Traders are selling West Texas Intermediate futures in anticipation of further strong production growth. As a result, prices are weakening further despite the uncertainty of such an outlook.
In fact, expectations from the industry and the EIA are for much slower U.S. oil production growth this year. But that has had no effect on trader behavior. The latter might be in for a surprise.
Hedge funds and other institutional traders sold the equivalent of 24 million barrels of U.S. crude in the week to January 16, Reuters market analyst John Kemp reported this week. This compared with Brent buys equivalent to 18 million barrels, Kemp noted.
Traders, then, expect even lower prices for U.S. oil later this year. And there is only one reason they expect this: more explosive growth like the one booked last year. Traders don’t want any more surprises, it seems. Yet they might still end up surprised.
In its latest Short-Term Energy Outlook, the Energy Information Administration predicted that output this year could reach 13.2 million barrels daily. This would be a new record high but this is not the important part. The important part is that the projected 2024 figure is only about 200,000 bpd higher than the average daily for 2023. And that 2023 average daily represented an increase of over 1 million bpd over the 2022 average.
Traders, however, have a good reason to expect more growth and that reason is that last year, the industry did not actively try to boost production so substantially. It happened kind of inadvertently as drillers continued to improve efficiency in a bid to extract more oil for the same money.
A surprise for the industry itself was higher than expected productivity from many wells, which also contributed to the production growth that shocked the oil market and made traders bears overnight.
The question this year would be whether the U.S. oil industry can and, more importantly, wants to repeat that stellar performance. The answer is likely to be “Not really.”
The latest Dallas Fed survey, released in December, suggested that few companies in the oil patch have any major spending increase plans. Most in the industry appeared still cautious with their production growth plans and frugal with their cash. When asked about spending plans, most respondents said they planned to either keep spending at 2023 levels or increase it slightly this year.
This, of course, does not mean that efficiency gains and well productivity could not still surprise to the upside. It simply means that it is not the most likely scenario: efficiency gains do not follow a linear upward curve and well productivity can surprise in both directions. So, after a year of strong gains, chances are this one may be quieter on that front.
There is, then, a potential for weaker growth in U.S. oil output than expected. And this potential weaker growth would be materializing against the background of constrained supply from OPEC. Sure, Brazil’s Petrobras has big production growth plans, and Guyana’s output is growing steadily, but when analysts talk about non-OPEC supply growth, they invariably mean the U.S. first and foremost. The U.S. is the swing producer these days. And it is also the maker or breaker for oil bulls and bears alike.
The problem is that the market appears to take uncertain developments for certainties. The expectation that U.S. oil output will continue growing as strongly as last year is a good example. And it appears to be an unshakeable expectation, for now. Perhaps it will materialize and shale drillers will exceed even last year’s growth rate. Or maybe growth will be as weak as the EIA and industry executives expect it and disappoint hedge fund bears.
By Irina Slav for Oilprice.com