HFI: U.S. oil production is going to be lower than expected

[dan_s]

In my podcast, I point out the U.S. oil production actually declined in 1H 2024. The "Paradigm" is the opposite.

Note from HFI Research on 9/9. Read the last three paragraphs carefully.

The consensus appears certain that 2025 oil market balances will be in surplus. < This is a False Paradigm.

The beauty of the oil market is that sometimes the narrative can change fundamentals by pushing prices to the extreme. In 2022, the narrative following the Russian/Ukraine invasion was that Russia would lose ~3 million b/d, and the world was headed for an energy crisis. Natural gas prices in Europe were skyrocketing, and global coordination was needed to prevent a crisis. As oil prices soared past $100/bbl, the IEA coordinated a global SPR release (~260 million bbls) that ended up preventing the so-called crisis.

But for those who lived through that period, what became obvious at the beginning of the oil price surge was that oil demand would not hold at those prices.

On April 20, 2022, we published a piece titled, "Oil Demand Surprises To The Downside, What This May Mean For Prices." In the article, we said:

This is extremely disturbing and suggests that the recent spike in oil prices is already having a significant impact on consumer behaviors. In combination with other commodity prices spiking, we are already seeing a wave of slowing demand taking hold.

Fast forwarding to today's narrative, the market is confident that 2025 balances will be in surplus due to 1) low oil demand growth and 2) high non-OPEC supply growth.

While we are of the view that oil demand growth could remain muted in 2025, what's not being said is that low prices also fuel potentially higher demand, just as high prices destroy demand. Similarly, low prices will result in the supply side disappointing, while higher prices will incentivize more supplies.

If we look at consensus estimates from IEA, EIA, Morgan Stanley, Bank of America, Goldman, and others, the growth range for non-OPEC supply in 2025 is between ~1.5 to ~1.8 million b/d. At $68/bbl prompt, and ~$66/bbl average in 2025, non-OPEC supply won't see any growth.

One of the main reasons is that at $65/bbl WTI, we have US oil production averaging ~13 million b/d in 2025 down from the ~13.25 million b/d in 2024. I suspect the oil market is already starting to find that level where US oil production starts to decline. The question is now whether or not it wants to keep it at this equilibrium or blow it to an extreme.
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MY TAKE: The "Right Price" for WTI is in the $75 to $85 range. Below this range, upstream companies will lower investments in developing new supply. This will cause supply shortages in the near-future. The global oil market is already tight, which I pointed out in the podcast. Plus, Geopolitical risks to supply (Russia, Middle East, Libya) is not currently priced into the oil price.
My opinion is that the Wall Street Gang wants the Fed to start cutting the interest rate. Lower oil prices will help to make this happen.

[Petroleum economist]

Looking at proven reserves, the fact that US production has started to flatten out is no surprise. For years US production has grown, but its reserves base has not kept up. The number of companies which has managed to replaced production fully with new reserves has been falling significantly in the period 2021-2023.

Bookings of proven reserves
• A company need a Reserves Replacement Ratio (RRR)of 1 to maintain its reserves.
• With an RRR= 1.0 as many reserves are booked as have been produced during the year.
• If the RRR > 1.0 than the reserves are growing, if the RRR <1.0 than the reserves are shrinking.

US companies RRR in the period 2021-2023
• During 2021 77% of the 56 US oil and gas companies that I track has an RRR >1.0, and thus were growing their reserves.
• In 2023 this percentage has dropped to 32%.
• In 2021 only 4% of the companies had more de-bookings than bookings. Their reserve base was shrinking, even without considering the volumes produced.
• In 2023 this percentage has increased to 25%.
• For details see the figure below

Conclusion
The production of US companies has flattened out. There is no easy way out revert the trend and to prevent the start of a general decline. The reserves base for this is missing.
With a shrinking reserve base, the capability for “sweet spotting” is reducing. This means that also economic less attractive reserves will have to be selected for development, putting an upward pressure on unit costs.