Macro

US Oil Output May Drop 1M Barrels/Day by 2025 Without Rig Count Boost, Investor Warns

US oil production may drop by 1 million barrels/day by 2025 without increased rig counts, says Vaughan Nelson.

By Barry Stearns

6/10, 12:59 EDT
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Key Takeaway

  • US oil production may decline by 1 million barrels per day by H2 2025 unless rig counts increase, warns Vaughan Nelson's Adam Rich.
  • Current US crude oil futures are at $77 per barrel; prices need to reach $90 to boost rig counts.
  • The number of active US rigs is at its lowest since January 2022, amid industry consolidation and a focus on shareholder returns.

US Oil Production Outlook

US oil production is facing a potential decline of about 1 million barrels per day by the second half of 2025 unless there is a significant increase in rig counts, according to Adam Rich, deputy chief investment officer at Vaughan Nelson. The current production level of 12-13 million barrels per day could be maintained for another six to nine months, but without an uptick in rig activity, a substantial drop is imminent. Rich emphasized, "We could probably keep the 12-13 million barrel-per-day level for six to nine more months, but if we don’t see rig counts really start moving up here, that’s going to be a big problem."

The number of active US rigs has fallen to its lowest level since January 2022, driven by industry consolidation and a shift in focus among producers towards moderate growth and shareholder returns. Vaughan Nelson, managing $16.4 billion in assets, highlights that oil prices need to approach $90 per barrel to incentivize an increase in rig counts. Currently, US crude oil futures are trading around $77 per barrel.

OPEC+ Production Decisions

Oil prices have been under pressure following OPEC+’s decision to begin unwinding some voluntary production cuts later this year. This decision contributed to a third consecutive weekly decline in crude prices, with Brent and WTI trading at four-month lows last week. The Organization of the Petroleum Exporting Countries and its allies agreed on June 2 to maintain overall production curbs through the end of 2025 while gradually unwinding an additional 2.2 million barrels per day of voluntary cuts starting in October.

The market reaction to the OPEC+ announcement was amplified by algorithmic trading, leading to a 2.5% drop in Brent prices last week. West Texas Intermediate (WTI) also saw declines, trading close to $76 per barrel. Despite the bearish sentiment, some analysts believe the impact of the additional barrels on global supplies may be less significant than initially feared. Priyanka Sachdeva, senior market analyst at Phillip Nova Pte, noted, "Investors who overreacted to the OPEC announcement last week are trying to grasp the possibility that additional barrels might not end up entering into global supplies."

Market Sentiment and Economic Data

The broader sentiment in the oil market remains bearish, influenced by a stronger US dollar and rising Treasury yields following a stronger-than-expected May jobs report. A stronger dollar makes commodities priced in the unit more expensive for buyers using other currencies, adding downward pressure on oil prices. Warren Patterson and Ewa Manthey, strategists at ING, observed that while the decline in crude prices was modest, the overall market sentiment remains negative.

Traders are now looking ahead to monthly reports from OPEC and the International Energy Agency, which are expected to provide further insights into the sector's health. Additionally, the Federal Reserve's upcoming decision on interest rates is a key focus, with strong economic data and persistent inflation leading the market to scale back expectations of an imminent pivot to lower borrowing costs.

Street Views

  • Adam Rich, Vaughan Nelson (Bearish on US oil production):

    "We could probably keep the 12-13 million barrel-per-day level for six to nine more months, but if we don’t see rig counts really start moving up here, that’s going to be a big problem."