional consolidation may help a little, but we do not see producers changing their mindset.”

“At this point, the world is really reliant on the Saudis and perhaps a handful of other OPEC producers to address the supply side of the equation,” said Grumhaus.

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