Lower 48 energy producers, in response to a massive OPEC-plus supply cut that is expected to spur a surge in oil prices, could bolster crude output in the final months of 2022 to both capitalize and ensure domestic supply/demand balance, analysts said Thursday.

U.S. exploration and production (E&P) companies could increase output to 12.7 million b/d by the end of the year, Rystad Energy said. That would mark a 700,000 b/d jump from September levels and bring production within striking distance of the record 13.1 million b/d level reached in March 2020, before the pandemic.

“The question is if, and how fast, production can be accelerated,” said Rystad’s Jorge Leon, senior vice president. He expects private producers that are unencumbered by investors’ calls for public E&Ps to conserve capital will lead the charge and make the forecasted increase plausible.

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Notably, domestic E&Ps bolstered oil supplies in the spring and early summer in response to earlier price spikes. Natural gas producers, meanwhile, ratcheted up output over the summer amid robust demand domestically and internationally. Gas production continues to rise this fall, with output hitting a record 102 Bcf/d in early October. 

At issue on the oil front is a move announced by OPEC-plus on Wednesday to slash its members’ collective crude production by 2 million b/d beginning in November. Citing global recessionary headwinds and potential threats to demand, it plans to maintain the reduced output through 2023.

Struggling To Meet Targets

Several OPEC-plus members, grappling with aging infrastructure and inflation, have struggled to meet production targets this year, meaning the immediate impact on the cartel’s output will not be as severe as the headline 2 million b/d. Still, analysts’ estimates Thursday coalesced around an expected 1 million b/d cut this fall, with more to follow next year.

The change in policy marked the coalition of oil-producing countries’ largest reduction since the early days of the pandemic in April 2020. It comes at a time when global balances are essentially aligned but headed for a modest supply surplus in the current quarter, according to OPEC’s estimation.  

However, should major economies stave off recession and global demand accelerate in coming months, OPEC-plus “risks the inability to deal with future shortages,” said ESAI Energy principal Sarah Emerson.

Analysts widely viewed the move as a step to bolster global prices after a months-long decline. International Brent crude prices had dropped roughly 30% after reaching a 2022 high in June above $120/bbl.

Brent prices hit $94 after the OPEC-plus announcement Wednesday and hovered above that level intraday Thursday, up from $88 at the close of last week.

Rystad expects Brent prices to exceed $100 by the end of the year.

Goldman Sachs analysts on Thursday raised their forecast price for the first quarter of 2023 by $10 to $115/bbl and said they “acknowledge price risks are skewed potentially even higher.”

If the full OPEC-plus cuts are realized and sustained through next year, the Goldman team said, it “would amount to $25/bbl upside from our previous 2023 $107.5/bbl Brent forecast, with potential for price spikes even higher should inventories fully deplete.”

The Biden administration criticized the OPEC-plus move, saying it would stimulate fresh inflationary pressures that could tilt the global economy into recession. The White House said it would order additional releases from the nation’s Strategic Petroleum Reserve (SPR) “as necessary,” reversing a plan to end SPR drawdowns next month.

SPR To The Rescue?

The administration previously announced up to 180 million barrels of SPR releases over six months beginning in May as part of an effort to bring down prices. It intends to increase such releases by 10 million bbl in November from current levels, while prodding U.S. E&Ps to step up activity.

However, President Biden cannot indefinitely draw upon the SPR, RBN Energy LLC analyst Jason Lindquist notes.

The current release program will leave the SPR at its lowest level since 1983: about 342 million bbl, or less than half of the system’s 714 million bbl capacity, Lindquist said.

“Having significantly lower volumes of crude oil socked away in the four SPR sites for an emergency such as a major hurricane would make the market even more skittish if further supply-related issues arise later this year or in 2023,” he said.

The U.S. president had lobbied Saudi Arabia, which leads OPEC-plus alongside Russia, to maintain or even increase production to keep downward pressure on oil prices. The U.S. administration has noted that Western sanctions against the Kremlin in rebuke of its war in Ukraine have hampered Russia’s oil deliveries to the West. Russia has lost nearly 1 million b/d of production since the onset of the war last February.

Russian supply on the global market could dwindle further later this year because the Kremlin faces a European Union (EU) oil embargo beginning in December. EU countries on Wednesday also agreed to impose a price cap on Russian oil, with specifics to be ironed out.

Russian Deputy Prime Minister Alexander Novak said the Kremlin would cease crude sales to any country that adopted the cap and could reduce its production by 7.5% in response.

All of this puts the onus on U.S. producers to fill the void, Rystad’s Leon said, or prices could soar. American E&Ps have much ground to gain to meet Leon’s 12.7 million b/d projection.

U.S. oil production for the week ended Sept. 30 held at 12.0 million b/d, on par with the previous week, the Energy Information Administration (EIA) said in its latest Weekly Petroleum Status Report. That kept output below the 2022 high of 12.2 million b/d.U.S. commercial crude inventories, excluding those in the SPR, decreased by 1.4 million bbl last week, EIA said. At 429.2 million bbl, stocks were 3% below the five-year average.