Contrary to the dominant theme of 2022, U.S. crude producers nudged output higher last week, while travel fuel consumption declined along with overall petroleum demand, the U.S. Energy Information Administration (EIA) said Wednesday.

Production for the week ended March 25 ticked up to 11.7 million b/d after holding at 11.6 million b/d through all of February and most of March, EIA’s latest Weekly Petroleum Status Report showed. American producers have been under pressure to increase crude supplies amid mounting global demand and waning Russian oil exports during the Kremlin’s war in Ukraine.

Exploration and production companies, however, have cautioned that it takes time to ramp up drilling and output – and that is particularly true in the current inflation-infused environment. High labor and input costs are making it difficult to secure the staff and resources needed to boost output, said director Tom Biracree, Oil and Gas Financial Analytics.

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The “same post-pandemic inflation that is plaguing the broader U.S. economy” is hampering energy companies, said Biracree, in a report for RBN Energy LLC. He also noted that major producers are under pressure to invest in renewable energy and return capital to shareholders via dividends and share buybacks.

Still, he and other analysts anticipated that production would rise this year, and the latest EIA data may signal a beginning. That would be significant, if it proves true, because global supplies trailed demand in the second half of 2021 and into this year, resulting in lofty prices. The war in Ukraine has amplified this, with major energy companies pulling out of Russia in protest and Western governments slapping the Kremlin with waves of economic sanctions.

The United States, for one, banned imports of Russian oil earlier this month.

Russian crude exports are falling as a result. Rystad Energy estimated that between 1.2 million and 1.5 million b/d of Russian exports have been lost since the start of the conflict on Feb. 24.

“The destination of the remaining crude exports from Russia (approximately 4.5 million b/d) is increasingly unknown, although it will likely be Asia, primarily China and India,” as European countries are weaning themselves from Russian energy, said Rystad’s Claudio Galimberti, senior vice president of analysis.

What Will OPEC Do?

This could leave Europe short on supplies – absent increases from the United States or Saudi Arabia-led OPEC, the world’s largest producers.

OPEC and its partner countries known as OPEC-plus – which includes Russia – are scheduled to meet Thursday to discuss their collective production goals for the coming months.

Analysts are looking to see if OPEC members may bolster output to offset Russia’s woes. A Bloomberg survey this week, however, found that a majority of Wall Street analysts expect OPEC and its partners to hold the line at monthly production increases of 400,000 b/d. This has been policy since last August, which sets a measured pace that gradually unwinds production cuts of nearly 10 million b/d made in April 2020 amid the pandemic.

OPEC members in recent weeks have said publicly that, while the war creates a major wildcard on the supply front, the pandemic continues to present unknowns on the demand side. Because of this, they are leery of increasing production too quickly.

Indeed, said Rystad’s Galimberti, demand has tapered in China this month amid fresh outbreaks of the coronavirus there. A combination of virus flare-ups and war uncertainty, he said, has tapered demand in parts of Europe as well.

In the United States, meanwhile, demand has climbed most of this year alongside a growing U.S. economy. However, petroleum consumption for the March 25 period declined 6% week/week, with demand for gasoline, jet fuels and distillates all down.  

“Gasoline demand decreased week-over-week and is tracking below pre-Covid levels while distillate demand experienced a severe drop and is now underperforming the five-year average,” said Randy Ollenberger, BMO Capital Markets analyst.

Analysts blame soaring prices. Gasoline costs reached record level earlier this month after Brent crude, the international benchmark, soared to $130/bbl. Oil prices in the second half of the month have been choppy, but Brent held well above $110 Wednesday, up about 45% this year.