The market has not yet paid attention to the surge in U.S. oil production

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[Oilprice.com reported on February 2]

• Wall Street banks expect oil supply to be on a shortage trend in 2022, while oil supply from OPEC, the International Energy Agency and the U.S. Department of Energy will be surplus.

• Standard Chartered bank said that basically, the surge in oil production in the fourth quarter of 2021 in the United States has not attracted attention.

The energy bull market shows no signs of slowing down. Despite little movement in crude oil prices, the stock easily closed at the top of the S&P list on Tuesday. The most popular benchmark index in the energy sector is the Energy Select sector SPDR ETF (NYSEARCA:XLE), which is up 23.0% so far this year, while the S&P 500 has returned -4.6%. Oil prices extended the rally at the beginning of the year, and recently, Brent crude oil prices have touched intraday lows for 5 consecutive days in the past week and intraday highs in 3 days.

The Joint Technical Committee of the Organization of the Petroleum Exporting Countries met on Tuesday to discuss oil market fundamentals. A ministerial meeting will be held on Wednesday. According to Reuters, the group predicts that the oil surplus will reach 1.3 million barrels per day in 2022, compared with the previous forecast of 1.4 million barrels per day.

OPEC+ is likely to stick to its 400,000 bpd monthly production growth, while Goldman expects cartels to announce at Wednesday's meeting that it will raise its production quota by 800,000 bpd, the group's sources said. Since the current agreement was reached in July 2021, OPEC+ production targets have been raised by 400,000 bpd on seven occasions at monthly meetings.

Interestingly, Goldman Sachs, JPMorgan and Morgan Stanley predict a deficit in oil in 2022, while OPEC, the International Energy Agency and the U.S. Department of Energy all forecast large surpluses in oil.

Another oil and commodities expert warned that the oil market could be overproduced, faster than expected.

Fly under radar

On Feb. 1, the latest commodities update, Standard Chartered Bank said that basically, the surge in oil production in the fourth quarter of 2021 in the United States has not yet attracted the attention of oil markets and oil analysts.

Standard Chartered noted that in October 2021, the U.S. Energy Agency predicted that the U.S. oil supply (excluding refining and processing revenues) will reach 17.86 million barrels per day next month. However, analysts estimate (using revised data published in the January 31st U.S. Energy Agency's monthly oil supply magazine "PSM") that U.S. oil supply in November actually averaged 18.795 billion bpd, an increase of 352,000 bpd. That's 935,000 bpd higher than the U.S. Energy Agency's forecast above, and only 375,000 bpd (1.96%) below the all-time high of January 2020.

Related: Arctic Storm Causes U.S. Gas Prices To Rise 10%

Standard Chartered bank said that in the latest earnings report of oil companies, the surge in U.S. oil production is obvious. As of now, oil production in the fourth quarter was 2.018 million bpd, an increase of 980,000 bpd (5.1%) QOQ. Corporate guidance suggests that this growth is likely to continue, particularly as ExxonMobil (NYSE:XOM) says its goal is to increase production in the Permian Basin by 25 percent, while Chevron (NYSE:CVX) expects production in the Permian Basin to grow by 10 percent throughout the year over the same period.

The surge in U.S. oil supply runs counter to market claims that investment banks support the oil super cycle. Investors are demanding dividends, they are not focused on rising stock prices, and U.S. oil supply growth is expected to be limited in 2021. However, Standard Chartered analysts say many ignore the fact that oil and gas companies can significantly raise dividends and capital expenditures at current oil prices.

In fact, analysts have predicted that we may see agencies, consultancies and Wall Street analysts significantly revise up U.S. oil supply growth in 2022. If U.S. oil supply remains at November 2021 levels in 2022, average annual growth will still exceed 1 million barrels per day, higher than current forecasts for U.S. supply growth by the International Energy Agency and the OPEC secretariat.

Standard Chartered said it was unexpected that U.S. oil supplies are expected to continue to grow in 2022, and that growth will not last long under the market's radar.

Capital constraints

Fortunately, U.S. oil production growth will not continue indefinitely, and independent producers will be forced to discipline capital.

Commodities experts predict that growth will slow in 2023 and beyond, with production growth from independent public companies dragged down even at higher price levels. Shareholder pressures to demand capital expenditure discipline and return capital can also drag them down. Rising service costs and underinvestments are impacting the progress of drilling new wells.

Translation: Li Jin

Reviewer: Gao Tiange

Editor: Li Jin