US crude production continues to rise, could result in further depressed WTI prices
Crude oil prices are directed by myriad and complex supply and demand forces, and US oil production is but one of the factors in the ultimate supply equation. Increased production means increased supply, which without supply declines elsewhere or an increase in demand results in lower prices. The US Department of Energy reports crude production figures on a monthly basis. Some market participants keep track of US supply figures as a factor in crude prices which affects the valuation of oil producers such as Oasis Petroleum (OAS), Whiting Petroleum (WLL), Concho Resources (CXO), and SandRidge Energy (SD).
Last month the DOE reported that crude production increased to 6.9 million barrels per day in November 2012. This was up 1% over October 2012 figures and 15% over November 2011 figures. The above graph shows recent monthly US crude production.
US crude production has been climbing at a rapid pace since 2008 after a long period of decline as shown in the below graph.
This is as a result of better technology (such as hydraulic fracturing and horizontal drilling) that has allowed drilling in previously uneconomic areas to become viable in areas such as the Bakken Shale in North Dakota and the Permian Basin in West Texas. Additionally, current high oil prices have prompted more investment and drilling into oil production.
Though US production has increased significantly, which ceteris paribus should result in lower oil prices, current oil prices are robust as seen in the above graph. This is because there have been cuts in supply outside of the US which have balanced the US supply increase. However, some market participants see a downside risk with particular regard to West Texas Intermediate (WTI) oil prices (the domestic benchmark) if US oil production continues to grow rapidly without the parallel increase in takeaway and refining capacity to soak up the extra supply. WTI already trades at a significant discount (~$20/barrel) to the international benchmark of Brent crude because of infrastructure constraints, though the two had historically traded on top of each other.
It is possible that the given the rapid growth in domestic oil production depressed WTI prices could occur if refinery and takeaway capacity becomes full or disruptions occur. Depressed WTI prices could especially hurt domestic producers with primarily inland assets such as OAS, WLL, CXO, and SD. Some domestic producers can also be found in a broad energy ETF such as the Energy Select Sector SPDR Fund (XLE), though they make up only a small portion of the total holdings.
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