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Why U.S. oil production hasn’t rebounded along with crude prices

Oil prices have rallied back to their per-pandemic levels and then some, but U.S. crude production has yet to fully rebound, as coronavirus variants wreck havoc on the outlook for economic activity and energy demand.

“Higher oil prices should encourage more drilling,” said Marshall Steeves, energy markets analyst at IHS Markit. That’s “likely forthcoming to some degree in the coming year.”

But it seems unlikely that output will climb to the 13.1 million barrels per day pre-pandemic peak from February 2020 anytime soon, “given the comparative slow recovery in investment,” he told MarketWatch.

U.S. crude-oil production this year is expected to average 11.18 million barrels per day, which would still be below the average 11.28 million barrels per day seen in 2020, according to the Energy Information Administration. For 2022, the EIA expects output to move up to an average of 11.85 million barrels per day.

In the second half of this year, U.S. oil production has grown at a lower rate than what might have been expected given the surge in prices this year, said Nicolas Daher, lead energy analyst at The Economist Intelligence Unit.

West Texas Intermediate crude for January delivery CLF22, -1.82% CL.1, -1.82% settled at $70.87 a barrel on the New York Mercantile Exchange Wednesday, up 46% year to date. February Brent crude BRNG22, -1.72% BRN00, -1.72%, meanwhile, ended at $73.88 a barrel on ICE Futures Europe, eying a yearly gain of nearly 43%.

Read: Why 2022 will be a ‘more challenging’ year for commodities such as oil and gold

There’s still a lot of uncertainty regarding “the expansion of the omicron variant and the impact that it would have on the global economy and supply chains, which is the main driver around the high volatility we are seeing in oil prices,” Daher said.

It’s likely that many U.S. oil producers are being “cautious before opening the taps” in case the world goes into another wave of lockdowns and global oil demand declines again, he said. If that happens, domestic oil producers may struggle to compete against other producers with lower production costs, he said.

U.S. shale producers are also taking advantage of the high prices and profits to “increase returns to shareholders,” rather than increase drilling and investment, said Daher.

All of that adds pressure to the “already not-great relationship” between the Biden administration and oil producers, he says. U.S. Energy Secretary Jennifer Granholm said in November that the energy industry is making “enormous profits,” and should increase supply to ease price pressures at the gasoline pump.

“Many in the oil industry are not at ease with the administration and that has renewed and intensified its efforts on the fight against climate change,” especially when compared with the Trump administration, said Daher. “This spat could affect investment and therefore long-term growth in the industry.”

Also, the storms this year impacted production in the Gulf of Mexico, he said.

Hurricane Ida knocked about 616,000 barrels per day of oil production offline for all of September and while roughly 95% of Gulf of Mexico output was back online by early October, said Daher, the remaining 70,000 barrels per day is likely to stay offline until at least the end of the first quarter of 2022.

He expects U.S. production to fall slightly this year, then increase by 6.2% next year, “as small, privately-owned oil companies ramp up production in response to elevated prices.”

IHS Markit’s Steeves also sees a likely rise in output levels next year, “albeit at a slow and uneven pace” as has been the case in 2021.

“Globally, the storage deficit should evolve into a surplus” with more production coming online from OPEC+ — the Organization of the Petroleum Exporting Countries and their allies — despite the group’s limited spare output capacity, said Steeves.

Read: OPEC+ takes unusual tack by keeping existing production policy, while leaving meeting ‘in session’

Looking ahead, IHS Markit expects oil prices to trade “broadly sideways,” with rallies driven by stronger demand growth and selloffs driven by accelerated supply growth, Steeves said.

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