Aug 18 / Victor Arduin

Energy Weekly Report - 2023 08 18

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"Since July, oil prices have risen more than 10%, reflecting coordinated action by OPEC+ members who have restricted the supply of the commodity to the world. With higher prices and strong demand, non-cartel producers were given incentives to increase their oil production. "

Drilling Productivity Boosting Oil Production in the U.S.

  • U.S. energy firms reduced the number of oil and gas rigs operating in 2023, but higher-than-expected well productivity is boosting production to a record this year.
  • Shale oil output falling in September after peaking in the highest record in July, raising risks of a tighter market for the rest of the year.
  • While there has been a recent increase in average oil prices, low natural gas prices are discouraging companies from expanding their operations.
  • A more restricted scenario for energy supply has also benefited Brazil, which should record an increase in oil exports in 2023.

Introduction

The oil and gas rig count, an early indicator of future oil and gas production, fell by five to 654 in the week tending on August 13. The first half of the year was marked by a sharp drop in oil prices, making the sustainability of some oil and gas operations more expensive and less profitable.

While most of the decline in 2023 has occurred because smaller players need higher oil and gas prices to sustain their operations, active producers are still increasing their market share through productivity. U.S. drillers are increasing the output from existing wells using new drilling efficiencies and innovations such as shale well refracturing.

Meanwhile, the new configuration of the oil supply in the world is benefiting Brazil, which it is expected to record its highest oil export volume in 2023.

Image 1: Oil Output in the U.S. (M bpd)

Source: EIA

Image 2: Production per Region U.S. (Thousand bpd)

Source: EIA

U.S. Oil Production Increase Based on More Productivity

Since July, oil prices have risen more than 10%, reflecting coordinated action by OPEC+ members who have restricted the supply of the commodity to the world. With higher prices and strong demand, non-cartel producers were given incentives to increase their oil production. That has been the case in the USA, which is able to increase its production by 850,000 bpd to a record 12.76 million bpd in 2023 according to Energy Information Agency (EIA).

However, the number of drilling rigs, an indicator associated with future oil production, has been falling rapidly this year in the US, which may soon result in lower oil output. After peaking in July, signs of lower production are emerging from the shale basin. The Permian basin, which accounts for nearly 40% of all oil production in U.S., fall production for a third month to 5.8 million.

Image 3: Rig Count vs WTI (U$ bbl)

Source: Baker Hugs, Refinitiv

Meanwhile, the decrease in rig counts has caused an important phenomenon in recent years in the US, the increase in productivity in oil and gas extraction. Abrupt drops in prices have removed less efficient competitors from the market, which need to interrupt their activities to avoid the risk of operational losses. This ends up benefiting companies with better economies of scale that increase their production to match oil demand.

Even though the average oil price has improved in recent weeks, low natural gas prices are likely to deter companies from returning in the short term and provide incentives for operating companies to manage their reserves sparingly. Therefore, the expansion of oil production in the U.S. should slow down in the months ahead.

Image 4: Permian Basis Production per Rig Vs WTI (U$ bbl)

Source: EIA, Refinitiv

Strong Forecast Oil Exports Include Brazil

Brazil is another country that has also consolidating its position in the international oil trade. Last year, data showed a 4% increase in its offshore production operations and 68.3% in crude oil exports. This year, oil exports have already grown by over 15% compared to the same period last year and are expected to record the highest volume of exports in the country’s history, surpassing even 2022, which held the previous record.

The current situation of change in the global energy supply chain has opened up opportunities for new players, and Brazil has taken advantage of this scenario to increase its presence in the international market. The country has been making strong investments in floating production, storage, and offloading vessels.

Image 5: Brazilian Crude Oil Exports (Kt bbl)

Source: Refinitiv

In Summary

The record volume in US oil production has been made possible by the higher productivity of current drillers in the country. Although the market is debating a possible cut in interest rates at the beginning of next year in the country, more hawkish speeches by U.S. monetary authorities and inflationary risks which could trigger more interest rates hikes should keep oil prices at current levels.

The restrictions on the supply of crude oil after the invasion of Ukraine by Russia and the recent production cuts in OPEC countries have created a positive scenario for producers in other countries. Brazil is among the countries that have benefited from re-configuration of the supply chain and increasing its crude oil exports. The country had record oil exports in 2022, and this year should be even better, increasing its importance in the world’s energy supply.

Weekly Report — Energy

Written by Victor Arduin
[email protected]
Reviewed by Natália Gandolphi
[email protected]
www.hedgepointglobal.com

Disclaimer

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