Oil Market Update: Prices Poised to Rise

Earlier this year, I predicted that the U.S. would achieve a new annual oil production record in 2023. So far, it seems that this prediction is on track.

According to the latest Weekly Petroleum Status Report by the Energy Information Administration (EIA), current U.S. oil production is 12.4 million barrels per day (bpd). This reflects an increase of 400,000 bpd compared to last year. However, it falls short of the peak level of 13.0 million bpd reached in November 2019. Nonetheless, year-to-date oil production is exceeding the 12.3 million bpd level seen in 2019.

There is concern about the Strategic Petroleum Reserve (SPR), as its current inventory is at its lowest level since 1983. Over the past year, the SPR has been reduced by 31% to address rising oil prices. While this reduction helped stabilize oil prices, it also removed a significant safety net in case of a real emergency.

The primary driver of increasing U.S. oil and gas production remains the tight oil and shale gas regions. The Permian Basin, in particular, has reached a record high of 5.8 million bpd, surpassing Saudi Arabia’s massive Ghawar oilfield. However, production gains in the Permian have slowed recently, with new wells merely compensating for the decline in older wells.

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According to the Baker Hughes rig count, the number of oil drilling wells has decreased by 5% compared to last year. However, the inventory of previously drilled but uncompleted (DUC) wells continues to decline. In the past year alone, the DUC inventory has decreased by 8%, and over the past three years, it has dropped by a significant 45%. Currently, the DUC inventory is at its lowest level in about ten years.

This suggests that production could increase further as the DUC inventory continues to decline. However, for oil production to rise significantly from current levels, there will likely need to be an increase in the rig count soon.

This activity is primarily driven by price. Oil prices have dropped from $120 per barrel (bbl) a year ago to just under $70/bbl today. Consequently, average retail gasoline prices have decreased from $5.11 per gallon last year to $3.71 per gallon currently, returning to levels seen before Russia’s invasion of Ukraine.

What occurs in the second half of the year will depend largely on Saudi Arabia and OPEC. They are already indicating that they believe pricing power has shifted back in their favor. With a reduced SPR inventory, the U.S. has limited tools available to counteract a surge in oil prices if Saudi production cuts persist.

But this strongly suggests we will see oil prices rising in the second half of the year.

PS: Looking for growth opportunities in this uncertain market? I suggest you follow the advice of our colleague, Dr. Stephen Leeb.

As chief investment strategist of The Complete Investor, Dr. Leeb has produced a special report on how to not only survive, but also thrive during the tectonic shifts facing the financial world. Click here for details.

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