U.S. oil production is expected to drop alongside demand this month, with American consumers projected to purchase 17 million fewer barrels of fuel each day compared with April 2019.
Oil companies are expected to lower output by 500,000 barrels a day as travel nearly grinds to a halt due to the coronavirus and as a trade war between Russia and Saudi Arabia sends prices plummeting.
The projections come from the latest forecast by the Energy Information Administration (EIA), which said the high supply of oil will keep prices low for the next several months.
That trend may persist into 2021, with producers reducing fuel production by 700,000 barrels per day, according to the EIA.
“If realized, the 2020 production decline would mark the first annual decline since 2016. Typically, price changes impact production after about a six-month lag. However, current market conditions, combined with the COVID-19 pandemic, will likely reduce this lag as many producers have already announced plans to reduce capital spending and drilling levels,” the EIA said.
U.S. oil producers are particularly sensitive to a severe drop in the price of oil given their reliance on fracking — a more costly process than the one associated with oil derricks.
Fracking also brings more oil to the surface within the first year of the life of the well, making it tough for producers to wait out changes in the market.
Reduced production would also suggest oil companies are drilling fewer new wells, allowing oil supply to gradually taper off as existing wells begin to produce less oil.
If prices continue to fall, producers might eventually “shut in” wells, essentially capping them to pause production. The move risks damaging the lifetime production of the well but allows them to reopen once prices rise.