U.S. oil production surged to a 43-year high, despite a price war that resulted in a more than 50 percent reduction in active U.S. oil wells.
Oil prices saw downward pressure in volatile trade Thursday morning, after the Department of Energy reported a draw down in crude inventories of 2.8 million barrels for the week ended May 22.
The DOE also reported that U.S. production rose to 9.566 million barrels per day, surpassing the previous peak of 9.422 million set in March. While no weekly data is available beyond 1983, the production number is the highest, if translated to a monthly basis, since May 1972.
From a supply and demand standpoint, record production in the United States and record production of 10.3 million barrels a day from Saudi Arabia in April continue to confirm that global supplies are ramping up in the face of lower prices, not falling.
The Organization of the Petroleum Exporting Countries has adopted a market-based pricing strategy that it hoped would shake out high cost producers. One such high cost producer is the U.S. shale industry, which dramatically boosted world production in recent years.
While U.S. rigs are now down more than 50 percent from last year, analysts and traders have speculated that the rigs coming off line are those that were already declining in production and that the robust rigs are still operating.
In addition, many investors believed that lower prices would squeeze U.S. shale producers to produce less, but the data show otherwise.
Analysts say the high level of production shows that the U.S. industry continues to be resilient and continues to find efficiencies in the system. "As the industry went through the first quarter we really haven't seen the effect of declining rig counts," said Andrew Lipow, president of Lipow Oil Associates.
Still, crude prices pared losses after the report.
"I actually think this report could be a little bullish for the market," said Anthony Grisanti, president of GRZ Energy. "When I look at the numbers I see a 2.8 mm barrel draw in crude and a 3.3 mm barrel draw in gasoline. That tells me that despite record production supplies are decreasing."
"It's possible that with Memorial Day and the start of summer driving season demand picked up, that's seasonal. But in that case I'd expect to see a draw in gasoline, not necessarily in crude."
Thursday morning Reuters reported that OPEC's draft report ahead of the June 5 meeting showed the cartel to believe that non-OPEC producers would continue to ramp production until 2017. If demand conditions don't change that could mean that either the cartel will have to take action to cut supply, or producers as a whole will have to endure lower prices for an extended period of time.
Citigroup analysts, in a note, said they saw no change in OPEC's 30 million barrel a day quote, when the cartel meets June 5. OPEC refrained from cutting production at its November meeting, and already weakening prices fell further.
"Saudi Arabia—the only vote that really counts—seems determined to stick with its new 'market share' driven policy if the record oil rig count in the Kingdom is any indication. The Saudi delegation will be scrutinized for any shift in policy given the overhaul of oil leadership. Ali Naimi remains Oil Minister but the market is keen to understand the implications of Deputy Crown Prince Mohammed bin Salman's newly acquired oversight of the oil sector," Citigroup energy analyst Seth Kleinman wrote.
Kleinman said, for now, OPEC hawks have been "cowed."
"Iran, typically the loudest hawk, is hoping to see its production rise materially in the coming year with sanctions removed, and if it hopes that OPEC will make room for this increase, and hence avoid an intra-OPEC price war, arguing for cuts now would be impolitic at best," he wrote.
Lipow, meanwhile, said the jump in U.S. production likely had little to do with a recent rise in oil prices. Analysts have expected U.S. producers to find more interest in drilling as oil prices rise close to and above $60 per barrel.
Lipow speculated that the increase last week could be the result of the DOE adjusting its weekly data ahead of its release of March monthly data Friday. He said this could be because March production is going to be much higher than the market thinks. Lipow expects it to be around 9.4 million barrels a day but the market may be expecting 9.2 million.
At 9.4 million barrels a day on monthly basis, March production would also be highest since 1972.