Energy Prospectus

Notes below are from HFI Research:

US Oil Production

Our base case scenario for US oil production was for a small increase to ~13.45 million b/d by year-end. The Matterhorn Express Pipeline was going to increase Permian natural gas takeaway capacity by 2.5 Bcf/d, so we expected producers to backload capex in anticipation of this.

Looking at our US oil production matrix, we are seeing an uptick in production. EIA will release its monthly oil production for September today and we expect that figure to be close to August (around ~13.44 million b/d). We think the adjustment figure will be negative at -200k b/d.

For October, we saw an uptick in production to ~13.65 million b/d, and excluding adjustment, production should be around ~13.45 million b/d. November US oil production is in-line with October figures, which means that it's going to be the peak for this year.

With US oil production exiting 2024 in line with our expectation, we see 2025 US oil production coming in at ~13.55 million b/d exit and a trough of ~13.2 million b/d in Q1 2025.

For 2026, we see US oil production increasing to ~13.65 - ~13.7 million b/d, which should mark the permanent peak for US oil production.

In essence, US oil production growth is marginal at best. It is going to be a rounding error in global oil supply & demand balances going forward. Demand drivers can easily wipe out US oil production growth, so the market participant focus should be on demand rather than the supply side.

The Saudis understand this and are choosing to play the long game. They know non-OPEC production is going to peak soon (with Brazil disappointing as well). It's only a matter of time before the Saudis have to ramp production back above ~10 million b/d to accommodate for the demand increase.
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MY TAKE: Trump's promise to "Drill Baby Drill" will only happen if oil prices move higher, probably a lot higher. More than 75% of U.S. oil production now comes from high decline rate horizontal wells in tight formations. The monthly decline rate for oil from of existing wells is estimated to be over 650,000 barrels per day, partly because of the increasing gas-to-oil ratios. After U.S. crude oil production peaks in 2026 it will likely plateau around 13.5 to 13.7 bpd through 2030. Bottomline: The Cheap Oil has been harvested. OPEC+ will control the global oil price.

Thoughts On The Global Oil Market< From HFI Research

From a trading perspective, there's little incentive to trade oil into the OPEC+ event (December 1st meeting). The tail risk is too great (small possibility of no agreement), while the upside is mostly priced in (consensus expecting a cut extension). Instead, what I think the oil market participants are forgetting is that oil is now meaningfully impacted by weather-related demand given the increase in NGL demand.

Here is a good illustration of what I mean. In 2021, we ended the year with a cold blast that sent natural gas prices soaring. This also sent propane/propylene demand way higher. How much higher? At least ~600,000 b/d.

A normal winter could boost oil demand anywhere from 300k b/d to 600k b/d, while a colder-than-normal winter has the potential to increase demand by ~800k b/d to ~1 million b/d. The heating-related demand for products would spike, while gasoline demand would be negatively impacted. Net-net, the result is higher demand with gasoline demand plateauing in recent years.

I think with the weather models trending bullish, Q4 balances will surprise to the upside into year-end. If the weather can remain supportive, then there's a reasonable argument to be made that oil should trade higher. Refining margins should also benefit from this demand uplift.

But I think the overall sentiment remains poor. Markets are right to be afraid of the "massive" builds, but the reality will be far different. If OPEC+ follows through (extending production quotas through Q1 2025), then we think oil market balances will be meaningfully better than what the consensus thinks, and oil prices should move higher because of it.