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Nothing Seems to Be Stopping America's Oil Growth Engine

Matthew DiLallo, The Motley Fool

America's oil production continued its unrelenting ascension last month, rising another 90,000 barrels per day (BPD) from December's level to an average of 12 million BPD, according to the U.S. Energy Information Administration. That has the U.S. on track to produce 12.4 million BPD this year and 13.2 million BPD in 2020, which would obliterate last year's record output of 10.9 million BPD, a number that shattered the previous mark that stood for 48 years.

Fueling America's high-octane oil growth is the Permian Basin, which stretches across parts of western Texas and southeastern New Mexico. That continued output expansion comes even though two notable speed bumps -- lower oil prices and pipeline constraints -- have tried to slow it down.

A silhouette of an oil pump in an oil field at sunset.

Image source: Getty Images.

Barely feeling a pinch from lower oil prices

Oil prices rose for most of 2018, which gave drillers incentive to boost spending on new wells, with the bulk of that incremental capital going into the Permian Basin. Occidental Petroleum (NYSE: OXY), for example, added $1.1 billion to its capital budget last year, with all those funds allocated to the Permian Basin. That additional spending enabled Occidental Petroleum to accelerate its growth rate.

However, with oil prices crashing to end 2018, producers are cutting spending. In Occidental Petroleum's case, it's reducing its capital budget by 10% to $4.5 billion. However, even with that spending reduction, Occidental Petroleum is on track to grow its total production 9% to 11% this year -- up from its 5% to 8% long-term target -- including 30%-plus growth out of the Permian.

Meanwhile, WPX Energy (NYSE: WPX) is cutting its 2019 capital budget. The company initially expected to spend between $1.45 billion and $1.65 billion this year, which would have been enough money to grow its U.S. oil volumes 25% to 30% from last year's level. The recent crash in crude prices, however, forced the company to reduce the range to between $1.1 billion and $1.275 billion, which is still enough to increase its output 20% from 2018's average. Overall, the company noted that it's forecasting only a 6% impact on its original production guidance despite a 23% spending reduction.

A close-up of a gas pipeline under construction.

Image source: Getty Images.

What pipeline constraints?

Another issue affecting Permian producers is dwindling space on pipelines to move crude out of the region. At one point last year, oil companies were pumping 3.3 million BPD out of the Permian but had only about 3.6 million BPD of pipeline space. That bottleneck has eased somewhat in recent months, after Plains All American Pipeline (NYSE: PAA) raced to finish its Sunrise expansion project, which came online in November. Plains All American is also on track to start partial service of its Cactus II pipeline by the third quarter of this year, with full service expected by next April. Meanwhile, Plains All American recently joined forces with ExxonMobil (NYSE: XOM) and another midstream company to move forward with a new pipeline project, Wink to Webster, which should start up in the first half of 2021. That pipeline is crucial to support ExxonMobil's Permian-focused expansion plans.

Railroads have also been working to fill in the gaps. Union Pacific (NYSE: UNP) signed a deal last year to ship to 400,000 barrels per month through the end of this year to help move crude out of the Permian until new pipelines start service. That decision paid off during the fourth quarter, when Union Pacific's crude oil shipments increased 25% as it helped producers get their oil to higher-priced refining and export markets.

The region's pipeline problems should disappear over the next year, since several new lines will enter service. Not only will Plains All American finish Cactus II, but EPIC Midstream and Phillips 66 Partners will also begin service on their two pipelines by late 2019 to early 2020. Meanwhile, Energy Transfer and several partners should complete the Permian Gulf Coast pipeline by the middle of next year. Those pipelines should enable Permian producers to continue expanding their output at a healthy rate for years to come.

America's oil growth engine is showing no signs of slowing

The U.S. is on track to deliver another record-smashing year of oil production, which will probably make the country the largest crude producer in the world, since both Russia and Saudi Arabia are reducing their output this year in an effort to boost prices. While the recent oil-price slump has forced some U.S. oil companies to cut spending, it isn't having as much impact on their ability to continue growing. Likewise, pipeline constraints aren't hurting, since the industry has found ways to work around the problem until new lines come online later this year. The industry is thus poised to continue growing in the coming years, which could have the greatest positive impact on pipeline companies like Plains All American.

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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool recommends Union Pacific. The Motley Fool has a disclosure policy.