US Oil Production Will Disappoint Again In 2025

Why Slowing U.S Production Growth Will Impact Oil Prices Beyond

One of the biggest misconceptions in the oil market is the perceived growth in non-OPEC+ oil supplies moving forward, particularly from the US. Consensus within the oil market has been robust US production growth set to continue for the foreseeable future.

Of course, the IEA is the poster child of said consensus. The IEA is expecting around 1.5 million b/d of production growth in 2025 from non-OPEC+ sources, 0.62 million of which is expected to be produced in the US.

However, as I detailed in depth here, many signs point to slowing US production growth moving forward. Just as US production growth disappointed expectations in 2024, it is set to do the same in 2025 through a combination of geology, misleading EIA accounting and unrealistic expectations.

Not only that, but we are also likely to see little production growth in the US over at least the next three to five years. While these dynamics may not have dramatic implications for oil prices in 2025, they certainly will for the rest of the decade. As such, it is worth taking a moment to re-hash some of the signals pointing to slowing US production.

On face value, the EIA’s monthly production data (as of October) shows US oil production reaching an all-time high at 13.45 million b/d, representing growth of only 0.30 million b/d versus October 2023.

Of course, as I detailed here, due to the accounting methods of the EIA, one must view these number with a grain of salt. Indeed, when we adjust the EIA’s monthly production figures by their adjustment factor, we can see actual oil production in 2024 has been flat. In actual fact, adjusted production has barely budged over the past 24 months after being overstated for much of 2023.

It is clear the reality of US production is minimal.

We can gain further insight into this dynamic by looking at US crude exports. As we can see below, exports are not only down year-over-year, but can declined throughout the entirety of 2024. While some of this lack of growth can be attributed to weak economic growth abroad, it’s clear the trend in exports is not signalling an increase in US production in 2024.

As it stands, US oil production in 2024 is set to have its lowest year of growth in since prior the shale revolution. Not only has recent US oil production disappointed, but evidence points to similar trends moving forward.

Indeed, despite rising production over recent years, the rig count continues to fall.

As do drilled but uncompleted wells (DUCs).

On its own, a decline in DUCs is not necessarily bearish for further production, as a falling number of DUCs could result not just from a decline in drilling activity but instead from an increase in well completions (which would be positive for supply). This is what occurred from mid-2020 until 2023, where DUCs were declining and the completed well count was rising, meaning producers were completing more wells than they were drilling, explaining much of the increase in production during this period. But since early 2023, completed wells, new wells drilled and drilled but uncompleted wells have all been on the decline.

We are also seeing increases in production occur with fewer and fewer employees in recent years.

Thus, as I have discussed in the past, recent US production growth is largely a result of improving productivity.

As a quick refresher, there have been a number of factors driving these recent productivity gains, such as:

• Increased rates of production from newly completed wells from technology advancements and drilling techniques, such as longer lateral lengths and optimised well spacings. This has allowed producers to increase production with fewer rigs and completion crews;
• High grading, with producers optimising Tier 1 wells over Tier 2 wells, a dynamic often seen when Tier 1 wells move closer to completion; and,
• Private producers overproducing in hopes if cashing in on the recent M&A boom. This dynamic was particularly notable during the M&A frenzy in 2023.

It is also worth noting that some of the lack of recent new drilling activity is also a result of the M&A that occurred during 2023 within the energy sector, with 2024 seeing those acquiring companies turn their attention to integrating their newly acquired businesses, so we should see some kind of rebound in drilling activity in 2025, but its likely to be minimal given the weaker oil prices we have seen of late. There is little reason to think the rig count will rise anytime soon.

In addition, the lack of capital expenditures in the industry will catch up at some point. Upstream oil spending has been flat for a decade now on an inflation adjusted basis. When we consider the higher decline rates of unconventional oil production (which Exxon estimate to be as high as 15%), an increasing level of capex is required just to maintain existing production, let alone grow new production.

Another factor worth mentioning here is we now have much higher interest rates than at any point since early 2010s, which makes financing expansion capex a much more difficult proposition.

Clearly, growth in shale production is going to be challenged moving forward. Not only are their capex headwinds for long-term production, but geological headwinds also continue to mount. As I touched on earlier, Tier 1 wells are being exhausted which will eventually leads to declines in productivity as higher capex requirements are required to maintain production and producers shift focus to Tier 2 wells. US oil production is also becoming gassier and gassier, another sign of exhausting oil reserves.

So to recap, what we have in relation to US oil production is the following:

• Little to no growth over the past 24 months when look at production adjusted for the EIA’s accounting methods;
• Recent production occurring as a result of productivity gains, which are likely to be finite given the geological headwinds facing the shales (high grading of Tier 1 wells, gassier production);
• Falling rig count, completions, DUCs, O&G employees and upstream capital expenditures, all of which are likely to constrain future growth;
• Higher interest rates and financing costs;
• Higher decline rates of existing wells; and,
• Industry consolation and a focus on shareholder returns and industry control by oil majors.

What this means is that US oil production is likely to disappoint estimates in 2025 and beyond, and clearly suggests Trump will most likely be unable to meet his production growth target of 3 million boe/d (and if he does, it will be via NGLs and natural gas as opposed to crude oil). And perhaps more importantly, plateauing US oil production reduces the likelihood of any OPEC+ disunity and allows the cartel to bring spare capacity back online in a manner that is much more supportive of oil prices (more on this later).

The Outlook for Oil Prices in 2025

Turning now to what these dynamics actually mean for oil prices in 2025, the most important point worth understanding here is should US oil production disappoint consensus in 2025, then much of the projected surplus will disappear, particularly as other non-OPEC+ growth sources also disappoint (looking at you Brazil).

This certainly doesn’t paint an overly bullish picture for 2025, but it likely removes much of the left tail risk implied by paper forecasts for the coming year. The latest delay and rescheduling in unwind of the 2.2 million b/d voluntary cuts by the eight OPEC+ members also helps alleviate much of the expected paper surplus in 2025. But don’t expect major deficits in 2025.

Indeed, there remains plenty of headwinds for oil prices in the immediate future. The most notable of these is the weakness in global economic growth outside of the United States, notably in China. As I detailed recently, demand has been holding back oil prices, and not much has changed on this front over the past couple of months.

The time of triple digit oil will be when Chinese growth returns and after OPEC+ can bring back spare capacity without negatively impacting balances. While we are slowly seeing signs of improvement in Chinese leading economic indicators, until we see a real stimulus package by policy makers (which they have hinted may be coming this year), Chinese demand growth is likely to be muted.

This means 2025 is setting up as a similar year to 2024 for oil prices, but importantly, it is not likely to be anywhere near as bearish as consensus has been expecting and was pricing in as we closed out 2024. Market participants are coming around to the idea that not only are paper balances overstated to the downside, but many of the left tail risks facing the market have diminished in their probability.

The primary of these was OPEC+ disunity resulting from overproduction in Iraq and Kazakhstan that could result in a Saudi price war to punish these members and reclaim market share from the US. But what we have clearly seen in recent months is the probability of such an outcome to be overstated. Importantly, not only was the December meeting and delay of cut unwinds testament to this, but we are seeing Iraq and Kazakhstan reduce their production back to target and compensate for recent overproduction. OPEC+ disunity and price wars tend to occur when non-OPEC+ supply is growing rapidly, and that is clearly not the case at present as we have seen.

Another dynamic worth highlighting as it relates to OPEC+ production cuts is the delta between production and exports. When we compare the decline in OPEC+ production to the decline in OPEC+ exports, the former is much more significant than the latter. This does not mean to say increases in OPEC+ production are not a headwind for prices (they are), but just that they are not likely to be as bearish as they may appear on face value.

Also pointing toward a neutral outlook for prices in 2025 are inventories. While it is true we saw material declines in US crude oil inventories throughout the second half of 2024, that was much less the case when we consider total crude and petroleum inventories in the US, which are commencing 2025 at levels on slightly below the five and 10-year averages.

The same can be said when we look at global commercial oil inventories.

We must also remember these five and 10-year averages are being biased higher due to the builds we saw in 2020. As it stands, weakness in the oil market is now largely in the refined product segments (notably distillates), which itself is largely a result of stagnant industrial activity and economic growth.

That refining margins are not moving higher in-line with prices over the past few weeks is testament to this.

Having said that, there are a number of bullish developments worth highlighting, particularly as it relates to expectations. As we saw earlier, consensus expectations is for a ~1 m b/d surplus in Q1 and inventories to build accordingly. So, as we see further evidence of non-OPEC+ oil supply disappointing to the downside and inventories not building to the extent to which they are projected, this will put upside pressure on prices. This tailwind should be present for much of the first half of 2025.

The recent rally in spot and tightness were are seeing in the physical market highlighted by strengthening term structure is testament to this.

In all probability, this dynamic could see prices move as high as $85-$90 by mid-year as bearish expectations get washed out.

We have already seen this play out to some degree, as positioning has moved from record bearish levels a few months ago to much more neutral levels now.

One final dynamic worth highlighting that has the potential to further support prices and deplete Q1 inventories is the colder than average weather expected in the US over the first half of January.

Not only will this cold weather significant increase demand for heating (via heating oil/distillate and propane), but we could see some production impacted briefly as we saw in January of last year. Given propane stocks are currently well above their seasonal averages, a above average spike in seasonal propane demand could see an additional ~30,000-40,000 drop in total crude and petroleum inventories through Q1.

However, aside from the potential tailwind of cold January weather, and given the recent rally in prices/unwind in spec positioning, this recent rally may be reaching a short-term top, thus traders should perhaps be a little cautious in the short-term, particular if the cold weather does not occur in January as expected. The next few weeks are also generally on a so-so period for oil price performance.

Nonetheless, while the outlook for oil prices in 2025 is largely natural (expect prices to be largely rangebound between $70-$85), this outlook is clearly much less bearish than previously expected. Should we see inventories trend sideways or even draw on net through Q1, then prices could easily hit $85-$90 by mid-year, but expect any such rally to be short-lived.

Until we see robust economic growth return that allows the unwinding of OPEC+ cuts in a manner that does not impact balances, rangebound oil prices are likely to continue. 2025 looms as a trader’s market, while long-term investors should use weakness to buy into attractive equities. My favourite ways to play the long-term oil thesis is via offshore drillers and services, Canadian O&G productions and US natural gas producers.