US drilling activity will likely start to pick up by the end of the year and climb more steadily into 2022 if the current higher prices hold, the US Energy Information Administration said July 7 in its latest Short-Term Energy Outlook.
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US oil production has not reacted sharply to the recent jump in prices, as investors continue to demand capital discipline that prioritizes shareholder returns over production growth.
EIA said it sees that changing if WTI prices remain above $60/b, a level that has signaled robust activity among US operators in the past.
Higher production will likely not appear until the end of the year because changes in rig counts typically lag WTI prices by three to six months, and production lags rig counts by another two months, EIA said.
EIA expects US crude production to average 11.2 million b/d in the third quarter before rising more steadily, from 11.3 million b/d in Q4 2021 to 12.2 million b/d in Q4 2022.
The report sees US oil output averaging 11.1 million b/d in 2021 and 11.85 million b/d in 2022. US drillers pumped an average of 11.31 million b/d in 2020 when oil prices and demand plunged as a result of the pandemic and oil price war.
Despite its outlook for increased drilling, EIA held out the possibility that capital discipline might keep operators on the sidelines for longer.
"The recent pace of rig deployment indicates that operators are adding rigs more slowly than during past periods when prices reached similar levels," EIA said. "If operators take a more cautious approach to rig deployment than we are expecting, crude oil production could be lower than in our forecast."
EIA raised its outlook for oil prices by $4 for 2021 and by more than $6 for 2022.
EIA now expects average 2021 crude prices of $65.85/b for WTI and $68.78/b for Brent and average 2022 crude prices of $62.97/b for WTI and $66.64/b for Brent.
Major risks ahead
Although EIA expects oil markets to be "fairly balanced" in 2022, it sees global supply starting to outpace demand, which will put moderate pressure on prices, the report said.
A major uncertainty, however, is the ongoing fight within OPEC and its allies over how to ease production limits in the coming months and whether to extend the supply agreement through 2022.
Global oil demand is expected to grow by 5.33 million b/d this year, which EIA trimmed by 80,000 b/d from last month's forecast. It sees 2022 oil demand growing 3.72 million b/d, an increase of 80,000 b/d from last month.
"For 2021, in addition to rising economic activity, oil consumption growth is driven by reopening economies and a return to travel patterns more similar to pre-pandemic norms," it said. "In 2022, economic growth alone becomes the main driver of oil consumption growth."
Oil demand growth remains uncertain in many non-OECD regions where vaccination campaigns have been slower than in the US and Europe, EIA said. And the spread of coronavirus variants and the effectiveness of vaccines are "significant risk factors to a full and sustained global recovery."