US oil output won't surge under Trump

Oil markets witnessed choppy trading in Wednesday’s session, with Brent crude for January delivery plunging before rebounding after Donald Trump defeated Kamala Harris to clinch leadership of the White House. Wall Street has expressed concerns that a second Trump term could negatively impact oil prices, with producers eager to drill and produce more when unencumbered by perceived Biden-era bureaucracy. 

However, another section of Wall Street is now arguing that this narrative is flawed. According to commodity experts at Standard Chartered, U.S oil production, and particularly unconventional (shale oil) production, has changed significantly from the time Trump first took office in 2017. StanChart points out that U.S. crude output clocked in at 13.40 million barrels per day (mb/d) in August 2024, an all-time high above the previous record of 3.31 mb/d set in December 2023. U.S. crude production has increased by 4.7 mb/d since the pandemic-era low of May 2020; however, it’s just 0.4 mb/d higher than the pre-pandemic high of November 2019, working out to an annual production growth rate of just 80 thousand barrels per day (kb/d) over this timeframe. Further, the growth clip is forecast to continue to slow down in the current year and in 2025. U.S. liquids supply increased by 1.605 mb/d in 2023, but StanChart has forecast growth of just 630 kb/d in 2024, slowing further to 300 kb/d in 2025.

StanChart notes that the dynamics of U.S. shale oil production make long-term supply increases difficult to maintain, noting that the country’s oil production is dominated by a few majors and independent producers, alongside private companies, rather than a national oil company as is often the case with many OPEC producers. These companies have largely left behind their trigger-happy, drill-baby-drill days and adopted strict capital discipline, eschewing rapid production increases in favor of returning more capital to shareholders in the form of dividends and share buybacks. StanChart also points out that extensive M&A activity in the sector has reduced the number of operating companies, changing the landscape from a patchwork of small producer acreages to larger contiguous acreage. This new modus operandi allows for complex drilling and completion techniques, including multi-pad wells with extremely long lateral sections that are able to optimize spacing and associated infrastructure. These drilling and completion efficiency gains have allowed production to continue growing despite a decline in rig count.

StanChart’s views appear to match those of Goldman Sachs’. Back in July, GS predicted that U.S. crude output would increase by 500,000 barrels per day (bpd) in the current year, a slower growth clip compared to last year’s increase of more than 1 million bpd. Still, the U.S. will account for 60% of non-OPEC production growth, with the Permian expected to post an annual growth of 340,000 barrels per day (bpd), down from an early-year forecast of 520,000 bpd by the Wall Street bank. According to GS, technological and efficiency gains have accounted for virtually all growth by the Texas-New Mexico shale basin since 2020; however, the bank has warned that “the Permian is maturing, and its deteriorating geology will weigh on the production of crude oil down the road.” The Permian rig count has declined nearly 15% from last year’s April high to 309 currently, and is 30% lower than its 2018-2019 average, Goldman Sachs has revealed. GS has predicted that the Permian rig count will be below 300 by the end of 2025.

Different Profile
To cement its bullish stance, StanChart has also pointed out that shale oil has a different production profile to conventional oil. Whereas shale oil production is brought onstream rapidly, peak production is only maintained for a relatively brief period, usually a couple of months, following which hyperbolic decline sets in. The rate of decline is determined by several factors, including reservoir characteristics, completion techniques and production drawdown, but can be between 40-80%. Such high decline rates and short production profiles mean that new production must be continually brought onstream, the so-called ‘Red Queen effect’. Effectively managed, StanChart has predicted that U.S. supply will stabilize at current prices.

Further discouraging large increases in production are incoming tariffs. Back in 2018, Trump imposed 25% tariffs on certain imports of steel and 10% on aluminum. He has pledged to impose massive tariffs of as much as 60% on imported products. Steel is used throughout the drilling and production phases, with treated steel required for drilling equipment, pumps, pipes and tubes. US oil producers have cited various cost pressures as significant headwinds to growth in many recent industry surveys. These costs are significant for new projects considering that the majority of steel piping used for oil and gas drilling and pipeline infrastructure is imported.

Finally, Trump is likely to open up Federal land for exploration and production. However, StanChart has noted that the timeframe required from licensing, to exploration and appraisal, and eventual production is multi-year, meaning any production from federal lands would likely come after his four-year term is over.