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US Crude Oil Output Falls: Saudi and China Drag Oil Lower

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US crude oil production falls

The EIA (U.S. Energy Information Administration) reported that US crude oil production fell by 42,000 bps (barrels per day) to 9.562 MMbpd (million barrels per day) for the week ending July 10, 2015. In contrast, US output rose slightly by 9,000 bpd for the week ending July 3, 2015.

Currently, US production is 11% more than the production of 8.592 MMbpd last year. US monthly output was at 9.7 MMbpd in April 2015—the highest since the 1970s. The massive US production was due to the availability of cheaper credit facilities after the 2008 financial crisis. It was also due to technological advancements.

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The EIA’s monthly drilling productivity report estimates that US production from key shale regions will fall in August 2015 by 91,000 bpd—compared to July 2015. US oil output from major shale regions is expected to be at 5.3 MMbpd in August 2015. Production from the Bakken and Eagle Ford shale regions is expected to fall by 22,000 and 55,000 bpd in August 2015 from the previous month. Slowing US production and falling US inventories could support crude oil prices.

In contrast, rising production from Saudi Arabia and Iran could balance the speculation of falling US production. Despite the supply side concerns, demand is also slowing from China. Saudi Arabian exports hit a five-month low due to slowing imports from China and a rise in domestic refinery demand. Saudi Arabia’s exports to China fell by 18% in May 2015 from the levels in 2014. This is the lowest level of exports to China since August 2012. Saudi Arabian exports fell to 6.94 MMbpd in May 2015 from 7.74 MMbpd in April 2015. This is the lowest level of exports since December 2014.

Long-term, lower crude oil prices impact oil and gas producers like Hess (HES), ExxonMobil (XOM), and Devon Energy (DVN). Combined, these stocks account for 23.52% of the Energy Select Sector SPDR ETF (XLE). For these companies, their oil production mix is greater than 46% of their production portfolio. They also impact energy ETFs like XLE and the SPDR S&P Oil & Gas Exploration & Production ETF (XOP).

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