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This Week in Petroleum

Release date: July 18, 2018  |  Next release date: July 25, 2018

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Despite takeaway capacity constraints, the Permian region is expected to drive U.S. crude oil production growth through 2019

In the July update of its Short-Term Energy Outlook (STEO), the U.S. Energy Information Administration (EIA) forecasts that U.S. crude oil production will average 10.8 million barrels per day (b/d) in 2018 and 11.8 million b/d in 2019. If realized, both of these forecast levels would surpass the previous record of 9.6 million b/d set in 1970. EIA's monitoring of current rig activity in several producing regions suggests continued production growth from tight-oil formations, such as shale in the Permian region, is driving overall U.S. production increases (Figure 1).

Figure 1. Monthly US cride oil production

EIA forecasts that Permian production will average 3.4 million b/d in 2018, an 871,000 b/d increase from 2017, and average 3.9 million b/d in 2019, a 514,000 b/d increase from 2018. Although favorable geology combined with technological and operational improvements have contributed to the Permian region becoming one of the more economically favorable regions for crude oil production in the United States, recent pipeline capacity constraints have dampened wellhead prices for the region's oil producers. Lower wellhead prices in the region are contributing to slower growth in Permian crude oil production in 2019 compared with 2018.

EIA's forecast for slower production growth in the Permian in 2019 compared with 2018 is strongly related to the expectation of reduced drilling activity growth, even though the rig count in the Permian remains the highest among the Lower 48 onshore regions. As the pipeline constraints persist in the Permian region, some operators are expected to temporarily move to the Eagle Ford region until those constraints are relieved in the fourth quarter of 2019 (Figure 2).

Figure 2. Monthly average rig count

In 2019, EIA forecasts Federal Offshore Gulf of Mexico (GOM) production will grow by 154,000 b/d to average 1.9 million b/d, making this region the second-largest contributor to STEO's forecast growth from 2018 to 2019. This growth rate is larger than the 60,000 b/d increase from 2017 to 2018. The forecast growth is driven by the ramping up of 2 new fields that started producing in 2017, the anticipation of 10 new fields starting up in 2018, and 6 additional new fields coming online in 2019. The combined 18 new fields added from 2017 through 2019 are forecast to contribute 480,000 b/d of the total 1.9 million b/d of GOM production in 2019.

EIA expects the Bakken region to hit record-high production in 2018, averaging 1.2 million b/d and then growing by 137,000 b/d in 2019 to average almost 1.4 million b/d, making it the third-largest growth contributor between 2018 and 2019. Although the Bakken region is geographically large, it contains fewer identified prolific formations and is significantly more affected by winter weather than the Permian. Much of the recent growth in the Bakken has been facilitated by the removal of pipeline capacity constraints that affected the region before 2017.

STEO forecasts production in the Eagle Ford region to increase by about 97,000 b/d from 2018 to 2019 to average 1.5 million b/d. The Eagle Ford region covers a significantly smaller geographic area with fewer prolific formations and fewer opportunities to drill compared with the Permian region. However, the Eagle Ford region does not have the same pipeline capacity constraints as the Permian region. As discussed above, producers could move away from the Permian in mid-to-late 2018 and in 2019 into the Eagle Ford while the Permian region pipeline transport is constrained.

STEO forecasts Niobrara and Anadarko production to grow by 71,000 b/d and 84,000 b/d, respectively, in 2019 to average 679,000 b/d and 622,000 b/d. Drilling activity is forecast to continue increasing in both of these regions through 2019, although at a slightly slower rate than expected from 2017 through 2018. The Anadarko region, however, is forecast to have the third-highest rig growth from 2018 through 2019.

EIA expects production in Alaska is to remain fairly steady, averaging 478,000 b/d in 2018 and 482,000 b/d in 2019. In the rest of the United States, production is expected to decline slightly (by 58,000 b/d) as a result of drilling activity that is insufficient to offset declining output from currently producing wells. If prices increase further, these areas could become more profitable, spurring the pace of drilling.

In STEO, EIA models monthly Lower 48 crude oil production at the state and regional levels. STEO forecasts are based 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.

EIA's forecast for rigs is regional and predominately driven by the fourth-month lagged West Texas Intermediate (WTI)-Cushing spot price, a proxy for net cash flow, and the previous month's rig activity. STEO recently updated its methodology to use the WTI-Midland price in the Permian region to forecast rig activity as a result of the widening spread between the WTI-Midland and WTI-Cushing spot prices, which more directly affect the Permian. In addition to responding to the WTI price, forecast increases or decreases in rig counts are related to representations of net cash flow and profitability, based on expectations of revenue from hedged and non-hedged production, and operating costs.

Changes in the number of active rigs lead to changes in the number of new wells drilled and their associated production volumes within about two months. Consequently, the STEO oil production forecast is based on the historical observation that changes in production volumes typically occur about six months after a change in the price of crude oil. In the Lower 48 states, observed rig counts typically follow changes in the WTI-Cushing price with an approximate four-month lag (Figure 3).

Figure 3. WIT-Cushing crude oil

U.S. average regular gasoline price increases, diesel price decreases

The U.S. average regular gasoline retail price increased nearly 1 cent from the previous week to $2.87 per gallon on July 16, up 59 cents from the same time last year. The East Coast price rose two cents to $2.80 per gallon and the Midwest price rose nearly two cents to $2.80 per gallon. The West Coast and Gulf Coast prices each decreased nearly two cents to $3.38 per gallon and $2.60 per gallon, respectively, and the Rocky Mountain price fell one cent to $2.96 per gallon.

The U.S. average diesel fuel price decreased less than a cent, remaining virtually unchanged at $3.24 per gallon on July 16, up 75 cents from a year ago. The West Coast price fell nearly a penny to $3.74 per gallon, the Midwest price decreased less than one cent to $3.17 per gallon, and the East Coast price fell slightly, remaining virtually unchanged at $3.24 per gallon. The Rocky Mountain and Gulf Coast prices were unchanged at $3.37 per gallon and $3.00 per gallon, respectively.

Propane/propylene inventories rise

U.S. propane/propylene stocks increased by 1.7 million barrels last week to 65.3 million barrels as of July 13, 2018, 7.1 million barrels (9.8%) lower than the five-year average inventory level for this same time of year. Midwest and East Coast inventories increased by 1.3 million barrels and 0.9 million barrels, respectively, while Gulf Coast inventories decreased by 0.5 million barrels and Rocky Mountain/West Coast inventories dipped slightly, remaining virtually unchanged. Propylene non-fuel-use inventories represented 3.9% of total propane/propylene inventories.

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

Tags: crude oil , gasoline , inventories/stocks , prices , STEO (Short-Term Energy Outlook) , weekly

Retail prices (dollars per gallon)

Retail price graphs
  Retail prices Change from last
  07/16/18 Week Year
Gasoline 2.865 0.008 0.587
Diesel 3.239 -0.004 0.748

Futures prices (dollars per gallon*)

Futures price graphs
  Futures prices Change from last
  07/13/18 Week Year
Crude oil 71.01 -2.79 24.47
Gasoline 2.107 -0.002 0.546
Heating oil 2.133 -0.035 0.618
*Note: Crude oil price in dollars per barrel.

Stocks (million barrels)

Stock price graphs
  Stocks Change from last
  07/13/18 Week Year
Crude oil 411.1 5.8 -79.5
Gasoline 235.8 -3.2 4.6
Distillate 121.3 -0.4 -30.1
Propane 65.256 1.664 -0.477