Brent crude price inching higher on optimistic that US inflationary pressures are fading. Brent crude closed up 1.1 USD/b ydy to a close of USD 86.39/b which was the highest close since the end of April. This morning it is trading up another half percent to USD 86.9/b along with comparable gains in industrial metals and Asian equities. At 14:30 CET the US will publish its preferred inflation gauge, the PCE figure. Recent data showed softer US personal spending in Q1. Expectations are now high that the PCE inflation number for May will show fading inflationary pressures in the US economy thus lifting the probability for rate cuts later this year which of course is positive for the economy and markets in general and thus positive for oil demand and oil prices. Hopes are high for sure.

Brent crude is trading at the highest since the end of April

The rally in Brent crude since early June is counter to rising US oil inventories and as such a bit puzzling to the market.

US commercial crude and oil product stocks excluding SPR. 

Actual US crude oil production data for April will be published later today. Zero growth in April is likely. Later today the US EIA will publish actual production data for US crude and liquids production for April. Estimates based on US DPR and DUC data indicates that there will indeed be zero growth in US crude oil production MoM in April. This will likely driving home the message that there is no growth in US crude oil production despite a Brent crude oil price of USD 83/b over the past 12 mths. The extension of this is of course rising expectations that there will be no growth in US crude oil production for the coming 12 months either as long as Brent crude hoovers around USD 85/b.

US production breaking a pattern since Jan 2014. No growth at USD 83/b. What stands out when graphing crude oil prices versus growth/decline in US crude oil production is that since January 2014 we have not seen a single month that US crude oil production is steady state or declining when the Brent crude oil price has been averaging USD 70.5/b or higher.

US Senate looking into the possibility that US shale oil producers are now colluding by holding back on investments, thus helping to keep prices leveled around USD 85/b.

Brent crude 12mth rolling average price vs 4mth/4mth change in US crude oil production. Scatter plot of data starting Jan 2014. Large red dot is if there is no change in US crude oil production from March to April. Orange dots are data since Jan 2023. The dot with ”-1.3%” is the March data point. 

Brent crude 12mth rolling average price vs 4mth/4mth change in US crude oil production. Data starting Jan 2014. The last data point is if there is no change in US crude oil production from March to April.

US crude oil production has been booming for more than a decade. Interrupted by two setbacks in response to sharp price declines. The US boom has created large waves in the global oil market and made life very difficult for OPEC(+). Brent crude has not traded below USD 70/b since Dec-2021 and over the past year, it has averaged USD 84/b. US shale oil production would typically boom with such a price level historically. However, there has been zero growth in US crude oil production from Sep-2023 to Mar-2024. This may be partially due to a cold US winter, but something fundamentally seems to have changed. We recently visited a range of US E&P and oil services companies in Houston. The general view was that there would be zero growth in US crude oil production YoY to May 2025. If so and if it also is a general shift to sideways US crude oil production beyond that point, it will be a tremendous shift for the global oil market. It will massively improve the position of OPEC+. It will also sharply change our perception of the forever booming US shale oil supply. But ”the proof is in the pudding” and that is data. More specifically the US monthly, controlled oil production data is to be published on Friday 28 June.

The most important data point in the global oil market will be published on Friday 28 June. The US EIA will then publish its monthly revised and controlled oil production data for April. Following years of booming growth, the US crude oil production has now gone sideways from September 2023 to March 2024. Is this a temporary blip in the growth curve due to a hard and cold US winter or is it the early signs of a huge, fundamental shift where US crude oil production moves from a decade of booming growth to flat-lining horizontal production?

We recently visited a range of E&P and oil services companies in Houston. The general view there was that US crude oil production will be no higher in May 2025 than it is in May 2024. I.e. zero growth.

It may sound undramatic, but if it plays out it is a huge change for the global oil market. It will significantly strengthen the position of OPEC+ and its ability to steer the oil price to a suitable level of its choosing.

The data point on Friday will tell us more about whether the companies we met are correct in their assessment of non-growth in the coming 12 months or whether production growth will accelerate yet again following a slowdown during winter.

The US releases weekly estimates for its crude oil production but these are rough, temporary estimates. The market was fooled by these weekly numbers last year when the weekly numbers pointed to a steady production of around 12.2 m b/d from March to July while actual monthly data, with a substantial lag in publishing, showed that production was rising strongly.

The real data are the monthly, controlled data. These data will be the ”proof of the pudding” of whether US shale oil production now is about to shift from a decade of booming growth to instead flat-line sideways or whether it will drift gradually higher as projected by the US EIA in its latest Short-Term Energy Outlook.

US crude oil production given by weekly data and monthly data. Note that the monthly, controlled data comes with a significant lag. The market was thus navigating along the weekly data which showed ”sideways at 12.2 m b/d” for a significant period last year until actual data showed otherwise with a time-lag.

If we add in Natural Gas Liquids and zoom out to include history back to 2001 we see an almost uninterrupted boom in supply since Sep 2011 with a few setbacks. At first glance, this graph gives little support to a belief that US crude oil production now suddenly will go sideways. Simple extrapolation of the graph indicates growth, growth, growth.

US crude and liquids production has boomed since September 2011

However. The latest actual data point for US crude oil production is for March with a reading of 13.18 m b/d. What stands out is that production then was still below the September level of 13.25 m b/d.

The world has gotten used to forever growing US crude oil production due to the US shale oil revolution, with shorter periods of sharp production declines as a result of sharp price declines.

But the Brent crude oil price hasn’t collapsed. Instead, it is trading solidly in the range of USD 70-80-90/b. The front-month Brent crude oil contract hasn’t closed below USD 70/b since December 2021.

Experiences from the last 15 years would imply wild production growth and activity in US shale oil production at current crude oil prices. But US crude oil production has now basically gone sideways to lower from September to March.

The big, big question is thus: Are we now witnessing the early innings of a big change in US shale oil production where we shift from booming growth to flat-lining of production?

If we zoom in we can see that US liquids production has flat-lined since September 2023. Is the flat-lining from Sep to Mar due to the cold winter so that we’ll see a revival into spring and summer or are we witnessing the early signs of a huge change in the global oil market where US crude oil production goes from booming growth to flat-line production.

The message from Houston was that there will be no growth in US crude oil production until May 2025. SEB recently visited oil and gas producers and services providers in Houston to take the pulse of the oil and gas business. Especially so the US shale oil and shale gas business. What we found was an unusually homogeneous view among the companies we met concerning both the state of the situation and the outlook. The sentiment was kind of peculiar. Everybody was making money and was kind of happy about that, but there was no enthusiasm as the growth and boom years were gone. The unanimous view was that US crude oil production would be no higher one year from now than it is today. I.e. flat-lining from here.

The arguments for flat-lining of US crude oil production here onward were many.

1) The shale oil business has ”grown up” and matured with a focus on profits rather than growth for the sake of growth.

2) Bankruptcies and M&As have consolidated the shale oil companies into larger, fewer public companies now accounting for up to 75% of total production. Investors in these companies have little interest/appetite for growth after having burned their fingers during a decade and a half of capital destruction. These investors may also be skeptical of the longevity of the US shale oil business. Better to fully utilize the current shale oil infrastructure steadily over the coming years and return profits to shareholders than to invest in yet more infrastructure capacity and growth.

3) The remaining 25% of shale oil producers which are in private hands have limited scope for growth as they lack pipeline capacity for bringing more crude oil from field to market. Associated nat gas production is also a problem/bottleneck as flaring is forbidden in many places and pipes to transport nat gas from field to market are limited.

4) The low-hanging fruits of volume productivity have been harvested. Drilling and fracking are now mostly running 24/7 and most new wells today are all ”long wells” of around 3 miles. So hard to shave off yet another day in terms of ”drilling yet faster” and the length of the wells has increasingly reached their natural optimal length.

5) The average ”rock quality” of wells drilled in the US in 2024 will be of slightly lower quality than in 2023 and 2025 will be slightly lower quality than 2024. That is not to say that the US, or more specifically the Permian basin, is quickly running out of shale oil resources. But this will be a slight headwind. There is also an increasing insight into the fact that US shale oil resources are indeed finite and that it is now time to harvest values over the coming 5-10 years. One company we met in Houston argued that US shale oil production would now move sideways for 6-7 years and then overall production decline would set in.

The US shale oil revolution can be divided into three main phases. Each phase is probably equally revolutionary as the other in terms of impact on the global oil market.

1) The boom phase. It started after 2008 but didn’t accelerate in force before the ”Arab Spring” erupted and drove the oil price to USD 110/b from 2011 to 2014. It was talked down time and time again, but it continued to boom and re-boom to the point that today it is almost impossible to envision that it won’t just continue to boom or at least grow forever.

2) The plateau phase. The low-hanging fruits of productivity growth have been harvested. The highest quality resources have been utilized. The halfway point of resources has been extracted. Consolidation, normalization, and maturity of the business has been reached. Production goes sideways.

3) The decline phase. Eventually, the resources will have been extracted to the point that production unavoidably starts to decline.

Moving from phase one to phase two may be almost as shocking for the oil market as the experience of phase 1. The discussions we had with oil producers and services companies in Houston may indicate that we may now be moving from phase one to phase two. That there will be zero shale oil production growth YoY in 2025 and that production then may go sideways for 6-7 years before phase three sets in.

US EIA June STEO report with EIA’s projection for US crude oil production to Dec-2025. Softer growth, but still growth.

US EIA June STEO report with YoY outlook growth for 2025. Projects that US crude production will grow by 0.47 m b/d YoY in 2025 and that total liquids will grow by 720 k b/d YoY.

US EIA June STEO report with outlook for production growth by country in 2025. This shows how big the US production growth of 0.7 m b/d YoY really is compared to other producers around the world

US EIA June STEO report with projected global growth in supply and demand YoY in 2025. Solid demand growth, but even strong supply growth with little room for OPEC+ to expand. Production growth by non-OPEC+ will basically cover global oil demand growth. 

But if there instead is zero growth in US crude oil production in 2025 and the US liquids production only grows by 0.25 m b/d YoY due to NGLs and biofuels, then suddenly there is room for OPEC+ to put some of its current production cuts back into the market. Thus growth/no-growth in US shale oil production will be of huge importance for OPEC+ in 2025. If there is no growth in US shale oil then  OPEC+ will have a much better position to control the oil price to where it wants it.

US crude oil production and drilling rig count

Strong gains last week but speculators needs to buy much more to catch up to bullish curve structure. Brent crude added a solid USD 2.6/b last week. It traded as high as USD 86.24/b on Friday and by that traded above even the best price prints from May. It settled the week at USD 85.2/b. Speculators added 68 million barrels of net length in Brent over the week to Tuesday 18 June with total net length reaching 140 million barrels. A solid gain over the week, but the net Brent spec position is still the 4th lowest in 52 weeks. Brent backwardation as measured by CO1 vs CO7 is currently at 37 week high and rising. That is reflecting a tight physical market. It is definitely not speculators who have helped to drive the backwardation to its current level which is often partially the case when speculators pile into the front-end of the crude curve. Speculators are clearly behind the curve here and has  a lot of catch up to do versus the current physical market as described by the backwardation. As such the price risk should be to the upside from current levels.

Brent crude 1mth contract traded to USD 86.24/b on Friday and above all price prints from May

Brent crude 1mth price in USD/b vs net long speculative positioning in Brent crude in million barrels.

52 week ranking of Brent backwardation (CO1 vs CO7) and 52 week ranking of net long Brent specs.