• Traders question the sudden surge in U.S. oil production reported by the EIA.
• The EIA's revised reporting method has raised production estimates, challenging industry expectations.
• U.S. oil exports are on the rise, impacting global markets and reducing reliance on Saudi-Russian supply.

One of the most contentious debates you can have with an oil trader these days is about U.S. production. Many “long ”, the market parlance for those betting on higher prices for a barrel, simply refuse to swallow the government line that output, which was virtually unchanged for over a year, had suddenly jumped a half million barrels per day in one week — and growing since.

The “government” here is the Energy Information Administration, or EIA, the statistical arm of the U.S. Department of Energy, or DoE, that issues the Weekly Petroleum Status Report and a load of other publications such as the monthly Drilling Productivity Report and Short-Term Energy Outlook. The EIA’s plethora of consistent and timely energy reports arguably make it the world’s most closely-followed authority on the subject.

In its latest Weekly Petroleum Status Report, the EIA projected U.S. crude output at 12.8M barrels per day during the week ended Aug. 18. That was the agency’s highest estimate since the record 13.1M barrels that the United States produced daily before the coronavirus outbreak in March 2020.

That 12.8M, by the way, was the culmination of three weeks of reporting, where the EIA had raised its production estimate by 100,000 barrels each week under a new reporting methodology. How it works is that the agency is getting a higher count for crude flowing from active oil wells compared with those that are drilled but uncompleted — the latter referred to as DUCs.

Thus, the revisions imply that drilling-rig productivity has been higher than past estimates despite the itself having fallen by more than 15% this year. 

“Earlier this year the EIA revised the number of drilled but uncompleted wells in the top U.S. shale basin, adding several years’ worth of unreported DUCs,” Phil Flynn, an energy analyst at Chicago’s Price Futures Group, wrote in one of his daily notes this week to explain the change to his readers, many of whom are long oil. 

Now, the EIA “believes active drilling rigs were about 10% more productive in 2021–2022 than previously estimated”, Flynn said, providing some granularity on the agency’s thinking. Obviously, his followers aren’t pleased with the finding, which along with other bearish supply-related news, has suppressed crude prices for a second week in a row after a prior seven-week rally that led to a nine-month high of almost $85 per barrel for U.S. crude and above $88 for global benchmark .

The revisions to the EIA’s weekly estimates on oil production also come as global oil supply sees shifts from Saudi and Russian efforts to slash production and exports amid slower buying by top oil importer China which is facing an economic crunch.

Saudi Arabia, which has been producing oil at well below its capacity for more than a year now, announced an additional million barrels per day reduction in July that could carry through into October. Cargo tracking data by Kpler also suggests that Russian exports may fall by as much as one million barrels per day this month as the Kremlin seeks to tighten production.

The higher estimate on U.S. oil output is challenging somewhat the optics of a market said to have little alternatives to the Saudi-Russian supply. 

As such, many oil bulls seem to think the new EIA methodology for estimating crude production is nothing but a DoE ruse to do the Biden administration a favor in clamping down on the global oil market, in order not to lead to another spike in pump prices of fuel and inflation at home that would anger Americans ahead of the 2024 election. 

Some analysts who have followed the DoE’s work for decades say the conspiracy theories are just bunk.

“These are career professionals who work for the energy sector and the American people; they are not there to tell you what the president wants, regardless who that president or party is,” said John Kilduff, partner at New York energy hedge fund Again Capital.

U.S. Crude Exports Are Climbing and Climbing

Interestingly, the EIA hasn’t been reporting more for just U.S. oil production — its number on crude exports have also been steadily rising.

The EIA report for the week ended August 18 also showed a staggering 10.544 million barrels per day of exports of both crude and fuel oils from a total crude production of 12.8 million. That means just 2.256 million barrels of crude per day were for domestic consumption, with the balance 82% going towards exports.

This suggests that higher drilling efficiency aside, U.S. oil producers seem to be pushing for volume, to get more exports out, and doing so without attracting too much attention. Analysts, who have been watching exports data, say there’s been a sheer escalation in shipments of crude from the world’s largest producer of the commodity, ostensibly to feed demand coming from markets that could be underserved by the Saudi-Russian cuts. 

Adds Kilduff:

“From just about 2.5M to 3.5M per day in crude exports a year ago, U.S. energy companies are now consistently shipping out 1M more a day now. It looks like they are really stepping up to the plate to ostensibly make up for some of the vacuum in oil supplies resulting from the Saudi-Russian cuts.” 

“That, of course, doesn’t help the bull narrative that the global market simply has little alternatives to the Saudi-Russian feed. The U.S. export numbers represent customs-certified data and that’s probably why oil longs would rather not talk too much about these.”

Surging U.S. crude exports have been pushing down oil prices in Europe and Asia, proving a key source of supply as producers cut output and sanctions on Russian crude disrupt trade flows, a Reuters report from Aug 6 said.

The introduction in June of U.S. crude grade WTI Midland to set the price of the dated benchmark assessed by S&P Global Commodity Insights has not only spurred the rising exports but also helped to cap Brent and the European, African, Brazilian and Asian oil that are priced off the benchmark, traders and analysts said in the report. 

U.S. crude exports have averaged 4.08 million barrels per day so far in 2023, up from an average of 3.53 million bpd in 2022, the report noted.

Most importantly, it cited these:

“U.S. crude exports are also easing the loss of supply after Saudi Arabia deepened output cuts from July, above what major producers agreed to in June.

The widening exports illustrate the increasing influence of crude from the U.S., the world's biggest oil producer, in the global market. It further cements the role of U.S. supplies in balancing the market, especially as outlets for sanctioned Russian crude are limited.”

Venezuela, Iran Could Put Out More Barrels Too

But while Russia might be deliberately putting out less oil in collaboration with the Saudis to get higher prices for a barrel, Venezuela and Iran — two other countries sanctioned by the United States — might be shipping more crude soon.

U.S. officials were drafting a proposal that would ease sanctions on Venezuela's oil sector, allowing more companies and countries to import its crude oil, if the South American nation moves toward a free and fair presidential election, five people with knowledge of the plans told Reuters.

Iran said this week its crude output will reach 3.4 million barrels daily by end-September despite Trump-era sanctions on the Islamic Republic remaining in place, without much enforcement by the Biden administration.

Reuters reports that Iran has already ramped up crude exports this year, with May’s outflow hitting a 4-1/2 year high of 1.54 million barrels per day, certified by Kpler data. Iran’s production climbed to 3 million barrels a day in July, reaching a 2018 high, according to the International Energy Agency in Paris.

In recent weeks, Washington and Iran are said to have reached an understanding on a possible prisoner exchange and the transfer of $6 billion in Iranian oil revenue stuck in South Korea — developments the Biden administration insists aren’t linked. 

Flynn, in a note Friday, lamented that Iranian and Venezuelan oil producers were being given more privilege by the Biden administration to grow their output versus U.S. energy companies, simply due to the fossil-fuel-inhibiting policies of the president who’s pushing for green energy at home. Worse, Biden was coddling enemies of America in the process, Flynn argued. 

“Well, people in the administration will tout that U.S. production is at an all-time high,” Flynn wrote. “The reality is that most experts believe that under a different administration that was more energy friendly that U.S. producers would be producing anywhere from 2 to 4 million barrels more a day than they are currently.”

Well, the higher drilling efficiency among U.S. oil producers and their relative quiet in competing for export markets may be getting them there, without so much of a hand from the government.

***

Disclaimer: The content of this article is purely to inform and does not in any way represent an inducement or recommendation to buy or sell any commodity or its related securities. The author Barani Krishnan does not hold a position in the commodities and securities he writes about. He typically uses a range of views outside his own to bring diversity to his analysis of any market. For neutrality, he sometimes presents contrarian views and market variables.