Despite all the talk about rising rig counts and the resilience of shale producers, the Energy Information Administration (EIA) is predicting that US production of both oil and natural gas is set to fall. In fact, for natural gas, this is a major event as this year will be the first time since the beginning of the shale revolution in 2005 that natural gas production would fall year-over-year. The prediction of falling gas production and to a lesser extent oil production, should have a chilling effect on the market and is potentially very potentially bullish.

We need OPEC to comply with the recent production cut to help save US oil output. That is basically what EIA is saying as U.S. crude oil production that averaged 9.4 million barrels per day (MBD) last year, is forecast to average 8.9 million mbd this year and fall again to 8.8 mbd next year. The falling US output is a sign that despite higher prices US producers have a long way to go to get back to 9.8 mbd high. The EIA does says that, “U.S. monthly oil production could increase more quickly next year if OPEC’s recent decision to trim its output pushes the price of oil above $50 a barrel, which would encourage more investment in U.S. regions that have tight oil production.”

The EIA is bullish on the demand side as, “A stronger economy in the United States and in other countries is expected to lead to higher global oil demand during 2017 than previously forecast, especially if major manufacturing regions continue to see growth.” The US held up their end of the bargain with record factory orders yesterday. “An increase in U.S. manufacturing is likely contributing to more distillate fuel consumption”.

The combination of lower US output and stronger demand caused the EIA to increase their price forecasts for Brent crude to $43 per barrel in 2016 and $52/b in 2017. West Texas Intermediate (WTI) crude oil prices are forecast to average about $1/b less than Brent prices in 2017. They say that the values of futures and options contracts indicate significant uncertainty in the price outlook. The NYMEX contract values for March 2017 delivery, traded during the five-day period ending December 1 suggest that a range from $34/b to $71/b encompasses the market expectation of WTI prices in March 2017 at the 95% confidence level.The EIA also is predicted that will break the record for gasoline demand this year!