Surging U.S. oil production may set a record in 2024, shielding consumers from Mideast war and pressuring OPEC

Published Sun, Jan 21 20247:00 AM ESTUpdated Wed, Feb 7 20244:05 PM EST

Surging U.S. oil production could set new records this year after ending 2023 at a historic level, pressuring OPEC and cushioning the market — at least so far — from price spikes that may emerge from tensions in the Middle East. U.S. production has undergone a dramatic turnaround after hitting a 62-year low in 2008, according to S & P Global Commodity Insights. By the end of last year, the U.S. was producing more oil than any other country in history, according to S & P. And U.S. production doesn't look to be pulling back. Crude oil production in the U.S. likely returned to record levels, 13.3 million barrels per day, during the week ending Jan. 12 after briefly falling below that level, according to the latest estimates from the Energy Information Administration. Chevron CEO Michael Wirth believes the U.S. could break records in 2024. "I wouldn't be surprised to see 13.5 million barrels per day this year or even a little bit more than that," Wirth told CNBC's Brian Sullivan at Goldman Sachs' energy conference earlier this month. Analysts at Macquarie are forecasting U.S. crude production to close out 2024 at 14 million barrels per day after falling slightly during the winter and rebounding in the second half of the year, according to Walt Chancellor, an energy strategist at the firm. "Call it the North American advantage," Daniel Yergin, vice chair of S & P Global told CNBC last Thursday at the World Economic Forum in Davos, Switzerland. "Canada and the United States have added a million and a half barrels of new supply to the world market." Once an important regional standard, West Texas Intermediate is increasingly displacing Brent as the leading global benchmark, said Adi Imsirovic, a veteran oil trader who is now an energy security expert at the Center for Strategic and International Studies . "You guys are basically setting prices for the whole world," Imsirovic, who is based in the United Kingdom, said of U.S. oil production. Oil prices fail to launch Oil prices have struggled to break out despite Houthi militant attacks on commercial shipping in the Red Sea and OPEC's promise to cut 2.2 million barrels of oil per day from the market this quarter. West Texas Intermediate futures have fallen nearly 5% since late November when the militant attacks began. U.S. crude prices are almost 3% lower since OPEC and its allies, OPEC+, announced production cuts. Meanwhile, the price of Brent futures can't seem to break above $80 a barrel "despite two conflicts and a number of terrorist attacks in one of the critical shipping lanes for oil through the Red Sea," Bank of America told clients in a research note Friday. It is striking that tensions in the Middle East have not really lifted prices, Yergin said. The absence of a significant price move is largely due to surging U.S. production, which is rebalancing not only supply and demand dynamics but also global geopolitics, Yergin said. "The psychology of the oil market has changed because the U.S. is by far the world's largest oil producer," said Yergin, author of The Prize: The Epic Quest for Oil, Money, and Power . Barring a major disruption, increased oil supply is expect to outstrip demand in 2024 due to rising production in the U.S., Canada, Brazil and Guyana, according to a forecast released by the International Energy Agency on Thursday. Supply is forecast to grow by 1.5 million barrels per day to a new high of 103.5 million barrels per day, according to the IEA. Demand will grow by 1.2 million barrels daily, down from 2.3 million in 2023, with the post-pandemic recovery over and major economies set to slow. Oil production in the Americas, particularly in the U.S., is putting OPEC in a bind. WTI and Brent closed out 2023 down more than 10% and OPEC+ production cuts have so far failed to lift prices. OPEC risks losing customers as the U.S. becomes an increasingly attractive place to do business, with WTI cheaper than Brent and no geopolitical risk, according to Bob Yawger, managing director and energy futures strategist at Mizuho Americas. "The OPEC folks are running the risk of their traditional customers falling in love with the U.S. barrel because of its geopolitical ease of operation," Yawger told CNBC. "You can just sail a vessel to the beautiful Gulf Coast of the United States and do business in a nice clean fashion," he said. The IEA said in its December outlook that the "shift in global oil supply from key producers in the Middle East to the United States and other Atlantic Basin countries" is profoundly reshaping global oil trade. U.S. crude exports to Europe, for example, hit a record 2.3 million barrels a day in December as refineries work to offset delivery issues in the Red Sea, according to Matt Smith, lead analyst for the Americas at Kpler . European refineries are shunning Middle Eastern crude and seeking out more secure supplies from the Atlantic basin, Smith said. Any geopolitical risk premium has remained muted thanks to U.S. production, but that would change if tensions in the Middle East lead to a direct confrontation with Iran that disrupts supply. Goldman Sachs, for example, says oil prices could double if there is a prolonged disruption to shipments through the Strait of Hormuz. 'Golden era' Stronger U.S. oil production in 2023 surprised even oil industry CEOs such as Chevron's Wirth and Occidental's Vicki Hollub, they told CNBC in recent interviews. "I'm a little surprised at the strength last year," Wirth told CNBC earlier this month. "I'm not surprised that we saw growth — it was a little stronger than I think we would have expected." Chancellor with Macquarie said U.S. production was strong in 2023 because returns were simply attractive: "Prices have been at levels that incentivize incremental supply," the analyst said. As long as WTI is in the $70 to $80 range strong growth should continue, Chancellor said. The outlook would start to come under pressure if U.S. crude fell into the $60s, he said. For growth to come to a halt, the price of WTI would likely have to fall into the $50s, he said. Shale producers have a rough breakeven price of $47 a barrel where the budget is balanced but they don't generate a return, according to Chancellor. The Saudis do have one "extremely powerful weapon" as OPEC comes under pressure from the U.S. — excess capacity and the threat to flood the market with oil, Imsirovic said. A "substantial surplus" of crude could hit the market in the second quarter if OPEC+ unwinds their voluntary cuts amid strong production outside OPEC, according to the IEA's January forecast. "It would be prudent of U.S. producers to be careful in terms of putting too much supply in the market," Hollub cautioned the industry in a December interview with CNBC. If OPEC brings enough oil back to market the only solution is for U.S. supply to shrink though this scenario is not in Macquarie's base case, Chancellor said. "Unless the OPEC folks decide they want to go price war, this is a golden age for the U.S. producer — or should I even say the Western Hemisphere producer," Yawger said. This article has been updated to correct the name of the Energy Information Administration.