US oil production starts to respond to higher prices

“No plan survives first contact with the enemy.” That military maxim, adapted from the writings of the Prussian general Helmuth von Moltke the Elder, could be usefully applied to a lot of the thinking around US energy security.  

When the US tight oil industry emerged in the 2010s, setting the country on course to become the world’s largest producer, there was a lot of speculation about how calculations around American energy security had changed forever. 

The US no longer needed to care about what happened in the Middle East, said some. The Strategic Petroleum Reserve had become obsolete, said others. 

The unfolding crisis created by the war with Iran has shattered those illusions. The integration of the US into world markets for crude and refined products means that disruption to supplies from the Middle East still has a direct impact on American consumers. 

The average retail price of regular gasoline in the US is about US$4.36 a gallon this week, up 41% from a year ago, according to the American Automobile Association. Diesel is about US$6.28 a gallon, up 71%. 

The importance of global supplies for US consumers was underlined on Friday, when President Donald Trump announced a commitment from Russia to sell diesel on world markets in return for sanctions relief. Russia’s ban on diesel exports, imposed in July, will be partially lifted. 

President Trump said he expected Russia to sell 800,000 tons (about 6 million barrels) of diesel to world markets in October and November, representing about 120,000 barrels per day and another 1 million tons (about 7.5 million barrels) “immediately thereafter.” Over the weekend, President Trump told President Volodymyr Zelenskyy to end the attacks on Russian refineries that have disrupted global diesel supplies. “He’s not going to affect our farmers, and he’s not going to affect our ranchers, and he’s not going to affect the rest of the world. So he better damn well stop,” he said. 

Meanwhile,the US Strategic Petroleum Reserve (SPR), along with reserves held by other countries, has been playing a vital role in the crisis. About 132 million barrels of crude have been released from the SPR since March, at an average rate of about 630,000 b/. The administration announced that the total planned release – conducted as an exchange, to be repaid with interest – would be 172 million barrels. A further 4 million barrel release was announced over the weekend to relieve the disruption created by Hurricane Isaias. 

Set against these numbers, the contribution to increased global supplies coming from the US upstream oil industry has so far been negligible.  

In February, just before the war began, the US Lower 48 states were producing about 11.29 million barrels a day of crude and condensate. This month, they will produce about 11.35 million b/d, Wood Mackenzie estimates, an increase of only about 60,000 b/d. 

In the short term, American consumers have seen little visible benefit from the nation’s position as the world’s largest oil producer.  

In the longer term, being a net oil exporter should mean that the US as a whole benefits from higher prices. But the impacts will be distributed unevenly across the country, with oil producers gaining and consumers losing.  

A surge in US production that helps ease tightness in world oil markets and brings down prices would be one clear way for American consumers to benefit. But so far they are still waiting for that benefit to arrive. 

The Wood Mackenzie view 

When thinking about how the US oil industry will respond to the crisis in the Middle East, there are two opposite fallacies that people can fall into. The first is the naïve view that US production will respond quickly to rebalance markets. The US tight oil industry is sometimes described as the new “swing producer”, playing the same role of market management that has for decades been played by OPEC. 

That kind of analysis often misses the fact that US production is determined by hundreds of separate decisions by separate companies, not set by the government as it is in OPEC member states. Unlike some OPEC members, the US has no reserve of spare production capacity that can be brought on stream quickly. Its companies will act to increase output only if they believe that will maximise shareholder value. 

On the other hand, expecting the US tight oil industry not to respond to higher prices would also be a mistake. Wood Mackenzie’s rule of thumb is that production typically takes about nine to 12 months to respond after prices have moved. That means we are starting to see around now the first increases resulting from the surge in crude prices that followed the start of the war at the end of February.  

There are several factors behind that lag, says Nathan Nemeth, Wood Mackenzie’s director of Lower 48 Upstream research. Once companies take the decision to ramp up activity, it takes time to mobilise rigs and pressure pumping fleets, drill and frac wells, and bring them into production. 

A volatile environment, where the oil price outlook is highly uncertain, is a deterrent to increased activity. Companies are reluctant to commit to increased spending if they see a risk that by the time their additional wells are on stream, prices will have fallen back again.  

“The volatility in the oil price makes companies cautious,” Nemeth says. “One tweet can drop crude by US$20 a barrel.” 

An oil futures market in steep backwardation, with prompt prices well above levels for six months or a year out, which has been the case for much of this year, makes it difficult to hedge against that risk. 

As one commenter to the latest Dallas Federal Reserve bank survey put it: “Pricing volatility is near an all-time high given the backdrop of Iran. Swings of $5, $10 and $20 up or down are common. It is very challenging to select a planning price or budgeting price.” 

The oil Majors and larger independents, that have built their appeal to shareholders on disciplined capital management and reliable dividends, are particularly reluctant to commit to increased spending that may seem unjustified if prices fall. 

However, there are some companies that have already started to ramp up activity. There were 462 rigs drilling for oil in the US last week, according to Baker Hughes, up from 418 a year ago. Typically the companies that are drilling more will be smaller and privately-held operators that are taking the opportunity to scale up, Wood Mackenzie’s Nemeth says. 

That increased activity has led him to raise his forecasts for US Lower 48 oil production. Before the war, back in February, Wood Mackenzie was forecasting that production would be close to 11 million b/d in December of this year. Now we are projecting that it will be about 11.4 million b/d. 

As companies enter the autumn budgeting season, setting plans for 2027, the fact that there is no clear resolution to the Middle East conflict in sight may incline more boards to commit to increased activity. 

By December 2027, Wood Mackenzie projects that US Lower 48 production will be about 11.8 million b/d, a full 1 million b/d higher than we were forecasting before the war began. 

Before the war, Wood Mackenzie was projecting that world oil markets would be well supplied this year, as the OPEC+ group unwound its production cuts. Brent crude could have dropped into the US$50-US$60 range. If the war ends and traffic through the Strait of Hormuz returns to its pre-war normal, those conditions could reassert themselves, once global inventories have been rebuilt. 

There are other factors complicating the outlook, including the United Arab Emirates’ decision to leave OPEC, and the revival of Venezuela’s oil industry now international investment is returning.  

But even allowing for that uncertainty, it seems likely that next year US Lower 48 oil production will be higher, exerting downward pressure on global prices. The US tight oil industry may not be an immediate swing producer, but given time it can play something like that role. 

In brief 

Devon Energy has announced a deal to rationalise its portfolio following the US$58 billion merger with Coterra Energy, which was completed in May. It is exiting the Eagle Ford play, selling its assets there to Crescent Energy for US$4.2 billion. Wood Mackenzie analysts described the assets as “firmly in the non-core category” for Devon, and said the sale price was broadly in line with our valuation. For Crescent, which was already the second-largest producer in the Eagle Ford, the deal offers increased scale and the opportunity for synergies valued at US$140million a year. 

Other views 

Unleashing the Caspian’s potential in oil, gas and critical minerals – Simon Flowers, Ian Simm, Malcolm Forbes-Cable and Craig Saunders 

EU methane regulation risks worsening the energy crisis – Simon Flowers and Valentina Kretzschmar 

Four-hour battery storage now beats gas peaking on cost globally 

6 ways large loads are reshaping power market policy – Caitlin Connelly 

Will the polysilicon Section 232 drive upstream solar manufacturing to the US? – Elissa Pierce 

Singapore’s 9.25 GW low-carbon electricity import pipeline is stuck: Wood Mackenzie expects just 15% of the generation mix from imports by 2035 

Why Texas is making data centers wait – Ryan McEntush 

Utility bills are rising Q3 2026 – Powerlines  

What's in the Senate permitting bill – Nikki Chiappa 

Pakistan's solar boom: visible and invisible grid defection in a high-cost, low-reliability power system – Wajid Islam, Jan Rosenow and Asha Amirali 

Quote of the week 

“The disruption in the energy world… gives us plenty of opportunities if you’re able to capture them… I prefer the world of disruption to the peaceful world. There are more opportunities, but you need to have the assets.” 

Patrick Pouyanné, chief executive of TotalEnergies, told the Energy Intelligence Forum in London that the company gained from being vertically integrated. Refineries in Europe, which had been thought of as liabilities, had become “goldmines” this year, he added. 

Chart of the week 

This comes from our recent Strategic Planning Outlook for European power. It shows historic and forecast power generation in the EU, plus the UK and Norway, from 2005 out to 2060. One of the key messages: renewable power in Europe is expected to be on a rising trend for many years to come, despite current headwinds.

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