US Oil Production is Higher Than We Thought

When oil traders began obsessing earlier this year about U.S. crude production, analysts were quick to sound alarms.

Market participants have been eager to discern whether the country’s oil output has peaked. Last year’s swoon in oil prices prompted companies to sharply cut spending, and new drilling for oil in the U.S. has plummeted. Traders began parsing U.S. Energy Information Administration reports for clues, and previously little-noticed week-to-week changes in production began moving the market.

But analysts warned the market shouldn’t rely too heavily on the weekly figures, which are largely based on a forecasting model. Wait for the monthly reports, they said. But be wary of the monthly reports too, because they can and will be revised.

Thursday offered a case in point. The first March data to be released showed average monthly U.S. crude production at 9.5 million barrels a day, the highest level since 1972 and higher than indicated by the weekly data released in March. The weekly data showed that output peaked in mid-March around 9.4 million barrels a day, then declined, which boosted prices at the time.

The production data for February and January were also revised higher. The EIA now reports production of roughly 9.4 million barrels a day for both months, up from last month’s figures of 9.2 million barrels a day for January and 9.3 million barrels a day for February.

The updated figures suggest that the glut of oil in the U.S. may not shrink as quickly as bullish traders have expected. U.S. producers have gotten more efficient, and their service costs have dropped. Some producers now say that if prices stabilize around $60 or $65 a barrel, they can increase output.

“Threshold oil prices required to drive production growth are considerably lower than what people thought,” said Bill Herbert, managing director at Simmons & Co. International. Shale-oil production is only about five years old, he noted, and its resiliency in a low-price environment has never been tested before. “We are going to be learning an awful lot in the next three to six quarters.”

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