U.S. crude oil production forecast to rise in 2022 and 2023, surpassing previous record

In our February 2022 Short-Term Energy Outlook (STEO), we forecast that U.S. crude oil production will increase, reaching record highs in 2023. Oil prices have generally risen since April 2020, and Brent crude oil spot prices reached $97 per barrel (b) on February 7, 2022, the highest nominal price (not adjusted for inflation) since September 17, 2014. Rising crude oil prices have contributed to an increasing number of active oil rigs and rising crude oil production. We expect that crude oil prices will remain sufficiently high for continued growth in U.S. crude oil production through 2023, when we forecast that U.S. production will average 12.6 million barrels per day (b/d), a record high. We expect crude oil production in the Permian region to drive the overall growth.

U.S. crude oil production typically lags crude oil price changes by four to six months (rig counts typically increase within two to three months, and production comes online two to three months after that). In 2021, the West Texas Intermediate (WTI) crude oil spot price averaged $58/b in the first quarter and increased to an average of $77/b in the fourth quarter. The Baker Hughes U.S. oil-directed active rig count increased from 275 rigs the week of January 8, 2021, to 497 rigs the week of February 4, 2022. Although some exploration and production activity in the United States during 2021 did not respond as quickly to the price increase as it has in the past, U.S. crude oil production increased from 10.7 million b/d in the first quarter of 2021 (1Q21) to 11.7 million b/d in 4Q21.

We expect that WTI crude oil prices will remain above $60/b through 2023, which we expect will lead to continued increases in drilling activity and crude oil production. In the February STEO, we forecast that U.S. crude oil production will increase to 12.0 million b/d in 2022, up 760,000 b/d from 2021. We forecast that crude oil production in the United States will rise by 630,000 b/d in 2023 to average 12.6 million b/d. In 2022 and 2023, we expect that the combined production from Alaska and the Federal Offshore Gulf of Mexico (GOM) will average 2.2 million b/d annually, while the remainder, around 82% of the production, will come from the Lower 48 states (L48). In our forecast, U.S. crude oil production growth is driven by production from new wells in the L48, particularly in the Permian region. Crude oil production from existing wells (legacy production) typically has relatively quick decline rates in tight oil formations, and we expect that production from new wells will offset these declines (Figure 1).

We expect that legacy production from wells drilled prior to December 2021 in the L48 will average 7.3 million b/d in 2022 and fall by 25% to 5.5 million b/d in 2023. We expect production from wells drilled after November 2021 to contribute 2.5 million b/d in 2022 and increase to 4.9 million b/d in 2023. The production from the new wells is expected to offset declining production from legacy wells and bring total L48 crude oil production to 10.4 million b/d in 2023, surpassing the previous annual record high of 9.9 million b/d set in 2019.

Most of the oil-directed rig growth has taken place in the Permian region. From January 8, 2021, to February 7, 2022, the L48 added 220 rigs, 114 of which were in the Permian region, contributing to rising production in that region. Crude oil production in the Permian region averaged 4.4 million b/d in 2020 and increased to an estimated average of 4.8 million b/d in 2021. In our February STEO, we forecast that most of the crude oil production growth in L48 will continue to come from the Permian region. We forecast that production in the Permian region will average 5.3 million b/d in 2022 and 5.7 million b/d in 2023. We expect that Permian production will account for 81% of the crude oil production growth in the L48 in 2022 and 58% in 2023 (Figure 2).

Through 2023, we forecast that production in the Bakken and Eagle Ford regions will increase the most after the Permian region. In 2022, we forecast that production in the Bakken region will increase by 130,000 b/d from 2021 and average 1.2 million b/d, and we forecast that production in 2023 will increase by 130,000 b/d to 1.4 million b/d. We expect production in the Eagle Ford region will decrease by 10,000 b/d in 2022, but we forecast that it will increase by 80,000 b/d in 2023 and average 1.1 million b/d.

Our crude oil production forecast is based on forecast WTI crude oil prices averaging $79/b in 2022 and $64/b in 2023. Although prices are expected to decline from current levels, we expect that prices will remain high enough to contribute to increasing U.S. rig counts and production. The price forecast is highly uncertain, however, and a number of factors could push prices higher or lower than we have forecast, including crude oil production outages as a result of increased geopolitical tensions or oil demand growth that is higher or lower than expected. The uncertainty surrounding the forward curve is reflected in the market-derived WTI price confidence intervals, which are based off futures and options prices for the five trading days ending February 3, 2022 (Figure 3).

U.S. average regular gasoline and diesel prices increase

The U.S. average regular gasoline retail price increased nearly 8 cents to $3.44 per gallon on February 7, 98 cents higher than a year ago. The Midwest price increased more than 10 cents to $3.29 per gallon, the Gulf Coast price increased more than 9 cents to $3.12 per gallon, the East Coast price increased nearly 8 cents to $3.39 per gallon, and the West Coast price increased more than 2 cents to $4.18 per gallon. The Rocky Mountain price remained unchanged at $3.33 per gallon.

The U.S. average diesel fuel price increased nearly 11 cents to $3.95 per gallon on February 7, $1.15 higher than a year ago. The Gulf Coast price increased more than 12 cents to $3.73 per gallon, the East Coast price increased nearly 12 cents to $3.97 per gallon, the Rocky Mountain price increased more than 10 cents to $3.86 per gallon, the Midwest price increased more than 9 cents to $3.81 per gallon, and the West Coast price increased nearly 8 cents to $4.62 per gallon.

Residential heating fuel prices increase

As of February 7, 2022, residential heating oil prices averaged almost $3.89 per gallon, 11 cents per gallon above last week’s price and nearly $1.22 per gallon higher than last year’s price at this time. Wholesale heating oil prices averaged more than $3.11 per gallon, more than 17 cents per gallon above last week’s price and almost $1.28 per gallo¬¬n above last year’s price.

Residential propane prices averaged nearly $2.83 per gallon, 5 cents per gallon above last week’s price and more than 60 cents per gallon above last year’s price. Wholesale propane prices averaged more than $1.55 per gallon, almost 5 cents per gallon above last week’s price and 46 cents per gallon above last year’s price.

Propane/propylene inventories decline

U.S. propane/propylene stocks decreased by 1.9 million barrels last week to 47.8 million barrels as of February 4, 2022, 5.7 million barrels (10.7%) less than the five-year (2017-2021) average inventory levels for this same time of year. Midwest, Gulf Coast, and Rocky Mountain/West Coast inventories decreased by 1.1 million barrels, 1.0 million barrels, and 0.4 million barrels, respectively. East Coast inventories increased by 0.6 million barrels.

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