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LONDON: US crude oil production has stabilised and is set to start rising again, after the massive shock last year caused by the coronavirus epidemic and a volume war in the oil market between Saudi Arabia and Russia.

US production was 11.1 million barrels per day (bpd) in January, essentially unchanged from December, according to data published by the US Energy Information Administration on Wednesday.

Output was still down 1.7 million bpd compared with the same month a year earlier, and 1.8 million bpd from the cyclical peak in November 2019 (“Petroleum supply monthly”, EIA, March 31).

But production is no longer declining month on month as the industry has adapted and prices have rebounded after the crisis, creating a floor from which output is likely to start increasing by the middle of this year.

In the short term, output is likely to have declined again sharply in February because of the extreme cold that disrupted the Texas oilfields, and the interruption probably bled into the first part of March.

But these are short-term interruptions driven by adverse weather rather than prices and market conditions so they should reverse rapidly.

By April and certainly by May, US production should start rising, slowly at first, then accelerating into the second half of the year.

Experience shows there is a lag of around four or five months between changes in the price of WTI futures and drilling rates, and then another lag of up to six months between changes in drilling and changes in output.

Front-month WTI futures prices hit a low of less than $20 per barrel in April 2020, and the number of rigs drilling for oil hit a cyclical low four months later in August.

Based on previous experience, output should hit a cyclical low roughly six months later, putting the trough sometime in the first quarter of 2021. Since April 2020, front-month futures prices have roughly tripled to $60 per barrel, while the number of active rigs has nearly doubled since August.

The drilling recovery is broadly following the same trajectory as after the two previous slumps ending in May 2016 and May 2009.

Once the weather-related production problems in February and March are out of the way, the earlier increase in prices and drilling should filter through to higher production in the second quarter.

US production is likely to remain below its previous peak of almost 13 million bpd throughout 2021 and 2022, but as output starts to turn upward, the extra barrels will start competing for market share with OPEC+.

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