Oil: US supply driving the increase in crude production - Westpac

US shale oil producers have become the de-facto swing suppliers in the global crude oil market and while non-US non-OPEC production has been fairly steady since the last quarter of 2015, US oil production has reacted sharply to both declines and increases in oil prices, according to Justin Smirk, Research Analyst at Westpac.

Key Quotes

“The comparative advantages the US industry has; such as, easy access to capital and skilled labour, a deep historical technical legacy that is constantly build upon, a well-established national distribution network with easy access to national and international markets, and multiple small companies via for access to crude basins, is why the US oil industry is the most dynamic in the world.”

“US production jumped to 10.3mbpd in February, a 14% gain in the year, to a new record high. US producers have been responding to an extended period of high prices and lifting output, as we had expected. But while output is at a new record high, even with a surge in the rig count it is still only half what it was at the peak in late 2014. Drillers have done a lot of work to lower costs and can now get a lot more oil with far fewer rigs.”

“During February the EIA also reported a new record for US crude oil exports of 2.04mbpd. We would argue that the recent surge in US crude exports is just the beginning and the US is set to play an increasing role in international crude markets in the years to come. US crude production should continue its torrid growth pace, pushing additional volumes onto the export market. As such, we increasingly see the US oil extraction cost structure as the price setting benchmark for global crude oil prices.”

“For the rest of the OECD, crude production should be broadly flat. OPEC production restrictions remain in place through 2018 but the Saudi Arabian Oil Minister recently commented that OPEC could begin easing production cuts in 2019 without hurting the market. OPEC is currently discussing the target for normalisation of global stocks and therefore when, and how, they reverse the current production cuts. Give the ramp up in US production this is another reason why we see prices falling late in 2018 and through 2019.”