When it comes to US oil markets, the story of 2022 is not all a mere continuation of 2021. Here are key highlights from our team's Q1 2022 oil supply outlook:

US oil production poised to return to previous records. IHS Markit projects US oil production will surpass 12.6 million b/d by year-end 2022, nearing its previous all-time high of 12.8 million b/d recorded in 2019. Entry-to-exit production is expected to rise by more than 850,000 b/d during 2022, driven almost entirely by output gains in the Permian Basin, Bakken, and deepwater Gulf of Mexico.

An upturn in drilling activity and upstream spending is well underway. Onshore Lower-48 rig counts reached nearly 650 in January 2022, up from less than 250 in mid-2020. IHS Markit expects rig activity will surpass 700 in mid-2022 before ultimately climbing to 760 by year-end 2023. All told, upstream capex is projected to reach nearly $100 billion during 2022, up from $67 billion in 2021.

Sustained oil prices above $70/bbl delivers a continued torrent of free cash flow. US operators are on track to generate a cash surplus of more than $70 billion during 2022. Although this sum is largely in line with 2021 totals, distribution will disproportionately benefit shareholders in 2022.

Cost inflation dampens an otherwise rosy near-term outlook. Industry expectations have coalesced around an anticipated 7-10% increase in service sector cost during 2022, leading to a sharp deterioration in capital efficiency for most operators.

Above-ground issues pose little immediate risk to US production growth. A host of issues - in particular, water disposal constraints in the Permian Basin, supply chain bottlenecks, and federal drilling restrictions - pose potential challenges for upstream producers, but the worst of these risks have generally failed to materialize.

Over the longer term, inventory exhaustion is likely to emerge as a mounting concern. Although drilling inventory within lower-tier acreage remains abundant, exhaustion of core acreage is likely to emerge within smaller, mature unconventional plays over the next several years.

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Posted 03 February 2022 by Imre Kugler, Director, Upstream Research, S&P Global Commodity Insights and

Narmadha Navaneethan, Associate Director, Upstream Solutions, S&P Global Commodity Insights and

Prescott Roach, Sr. Analyst, North American Plays & Basins, S&P Global Commodity Insights and

Reed Olmstead, Executive Director, Upstream Research, S&P Global Commodity Insights

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.