Forecasters believe US oil production will be up next year, but differ on the amount

Key Points
  • Oil markets forecasters see U.S. crude production rising in 2018, but disagree on how much it will grow.
  • The flexibility in the U.S. shale oil patch is making it hard for forecasters to project U.S. growth, the International Energy Agency said on Thursday.
  • Further clouding projections, cost-conscious U.S. drillers may spend more prudently on new production than they have in the past.
A worker prepares to lift drills by pulley
Brittany Sowacke | Bloomberg | Getty Images

A trio of closely watched energy organizations all raised their forecasts for American oil production this week, but the prognosticators can't seem to agree on one thing: Just how much more crude will U.S. drillers pump?

The flexibility and innovation in the U.S. shale oil patch — where new production can be started up quickly — is making it difficult for forecasters to make projections about American oil supply in 2018, the Paris-based International Energy Agency said in a monthly report on Thursday.

That might explain why forecasts this week were all over the map.

The U.S. Energy Information Administration on Tuesday said it expects U.S. output to grow by 780,000 barrels a day next year. The following day, the 14-member oil cartel OPEC forecast growth of 1.05 million barrels a day. And on Thursday, IEA said it sees the American oil patch raising output by 870,000 barrels a day.

"That's a wide margin of error, so the key takeaway is no one really knows what that value is going to be, but it is going to be a sizable chunk," Matt Smith, director of commodity research at ClipperData, told CNBC's "Squawk Box" on Thursday.

US oil net imports haven't done this since 1985: ClipperData's Matt Smith
US oil net imports haven't done this since 1985: ClipperData's Matt Smith

Adding to the confusion, oil prices are on the rise, and U.S. shale drillers have pumped aggressively in the past when that happens. But many are now saying they're focusing on generating positive cash flow and returning money to shareholders.

That means they may have less capital to spend on funding new production, so a continued rise in oil prices might not produce the same output growth the market has seen in the past. Shale producers rely on an expensive drilling method called hydraulic fracturing to free oil from rock formations.

The "new mantra in the U.S. shale regions is 'moderation', reflecting a desire to greet stronger prices as an opportunity to consolidate rather than to launch yet more headlong expansion," IEA said.

Independent drillers have long borrowed heavily to fund growth, and are notorious for failing to deliver on promises to generate positive cash flow. But this year, shareholders have signaled they want drillers to get their finances in order.

Still, some analysts believe the new focus on financial discipline won't necessarily create a huge drag on overall U.S. production growth.

Barclays analysts on Wednesday said U.S. production can grow by 1 million barrels a day next year even as drillers try to shape up their balance sheets.

Commodities tomorrow: Will US production continue to rise?
Commodities tomorrow: Will US production continue to rise?

The bank's equity research analysts warn that "capital discipline should not be confused with austerity." Many publicly traded firms are now healthy enough to spend more prudently while still growing output, in their view.

While some drillers might shrink their capital spending to buy shares back from stockholders or fund higher dividends, many will stick with their short- and medium-term plans, they say.

Analysts at financial services company Stifel also think some publicly traded drillers can grow production without spending beyond their means as oil prices rise.

In September, the firm estimated that the drillers it covers would increase their oil volumes by 20 percent next year while outspending their cash flow by $3.2 billion. Last month, with forward oil prices having risen 9 percent from September, it said those companies can grow volumes by 18 percent while underspending cash flow by $3.1 billion.

The companies with the best free cash flow yield in 2018 include Devon Energy, Continental Resources, Marathon Oil, Newfield Exploration and Abraxas Petroleum, according to Stifel's research.

However, many small and medium-sized drillers will struggle to generate both positive cash flow and output growth, Stifel said.