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This Week in Petroleum

Release date: February 21, 2019  |  Next release date: February 27, 2019

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Permian and Gulf of Mexico regions expected to drive continued record-high U.S. crude oil production through 2020

The U.S. Energy Information Administration’s (EIA) February 2019 update of its Short-Term Energy Outlook (STEO) forecasts that U.S. crude oil production will average 12.4 million barrels per day (b/d) in 2019 and 13.2 million b/d in 2020. If realized, both of these forecast levels would surpass the record high of 11.0 million b/d set in 2018, keeping the United States as the world’s largest producer of crude oil. Overall U.S. crude oil production increases are largely the result of continued production growth in the tight-oil formations in the Permian region, as well as the expectation for 19 new projects to start in 2019 and 2020 in the Federal Offshore Gulf of Mexico (GOM) (Figure 1).

Figure 1. Monthly U.S. crude oil production January 2018 - December 2020

Favorable geology combined with technological improvements have contributed to the Permian region becoming one of the more economic regions for crude oil production in the United States. EIA forecasts that Permian production will average 4.2 million b/d in 2019, a 750,000 b/d increase from 2018, and 4.7 million b/d in 2020, a 530,000 b/d increase over 2019. Despite pipeline capacity constraints, the Permian region’s month-over-month growth averaged nearly 100,000 b/d for almost all of 2018, exceeding EIA’s expectations as expressed in monthly STEO revisions.

EIA’s STEO forecast for the Permian region experienced many revisions in 2018 as prices changed in response to evolving market expectations (Figure 2). Production in the Permian region exceeded EIA’s expectations despite large price spreads that likely put downward pressure on production. As historical data filled in with a two-month lag and forecast prices were revised, significant upward revisions were repeatedly made to the Permian production forecast.

Figure 2. Revisions to Premian region Short-Term Energy Outlook (STEO) forecast production

Starting in the second quarter of 2018, pipeline capacity constraints contributed to West Texas Intermediate (WTI)-Midland crude oil averaging more than a $14 per barrel (b) discount to WTI-Cushing from July through September and reaching a $16/b discount in August (Figure 3). In response to the increasing WTI-Midland price discount, Permian region production growth was expected to start to slow until more pipeline capacity was built. However, from July to September 2018, when the Midland-Cushing spread was at its widest, the Permian region’s production rate grew by more than 290,000 b/d and continued to grow by more than 170,000 b/d from September to November.

Figure 3. WTI-Midland price compared with WTI-Cushing price

Producers in the Permian region were able to increase production despite large regional price discounts largely because of operational efficiencies in trucking and rail and higher overall WTI-Cushing prices. Although the Midland-Cushing discount reached $16/b in August 2018, WTI-Cushing prices that month averaged $68/b, which translated to an average price of $52/b for Permian producers, supporting production growth.

EIA’s February STEO forecasts that WTI-Cushing prices would average $55/b in 2019 and $58/b in 2020, lower than the 2018 average of $65/b. As new pipeline projects are expected to be completed throughout 2019 and 2020, EIA expects the Midland-Cushing spread to narrow significantly, allowing the Permian region to continue to lead crude oil production in the United States.

The second-largest source of forecast growth is the GOM, where production reached a record high of 1.9 million b/d in November 2018. EIA expects that GOM production will average 2.0 million b/d in 2019, a 280,000 b/d increase from 2018, followed by an additional increase of 310,000 b/d in 2020. GOM forecast growth is driven by increased production from 11 new fields that started producing in 2018, 7 new fields planned to come online in 2019, and 12 new fields planned to come online in 2020. EIA forecasts that these 30 new fields will contribute 554,000 b/d of the total 2.3 million b/d of GOM production in 2020.

EIA expects production in all other major regions to remain fairly flat or decline slightly through 2020 in response to lower forecast WTI-Cushing crude oil spot prices (Figure 4), which leads to reduced growth in expected future rig counts. EIA models crude oil production monthly in STEO at the state and regional levels. EIA bases STEO forecasts on recent trends in drilling and production and on anticipated future changes. EIA evaluates past production trends on a well-by-well basis for all production documented since 2016 and uses that history to estimate future well performance and decline rates at the state and regional levels.

Figure 4. WTI-Cushing crude oil spot price vs Lower 48 crude oil production (excluding Premain region)

EIA’s regional forecast for the number of active rigs is driven predominately by the fourth-month lagged WTI-Cushing spot price (WTI-Midland in the Permian) and the previous month’s rig activity. Changes in the number of active rigs lead to changes in the number of new wells drilled and completed and their associated production volumes within about two months after the rigs become active. In addition, EIA does month-by-month analysis for well completions in response to external short-term problems such as pipeline constraints and weather-related problems such as hurricanes and freeze-offs. Consequently, the STEO oil production forecast is based largely on the observation that changes in production volumes typically occur about six months after a change in the price of crude oil.

U.S. average regular gasoline and diesel prices increase

The U.S. average regular gasoline retail price rose more than 4 cents from the previous week to $2.32 per gallon on February 18, down 24 cents from the same time last year. Gulf Coast prices increased nearly 9 cents to $2.05 per gallon, Midwest prices rose nearly 6 cents to $2.21 per gallon, East Coast prices increased more than 3 cents to $2.27 per gallon, Rocky Mountain prices rose nearly 2 cents to $2.18 per gallon, and West Coast prices increased less than a cent, remaining virtually unchanged at $2.92 per gallon.

The U.S. average diesel fuel price increased 4 cents to $3.01 per gallon on February 18, 2 cents lower than a year ago. Midwest prices rose nearly 6 cents to $2.90 per gallon, East Coast prices increased more than 4 cents to $3.07 per gallon, Gulf Coast prices increased more than 3 cents to $2.81 per gallon, West Coast prices rose more than 2 cents to $3.46 per gallon, and Rocky Mountain prices rose nearly 2 cents to $2.89 per gallon.

Propane/propylene inventories decline

U.S. propane/propylene stocks decreased by 3.6 million barrels last week to 54.6 million barrels as of February 15, 2019, 4.3 million barrels (8.5%) more than the five-year (2014-2018) average inventory levels for this same time of year. Midwest, Gulf Coast, and Rocky Mountain/West Coast inventories decreased by 1.8 million barrels, 1.7 million barrels, and 0.1 million barrels, respectively, while East Coast inventories fell slightly, remaining virtually unchanged. Propylene non-fuel-use inventories represented 11.8% of total propane/propylene inventories.

Residential heating oil prices increase, propane prices decrease

As of February 18, 2019, residential heating oil prices averaged nearly $3.23 per gallon, more than 4 cents per gallon higher than last week’s price and 12 cents per gallon higher than last year’s price at this time. Wholesale heating oil prices averaged $2.14 per gallon, 11 cents per gallon more than last week and 11 cents per gallon above last year’s price.

Residential propane prices averaged almost $2.43 per gallon, less than 1 cent per gallon lower than last week and nearly 14 cents per gallon lower than a year ago. Wholesale propane prices averaged almost $0.83 per gallon, nearly 6 cents per gallon higher than last week but almost 18 cents per gallon below last year’s price.

For questions about This Week in Petroleum, contact the Petroleum Markets Team at 202-586-4522.

Tags: crude oil , Gulf of Mexico , oil/petroleum , Permian , production/supply , STEO (Short-Term Energy Outlook)

Retail prices (dollars per gallon)

Retail price graphs
  Retail prices Change from last
  02/18/19 Week Year
Gasoline 2.317 0.041 -0.240
Diesel 3.006 0.040 -0.021
Heating Oil 3.225 0.044 0.123
Propane 2.429 -0.002 -0.139

Futures prices (dollars per gallon*)

Futures price graphs
  Futures prices Change from last
  02/15/19 Week Year
Crude oil 55.59 2.87 -6.09
Gasoline 1.573 0.127 -0.178
Heating oil 2.020 0.111 0.110
*Note: Crude oil price in dollars per barrel.

Stocks (million barrels)

Stock price graphs
  Stocks Change from last
  02/15/19 Week Year
Crude oil 454.5 3.7 34.0
Gasoline 256.8 -1.5 7.5
Distillate 138.7 -1.5 -0.3
Propane 54.599 -3.569 11.506