Earnings reports from the first quarter of 2023 have provided anecdotal evidence that supply chain woes that had been plaguing U.S. O&G operators since the pandemic have been easing.
For example, as late as the fourth quarter of 2022, some operators said they had difficulty obtaining critical materials like specialty tubular products.
In fact, according to the Dallas Fed Energy Survey published this past March, which asks around 200 O&G firms located in Texas, southern New Mexico and northern Louisiana about their business activities, the supplier delivery-time index for all firms fell to negative 14.0 during the first quarter of 2023. This contrasts with a positive 14.4 in the fourth quarter of 2022. The shift marks the first time since late 2020 that the time to receive materials and equipment is no longer increasing quarter over quarter, according to the survey.
Upstream data and analysis from Rystad Energy also points to lowering oil breakevens — the requisite price of oil to cover the costs of drilling a new well. In the Permian Basin in 2023 versus 2022, the estimated breakeven price to drill a new well dropped by about $0.50/bl, to approximately $42/bl.
First quarter earnings reports also revealed that crude oil production rates rose year-on-year in major crude oil producing areas of the U.S. This tallies with EIA estimates, which revealed in its monthly Drilling Productivity Report that major onshore oil plays in the U.S., including the Permian and Eagle Ford plays in Texas and the Niobrara play in Colorado, showed sequential gains in average quarterly production rates. The EIA reported that total U.S domestic production for the first quarter 2023 was 12.5 million b/d, an increase of about 200,000 b/d from the previous quarter. Annual production is on pace to increase to 12.5 million b/d in 2023 from 11.9 million b/d in 2022.
The EIA anticipates global crude oil demand to rise by 1.6 million b/d in 2023 and by 1.7 million b/d in 2024, with the U.S. and other non-OPEC countries leading incremental global production growth. U.S. petroleum and other liquids consumption is expected to grow from 20.3 million b/d in 2022 to 20.5 million b/d in 2023, and to 20.8 million b/d in 2024.
By comparison, the International Energy Agency (IEA), in its May 2023 Oil Market Report, estimates even greater global crude oil demand growth for 2023 from year earlier levels at 2.2 million b/d, reaching an average of 102 million b/d, based on continued expectations for strong demand recovery from China. According to the IEA, global oil demand balances are expected to tighten considerably during the second half of 2023, as demand in China, and Asia in general, is expected to accelerate. The IEA has reported that Organisation for Economic and Cooperative and Development crude oil inventories are already trending down significantly as we approach the summer driving season in the U.S. and summer travel, globally.
Supply chain woes might have eased for some players, but other risks that are always prevalent in the industry have intensified, including geopolitical and other macroeconomic factors. These risks have historically led to volatility in oil prices and may have influenced the surprise production cut that OPEC+ announced in early April, which is expected to reduce global crude oil supply by approximately 300,000 b/d on an annual basis, according to the EIA.
Russian oil production continues to remain robust despite sanctions, and there has been growing sentiment in the market that additional measures might be imposed to reduce the amount of sanctioned Russian crude oil making its way to buyers around the globe.
Against the backdrop of rising global crude oil demand and tightening supply, the U.S. O&G industry stands ready to provide reliable supply for domestic consumption, and to markets abroad. In 2022, the U.S. increased crude export volumes by over 20% versus 2021, and by over 14% for finished petroleum products. The U.S. O&G sector can continue to work through operational bottlenecks to help meet growing world demand but needs an environment that helps enable ample production and infrastructure.
