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Drop in US Crude Oil Production Supported WTI Prices

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US crude oil production

The EIA (US Energy Information Administration) estimates that US crude oil production fell by 40,000 bpd (barrels per day) to 9.096 MMbpd (million barrels per day) in the week ending September 25, compared to the week ending September 18. This level is ~3% higher than last year’s level of ~8.837 MMbpd.

The four-week average production of 9.121 MMbpd through the week ending September 25 was ~3.84% higher than the corresponding period last year at ~8.783 MMbpd. However, the four-week average fell ~0.33% week-over-week. Looking at four-week averages gives you a broader view of what’s otherwise a volatile number week-over-week.

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What does this mean?

Lower production, meaning lower supply, should be bullish for WTI (West Texas Intermediate) crude oil prices (USO). Higher WTI prices are positive for crude oil producers like Chevron (CVX), ConocoPhillips (COP), and Anadarko Petroleum (APC). All of these companies are part of the Vanguard Energy ETF (VDE). Together, they account for ~17.33% of the fund.

However, MLPs such as Plains All American Pipeline (PAA) stand to lose when production falls. These companies make money by transporting energy. The decline in production and the declining four-week average trend reflected in the chart above support the notion that the US shale-induced crude oil production boom is easing as a result of falling prices.

The bullish production number could be a reason why the drop in WTI crude oil prices was subdued despite a headline bearish inventory number. Read part one for more on this.

US crude oil imports

Net US crude oil imports rose by 378,000 bpd to average 7.554 MMbpd in the week ending September 25. The increase in imports was driven mainly by increased imports from Venezuela and the Middle East. A rise in imports, meaning higher supplies, is bearish for WTI crude oil prices.

Imports were ~3.7% higher than last year’s levels during the same week. However, the four-week average of ~7.345 MMbpd through the week ending September 25 was ~1.7% lower than last year’s average, which was 1% lower compared to the previous four-week average through September 18.

Supply forecasts for 2015 and 2016

According to the EIA, crude oil production will average 9.2 MMbpd in 2015 and 8.8 MMbpd in 2016. The decrease in 2016 is expected to be driven by weak crude oil prices. Crude oil production averaged 8.72 MMbpd in 2014. The EIA forecasts average net crude oil imports of 6.81 MMbpd in 2015 and 7.07 MMbpd in 2016.

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