Record US oil output challenges Saudi mastery

LONDON, Dec 4 (Reuters): US crude oil production set a record for the second month running in September, highlighting the challenge to Saudi Arabia and its OPEC? partners as they cut their own production to boost prices.
Repeated OPEC? output cuts since the fourth quarter of 2022 have thrown a lifeline to U.S. producers, averting a deeper slump in prices and conceding more market share to them.
U.S. crude and condensate production increased by 224,000 barrels per day (b/d) to 13.24 million b/d in September from August, according to the US Energy Information Administration.
Crude and condensate production had increased by 342,000 b/d over the previous three months (annualised growth of 11 per cent) and was 750,000 b/d higher than a year earlier (an increase of 7 per cent).
The large increase in domestic production has contributed to the accumulation of crude inventories and softening of prices since the start of the fourth quarter.
In the most recent month, production increased in the federal waters of the Gulf of Mexico (+108,000 b/d) and Alaska (+19,000) as well as in the Lower 48 states (+97,000).
Lower 48 production climbed to a record of 10.8 million b/d, surpassing the pre-pandemic peak of 10.5 million b/d set in December 2019.
Lower 48 output had increased by 210,000 b/d over the previous three months (an annualised rate of +8 per cent) and 750,000 b/d over the previous year (an increase of +7 per cent).
There are few signs Lower 48 production growth is slowing despite the slump in prices and fall in the number of active drilling rigs over the last year.
Inflation-adjusted front-month US crude futures prices have fallen from an average of $121 per barrel in June 2022 to $90 in September 2023 and further to $77 in November 2023.
Drilling activity usually turns down around 4-5 months after prices and production turns down 10-12 months after prices fall.
Roughly in line with this, the number of rigs drilling for oil dropped from an average of 623 in December 2022 to 510 in September 2023 and 498 in November 2023.
Nonetheless output has continued to increase as drillers boost efficiency by focusing on the most prospective sites and boring longer horizontal well sections to maximise contact with oil-bearing rock.
US producers have also benefited from repeated OPEC? cuts that have stabilised prices at a relatively high level and blunted the price signal to cut drilling further.
Front-month prices averaged $90 in September 2023, which was slightly higher than $87 the same month a year earlier after taking inflation into account.
By November, prices had fallen to average of $77 but that was almost exactly in line with the inflation-adjusted average since the start of the century.
The market is being rebalanced through OPEC? cuts and increases in the group's collective spare capacity rather than changes in prices and U.S. production.
Saudi Arabia, together with its closest OPEC? partners, has reluctantly resumed its traditional role of swing producer balancing the market by its own output.
Meanwhile, US shale firms and other non-OPEC non-shale (NONS) producers have stepped into the same role as free riders as North Sea producers in the 1980s.
Free riders have been the primary beneficiaries from Saudi Arabia and its allies' determination to avert an accumulation of crude inventories and lift prices.
Enlarging the control group has always been Saudi Arabia and OPEC's preferred strategy for dealing with free riding.
In the 1980s, there was a (failed) attempt to reach out to the United Kingdom and other North Sea producers to share the burden of supporting prices.
Since the 1990s, there have been repeated attempts to bring in Russia and other former Soviet states, culminating in the Vienna Agreement and Declaration of Cooperation in 2016.