LONDON - U.S. oil and gas production continued to trend higher through April – a delayed response to very high prices in the middle of 2022 after Russia’s invasion of Ukraine.

But the fall in prices and drilling rates since late 2022 is set to reduce output in the second half of 2023 and tighten markets for both oil and gas later this year and into 2024.

Crude and condensates production from the Lower 48 states excluding federal waters in the Gulf of Mexico increased by 37,000 barrels per day (bpd) in May compared with April.

Production increased by 986,000 bpd (+10%) compared with the same month a year earlier, according to data from the U.S. Energy Information Administration (EIA).

Lower 48 production was running at the second-fastest rate on record and only 70,000 bpd below the previous peak of 10.52 million bpd in November and December 2019.

Experience shows U.S. production responds to a change in prices with an average lag of around 12 months, so near-record output in April 2023 reflects very high prices in the second quarter of 2022.

After adjusting for inflation, U.S. crude futures prices averaged $108 per barrel in April 2022 (74th percentile for all months since 2000) rising to a peak of $120 (82nd percentile) in June 2022.

Since then, front-month futures prices have fallen to $78 in December 2022 (51st percentile) and just $70 in June 2023 (43rd percentile).

In response to the fall in prices, the number of rigs drilling for oil and gas has fallen from an average of 780 in December 2022 to 687 in June 2023, according to data from oilfield services firm Baker Hughes.

The reduced rig count should ensure Lower 48 production turns down in the third quarter of 2023 and continues to fall through at least the first quarter of 2024.

Provided there is no global recession, slower or negative growth from the Lower 48 combined with cuts announced by Saudi Arabia and its allies in OPEC+ are likely to reduce global inventories later in 2023 and early 2024.

Ironically, cuts by OPEC+ are likely to stabilise crude prices at a higher level than would otherwise have been the case, relieving some pressure on Lower 48 producers and stabilising their output at a somewhat higher level.

On the gas side, dry production amounted to 3,063 billion cubic feet (bcf) in April 2023, an increase of almost 6% from April 2022.

Total production in the first four months of the year hit a record of 12,239 bcf, up 7% from the same period a year earlier.

Like oil, gas production has continued to increase in a lagged response to very high prices during the second and third quarters of 2022.

In real terms, monthly average futures prices peaked at more than $9 per million British thermal units in August 2022 (78th percentile for all months since 2000) but had slumped to less than $2.50 (4th percentile) in June 2023.

Gas production growth is set to slow sharply in the second half of 2023 and into the first half of 2024 which should erode excess inventories during the winter of 2023/24.

U.S. gas stocks were 261 billion cubic feet (+14% or +0.58 standard deviations) above the prior ten-year seasonal average at the end of April 2023.

The surplus had grown to 290 billion cubic feet (+12% or +0.76 standard deviations) by late June 2023, according to data from the EIA.

But provided winter temperatures are roughly in line with the recent average, the slowdown in production growth should eliminate the surplus over the course of winter 2023/24.

John Kemp is a Reuters market analyst. The views expressed are his own

(Editing by Mark Potter)