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When it comes to US oil markets, the story of 2022 is not all a
mere continuation of 2021. Here are key highlights from our team's
Q1 2022 oil supply outlook:
US oil production poised to return to previous
records. IHS Markit projects US oil production will
surpass 12.6 million b/d by year-end 2022, nearing its previous
all-time high of 12.8 million b/d recorded in 2019. Entry-to-exit
production is expected to rise by more than 850,000 b/d during
2022, driven almost entirely by output gains in the Permian Basin,
Bakken, and deepwater Gulf of Mexico.
An upturn in drilling activity and upstream spending is
well underway. Onshore Lower-48 rig counts reached nearly
650 in January 2022, up from less than 250 in mid-2020. IHS Markit
expects rig activity will surpass 700 in mid-2022 before ultimately
climbing to 760 by year-end 2023. All told, upstream capex is
projected to reach nearly $100 billion during 2022, up from $67
billion in 2021.
Sustained oil prices above $70/bbl delivers a continued
torrent of free cash flow. US operators are on track to
generate a cash surplus of more than $70 billion during 2022.
Although this sum is largely in line with 2021 totals, distribution
will disproportionately benefit shareholders in 2022.
Cost inflation dampens an otherwise rosy near-term
outlook. Industry expectations have coalesced around an
anticipated 7-10% increase in service sector cost during 2022,
leading to a sharp deterioration in capital efficiency for most
operators.
Above-ground issues pose little immediate risk to US
production growth. A host of issues - in particular, water
disposal constraints in the Permian Basin, supply chain
bottlenecks, and federal drilling restrictions - pose potential
challenges for upstream producers, but the worst of these risks
have generally failed to materialize.
Over the longer term, inventory exhaustion is likely to
emerge as a mounting concern. Although drilling inventory
within lower-tier acreage remains abundant, exhaustion of core
acreage is likely to emerge within smaller, mature unconventional
plays over the next several years.