By Naser Ameen, Dana Van Wagener and Jeff Barron on 5/14/2020
Reading time: 2 minutes 30 seconds
WASHINGTON – The U.S. Energy Information Administration expects U.S. crude oil production to fall in 2020 and 2021 as efforts to mitigate the spread of the 2019 novel coronavirus disease continue to result in a steep drop in demand for petroleum products and crude oil prices. In its May Short-Term Energy Outlook, EIA forecasts that U.S. crude oil production will average 11.7 million barrels per day (bpd) in 2020 and 10.9 million bpd in 2021. These levels would be 0.5 million bpd and 1.3 million bpd, respectively, lower than the 2019 average of 12.2 million bpd.
The benchmark West Texas Intermediate (WTI) crude oil average spot price dropped from $58 dollars per barrel (b) in January 2020 to $29/bbl in March and $17/bbl in April. This sharp decline in the oil price is already having a significant effect on drilling activity in the United States. The number of active drilling rigs in the Lower 48 states, excluding the Federal Offshore Gulf of Mexico (GOM), totaled 753 as of February, but it fell to 738 in March and 572 in April, the lowest since May 2016. As of May 8, 2020, the Lower 48 land rig count stood at 355 rigs, according to Baker Hughes data.
EIA’s short-term forecast for crude oil production is separated into three regions: the Lower 48 states excluding GOM (81% of 2019 crude oil production), the GOM (15%), and Alaska (4%). Most of the expected changes in U.S. crude oil production arise in changes in Lower 48 states excluding GOM production because projects in the GOM and Alaska tend to have different development timelines and are less sensitive to near-term price changes.
Typically, crude oil price changes result in changes in Lower 48 U.S. crude oil production after about six months. However, current market conditions will likely not follow this relationship as many producers have already announced significant reductions in capital spending and drilling levels, as well as plans to curtail production. Much of the recent changes in the WTI price will continue to affect production later this year and throughout 2021. EIA’s forecast 0.8 million bpd decline in U.S. crude oil production in 2021 would be the largest annual decline in U.S. crude oil production on record.
EIA forecasts GOM production to remain relatively flat, averaging 1.9 million bpd in 2020 and 2021, nearly unchanged from its 2019 average. In addition, EIA expects no cancellation in announced GOM projects for 2020 and 2021. EIA forecasts that crude oil production from Alaska will remain at an average of 460,000 bpd in 2020 and that it will increase slightly in 2021.
EIA’s crude oil production forecast is highly uncertain given the still-evolving impacts of the COVID-19 mitigation efforts and the resulting economic effects. In addition, members of the Organization of the Petroleum Exporting Countries (OPEC) and other partner countries announced significant production reductions through 2022 which, if realized, would affect oil prices and U.S. producer investment decisions.