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Why US Crude Oil Production Is Crucial for 2016 Prices

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US crude oil production 

The EIA (U.S. Energy Information Administration) reported that weekly US crude oil production marginally fell by 38,000 bpd (barrels per day) to 9.2 MMbpd (million barrels per day) for the week ending December 4, 2015, as compared with the previous week. US production fell for the fourth time in the last ten weeks. Monthly US production peaked at 9.6 MMbpd in April 2015. The latest monthly production figure for September 2015 was 9.4 MMbpd.

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US production in 2014

The current US production is 0.5% more than the US production of 9.1 in 2014. The peak production we’ve seen in 2015 is the highest since the 1970s. US production hit a record due to advancements in drilling technology, triple-digit crude oil prices between 2010 and 2014, and cheap borrowing facilities. However, the US oil producers never asked themselves what the suppliers to the United States would do to maintain market share if US production hit a record. Middle Eastern oil producers started producing more oil so that US producers would shut down their oil business due to lower oil prices. They have been marginally successful.

The current lower prices of $35 per barrel are highly challenging for high-cost US shale operators. The US shale operators have high break-even and production costs, as compared to the costs of their Middle Eastern and Russian peers.

Why US production is important

The slowing US production due to the higher break-even and production costs will reduce supplies in the global oil market. As a result, we could see the supply and demand gap narrow down it 2016. US production averaged 9.3 MMbpd in 2015 and is expected to slow down to 8.8 MMbpd in 2016. A drop of 0.6 MMbpd in production could benefit US oil prices.

Higher oil prices would benefit US shale oil producers like Whiting Petroleum Corporation (WLL), Continental Resources (CLR), Oasis Petroleum (OAS), and EOG Resources (EOG). They also affect ETFs like the Vanguard Energy ETF (VDE), the iShares US Oil Equipment & Services ETF (IEZ), and the First Trust Energy AlphaDEX Fund (FXN).

However, Iran and Saudi Arabia may play the spoilsports by increasing production. Read the next part of the series to find out more.

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