Even with oil prices continuing to plummet and oil companies decommissioning drilling rigs every day, the US Department of Energy on Tuesday projected that domestic crude production would continue to rise this year, although growth would slow.
The forecast of even more US supplies in an oversupplied global market was not unexpected, but it added to the probability that oil prices that have plummeted by about 55 percent since June last year would not completely recover any time soon, but the department projected a modest recovery for the Brent global oil price benchmark, now about US$46 a barrel, which it said would average US$58 a barrel this year, but rebound to US$75 next year.
On Tuesday, both oil prices tumbled sharply, but later came off their lows.
Illustration: June Hsu
The US benchmark closed down US$0.39 at US$45.89, after falling as much as 4 percent, while Brent fell as much, but also recovered, to US$46.59, coming off a bottom of US$45.19.
The projection came hours after North Dakota regulators reported that oil companies had decommissioned eight rigs overnight, reducing the number in the state to the lowest level in more than four years. North Dakota, the No. 2 state in oil production behind Texas, still has 158 rigs drilling, but only last month there were 183 rigs operating.
Nevertheless, the report issued by the department’s Energy Information Administration forecast that total US crude production that averaged 9.2 million barrels a day at the end of last year would average 9.3 million barrels a day this year.
“We don’t see a massive downturn,” Energy Information Administration Deputy Administrator Howard Gruenspecht said.
Gruenspecht said that production in several areas of the nation was “significantly locked in” and that output in the federal waters of the Gulf of Mexico would actually be increasing.
The decline in drilling, Gruenspecht said, would come in the shale fields of the lower 48 states, which have represented the heart of the US boom that has increased production by more than a million barrels a day in each of the past three years.
Shale oil production would continue to increase through the first half of the year, but then decline in the second half, before picking up again next year as prices rise again.
Shale oil is generally more expensive to produce, and can more easily be started and stopped than traditional wells, which when capped are difficult to revive.
The report was received with some optimism in the financial community, even on a day when oil prices continued to swoon.
“They are predicting a recovery,” Aquamarine Investment Partners chief executive Joel Moser said.
“Oil can fall to US$30 and you will still see production continue. We are seeing price levels that are artificially low because of the echo chamber of commodity trading,” he said.
For next year, the US Department of Energy expects US oil production to increase to 9.5 million barrels a day, which would be its second-highest annual average level of production ever and the highest since 1970.
If that projection holds true, it would mean that any advantage OPEC producers hope to gain from a decline in US production would be short-lived.
Global oil prices sank to a six-year low on Tuesday after the United Arab Emirate’s oil minister promised that the OPEC cartel would not budge from its decision in November last year not to reduce production.
Emirati Oil Minister Suhail Mohamed Faraj al-Mazrouei suggested on Tuesday that the cartel could wait for US producers to reduce their production to shore up prices. His statements at an oil conference in Abu Dhabi came despite efforts by Venezuela, Algeria and Iran to persuade cartel partners to cut production.
One reason oil prices have plunged in recent weeks is the growing fear of a slowdown in the global economy and in demand for oil, but the US Department of Energy projected modest increases in consumption, both in the US and abroad. It estimated that global consumption, which grew by 900,000 barrels a day last year, would grow fractionally by 1 million barrels a day this year. That is just a bit more than 1 percent.
US consumption is set to increase by 300,000 barrels a day this year, while consumption in Japan and Europe is expected to continue to decline.
Oil company executives responded cautiously to the report.
“There is a complexity to not knowing how long this will last and where the bottom will be,” said Henry Jimenez, chief executive of Craig Energy, an oil service company that operates in North Dakota and other western US states.
“Supply has a number of different question marks; obviously one is the rig count and the reduction of the rig count here in the US, and what that is going to do to US production. We have to be as cautious as possible and conservative as possible given the circumstances,” he said.
Gruenspecht identified several wild cards that could send prices soaring again, among them a sudden change in Saudi Arabia’s policy of refusing to allow OPEC to curtail production levels.
He also mentioned the possibility of major disruptions in Iraqi oil production and exports by the Islamic State terrorist group, formerly known as the Islamic State of Iraq and the Levant, or social unrest in other major oil-producing nations.
The US Department of Energy report delivered more good news to US drivers. It projected that the average price motorists would pay this year for regular gasoline would be US$2.33 a gallon (US$0.62 a liter), more than a dollar below last year’s price, before rising to US$2.72 a gallon next year.
“Decreased crude oil prices will keep gasoline prices low in 2015 and save the average US household about US$750 [a year],” Energy Information Administration Administrator Adam Sieminski said.
Contributing reporter Stanley Reed in London
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