Don’t look now, but the United States is ready to once again pass a major oil supply milestone. After seeing output dip from a June 2015 high of more than 9.6 million barrels per day (bpd) down below 8.5 million bpd in October 2016, American oil production is now knocking at the door of the 9 million bpd range, as the Energy Information Administration (EIA) reports we produced 8.977 million bpd this past week.
That’s a big turnaround—producers have succeeded not only in halting a slide predicted by a corresponding fall in global oil prices, but they’ve also been able to once again use unconventional drilling in shale fields to kickstart U.S. production. Now, as the EIA reports, we’re not just adding more rigs, we’re also adding more barrels of crude:
Increased drilling in the Permian region responded relatively quickly to a rise in the West Texas Intermediate (WTI) crude oil price, which increased from an average of near $30 per barrel (b) in the first quarter of 2016 to $45/b or higher beginning in the second quarter of 2016. In the [Gulf of Mexico (GOM)], the new projects that came online in the last quarter of 2016 were planned and approved during the 2012–14 period.
Shale is catching its second wind in large part thanks to drilling in West Texas’s Permian basin:
The Permian region was the only area covered in EIA’s Drilling Productivity Report (DPR) that did not experience a month with a year-over-year production decline throughout 2014–16. This region benefits from a number of highly productive formations located within what is an established oil-producing region that allows producers to continue operations despite low prices…
Production from formations elsewhere in the United States hasn’t started to surge yet, but the EIA expects that might change soon:
In contrast to the Permian, other onshore regions in the United States experienced year-over-year production declines in November. However, recent drilling activity suggests that production may be increasing in these areas as well. According to Baker Hughes, the total U.S. oil-directed rig count increased by 123 rigs since November 2016, with 39% of the increase occurring in regions outside of the Permian.
Rig count is an imperfect metric, as the number of active rigs in operation doesn’t directly correlate with total output. As we noted almost exactly two years ago, when rig counts were starting a precipitous slide as companies sought to right their balance sheets in the face of a bearish oil market, the first rigs to go were necessarily the least productive and the most expensive to operate. Low prices forced the U.S. oil industry to cull the herd, so to speak, and the rigs that survived those difficult months were best in class.
But firms are now adding rigs, and in this market environment, we can reasonably expect production will soon creep upward as a result—both inside and out of the Permian basin. And, according to the latest data, it only has to rise 23,000 bpd before the U.S. is once again pumping more than 9 million bpd. If OPEC and the rest of the world’s petrostates continue to constrain their own supplies in order to inflate prices, we can expect our own output to rise well past that 9 million mark. Welcome to the shale revolution, 2.0.