Illustration; Source: EIA

What impact will OPEC+ cuts have on global and US oil & gas production?

The U.S. Energy Information Administration (EIA) expects global oil production to be lower than previously anticipated after OPEC+ announced it will extend its crude oil production cuts through 2024 and Saudi Arabia announced an additional voluntary oil production cut of 1 million barrels per day in July.

Illustration; Source: EIA

In light of this, EIA forecasts lower crude oil inventories and higher prices in its June Short-Term Energy Outlook (STEO), with the Brent crude oil price expected to average $79 per barrel in the second half of 2023 and $84 per barrel in 2024. This is an increase of $1 per barrel and $9 per barrel from last month’s forecasts, respectively.

Moreover, EIA predicts overall growth in global oil production in 2023 and 2024, led by increased production from non-OPEC countries despite the OPEC+ extension and Saudi Arabia’s additional cuts. In addition, the consumption of liquid fuels such as gasoline and jet fuel is on the road to establishing new record highs in 2023 and 2024, largely driven by non-OECD countries—especially China.

Joe DeCarolis, EIA Administrator, elaborated: “We expect to see demand for travel continue to increase, which drives our forecast for record consumption of petroleum products. The petroleum market remains highly uncertain, so we will continue monitoring developments and tracking supply and demand dynamics.”

Following OPEC+’s crude oil production cuts for 2023, the U.S. Energy Information Administration slightly revised its forecasts, reducing OPEC production by 0.5 million b/d for the rest of 2023 and increasing the Brent crude oil spot price. On the other hand, Ed Morse, Citigroup’s global head of commodities research, pointed out that Brent oil prices were likely to fall below $80 a barrel despite OPEC+’s efforts to support that level with production cuts. Morse also predicted that oil prices could fall even below $70 a barrel.

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Regarding U.S. crude oil production, EIA believes it will set annual record highs in 2023 and 2024, though growth in domestic crude oil production is slowing. This slower production growth may reflect a combination of the use of capital to increase dividends and repurchase shares instead of investments in new production; the effects of tighter labour markets and higher costs; and increased pressure on oilfield supply chains.

On the other hand, EIA estimates that U.S. dry natural gas production reached a record average of 104 billion cubic feet per day in April and expects natural gas production to remain just below that level for the rest of the year. Natural gas prices at the benchmark Henry Hub are about 70 per cent lower than their peak last year, which is decreasing new gas-only drilling. Despite this, associated natural gas production is predicted to increase in the Permian Basin in the short term, offsetting decreases in other regions.

“Drilling in the Permian Basin typically produces a blend of hydrocarbons that includes crude oil and natural gas. So as producers increase their crude oil production in the region, we expect natural gas production to increase as well,” said DeCarolis.

EIA also expects a 24 per cent increase in electricity produced by solar power this summer compared with last summer. The increase is largely driven by an increase in solar capacity, as solar has been the leading source of new electricity generating capacity so far this year.

Oil outlook ‘broadly supportive’ for prices

In Wood Mackenzie’s view, the decision by OPEC+ to extend current production cuts and the additional voluntary 1 million b/d reduction for July from Saudi Arabia should provide support for prices in the rest of 2023.

Ann-Louise Hittle, Vice President Macro Oils, at Wood Mackenzie, underlined: “Setting aside various markets’ fears of possible global recession, the outlook for oil demand and supply remains broadly supportive for Brent prices in the second half of 2023.

We forecast a significant implied global stock draw in 3Q 2023, and we expect the OPEC+ 4 June decision to increase the implied stock draw for that quarter due to mostly the additional voluntary production cuts Saudi Arabia announced.”

Wood Mackenzie estimates that the global oil demand will rise 2.4 million b/d on an annualized basis, eclipsing a 1.5 million b/d year-on-year gain in total liquids supply, with Brent forecast to average $84.70/bbl in 2023. The company expects global oil demand to surpass total liquids supply in 2Q through 4Q 2023, provided market concerns about economic weakness ease.

“OPEC+ faced several tricky issues at its biannual meeting. Mainly, ongoing fears in the greater financial markets that China’s economic recovery is not happening and therefore demand growth is seen as a risk, as well as the geopolitical complications of reorganising, reassigning and agreeing on an additional production cut for the rest of this year,” elaborated Hittle.