U.S. Oil Production to Near Record-High Despite Price Slide -- Fed

Despite the continued fall in crude oil prices -- which have now slid below $50 per barrel, the level at which many analysts thought the downturn would stop -- U.S. oil producers are expected to continue to produce at levels the nation hasn't seen in more than four decades, new federal data show. However, considering current prices, supply, and demand, analysts say it's tough to imagine production will continue at the rate the Fed projects.

The U.S. Energy Information Administration (EIA) released its latest Short-Term Energy Outlook for 2015 on Tuesday. The report shows despite the continuation of a six-month-long decline that's taken Brent crude down by more than $20 a barrel, U.S. producers -- namely those in the northern Plains Bakken formation region -- will continue to produce at a breakneck speed, likely sending domestic production to its second-highest level in history and highest since 1970.

"Total U.S. crude oil production averaged an estimated 9.2 million barrels per day (bbl/d) in December," according to EIA's report released Tuesday. "Forecast total crude oil production averages 9.3 million bbl/d in 2015. Under EIA's price forecast, projected crude oil production averages 9.5 million bbl/d in 2016, which would be the second-highest annual average level of production in U.S. history; the highest was 9.6 million bbl/d in 1970."

The production climb comes despite falling retail gasoline prices, which are around $2 per gallon, the lowest they've been in almost six years in the U.S. Tuesday's EIA report shows government analysts expect those retail prices to stay within a half dollar of $2 per gallon through the year, more than $1 cheaper than it averaged for the whole of 2014. It represents a major cost savings for the average U.S. fuel consumer, though some analysts say domestic production can't continue to grow under the current pricing trend at the pump.

"Driven largely by falling crude oil prices, U.S. weekly regular gasoline retail prices averaged $2.14 a gallon on January 12, the lowest since May 4, 2009. U.S. regular gasoline retail prices are projected to average $2.16 per gallon in the first quarter of 2015. EIA expects U.S. regular gasoline retail prices, which averaged $3.36 a gal in 2014, to average $2.33 per gallon in 2015," according to EIA's Tuesday report. "The average household is now expected to spend about $750 less for gasoline in 2015 compared with last year because of lower prices. The projected regular gasoline retail price increases to an average of $2.72 per gal in 2016."

"It just makes sense that domestic production will run into some trouble once the hedges are gone. If oil stays below $50 for an extended period of time, domestic production will be curtailed," says Peter Meyer, senior director for agricultural commodities at PIRA Energy Group. "It looks to me like the EIA is taking quite a leap of faith given current pricing."

The question of whether domestic oil production will fall may be answered later in the first quarter of this year; Meyer says that's when oil producers in the Bakken region will see hedges they currently have in place "roll off," exposing them to market prices well below levels existing when those hedges were put in place. Only then will the market's true cost-competitiveness be exposed to some of that region's larger producers, and if production costs put them in the red, the pumps may be turned off.

"We are surprised at the resiliency of the Bakken producers but also know that they’ve done an admirable job of hedging a lot of their output when prices were much higher than they are now," Meyer says. "The litmus test will occur once the hedges roll off, sometime late in the first quarter. Only then will we find out their true cost of production."

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