The Outlook for U.S. Energy Production & Midstream Impact

• US oil and gas producers are dropping rigs and trimming budgets, but production will likely be more resilient than headlines may suggest.
• If oil prices remain around current levels, moderate US oil production growth likely continues. There is a greater risk to production growth if oil lingers below $50 per barrel.
• It is important to differentiate between the fundamentals for oil and those for natural gas, as the robust outlook for natural gas demand remains intact and unimpacted by oil volatility.

With U.S. benchmark oil prices dipping below $60 per barrel last month, some producers are recalibrating their drilling plans and dropping rigs in response to weaker oil prices. That said, the outlook for U.S. production has arguably not changed as much as headlines may suggest. This note digs into the near-term outlook for U.S. energy production and the implications for midstream.

Investors are asking about the outlook for U.S. energy production as the rig count falls and producers discuss pulling back on activity. History provides important context to recent commentary from U.S. oil and gas exploration and production companies (E&Ps). E&Ps spent much of the 2010s in the penalty box with investors for growing their output too aggressively and destroying shareholder value along the way. Remember, energy was 12% of the S&P 500 in 2010, and had fallen to just 4% by the end of 2019.

Accordingly, U.S. oil and gas producers have been very focused on capital discipline in recent years. Many companies were reporting 1Q25 results just as the U.S. oil benchmark was hitting four-year lows beneath $60 per barrel. Understandably, these companies needed to show their investors that they were being responsive to lower prices, even if actions were somewhat symbolic. Alongside earnings, public companies announced plans to drop rigs and trim drilling budgets. However, production outlooks were little changed.

For example, ConocoPhillips (COP) lowered its capex guidance by about $450 million at the midpoint (-3.5%) but maintained its production guidance. EOG Resources (EOG) trimmed its 2025 budget by $200 million or 3%, but the midpoint of its U.S. oil production guidance for the year fell by just 0.4%. In early May, Diamondback Energy (FANG) lowered its 2025 capital budget by $400 million, or 10%, at the midpoint. The company planned to drop three rigs and one completion crew this quarter. However, FANG’s annual oil production forecast only came down 0.8% at the midpoint. For some, production upside in 1Q is also helping mute the impact of reduced activity.

To be fair, weaker prices tend to disproportionately weigh on smaller, private producers. Companies only operating a few rigs are more likely to cut back in response to lower prices. The U.S. oil rig count has come down noticeably and fairly quickly. Per Baker Hughes, the number of operating oil rigs in the U.S. has gone from 489 in early April to 442 as of June 6 ­­­— a low not seen since late 2021.

The U.S. Energy Information Administration is forecasting total U.S. oil production growth of 210 thousand barrels per day (MBpd) or 1.6% for 2025. For 2026, it forecasts 80 MBpd, or 0.6% growth, to 13.5 million barrels per day. For context, oil production in 2024 was up 270 MBpd, or just over 2%.

As the primary driver of oil and gas production growth in the U.S., the Permian Basin merits additional discussion. The Permian is an oily basin, which means that oil prices largely dictate activity levels, even though wells have gotten gassier over time. The Bakken in North Dakota and Eagle Ford in Texas are the other notable oil plays in the U.S. However, the Permian produces around five times as much oil, at 6.2 million barrels per day currently.

Within the Permian, Exxon (XOM) and Chevron (CVX) are leading producers, with their positions bolstered by past acquisitions. Permian production growth is a key component of their long-term strategic plans. CVX is expecting Permian production growth of 85,000 barrels of oil equivalent per day (Boe/d) this year and a 5%-6% compound annual growth rate through 2026. Exxon is targeting 2 million Boe/d of Permian volumes by 2027, and 2.3 MMBoe/d by 2030. This compares to Exxon’s 1.5 MMBoe/d of production at the end of 2024. These larger players with more emphasis on long-term strategy may help support more resilient production in the Permian. In short, XOM and CVX are less reactive to short-term price volatility.

Looking more broadly, in May, Permian midstream player Plains All American (PAA) reaffirmed their forecast for Permian oil growth between 200 and 300 MBpd from the end of 2024 to the end of 2025. Management noted growth so far this year had already exceeded 100 MBpd.

On its recent earnings call, management of Enterprise Products Partners (EPD) discussed how the Permian is likely in maintenance mode if oil is at $55 to $60 per barrel (bbl), implying flattish production instead of growth. However, even in a scenario with flat oil production to 2027, it models notable growth in natural gas and natural gas liquids. For context, oil production declines more steeply than natural gas. In other words, a well is very productive at the beginning of its life and volumes decline over time, with a steeper drop for oil.

While oil prices have been volatile amid tariff uncertainty, macroeconomic concerns, and geopolitical risk, U.S. natural gas prices are driven more by domestic supply and demand. The long-term outlook for growing North American natural gas demand remains robust underwritten by rising LNG exports and growing power demand. This is creating demand-pull pipeline opportunities for midstream companies. For these pipelines, volumes are driven by the steady demand from a power plant or LNG export facility ­­­— not impacted by fluctuations in natural gas prices, much less oil prices.

The EIA is forecasting U.S. natural gas production growth of just under 2 billion cubic feet per day in 2025 and 2026. This represents a little over 1.5% growth each year. By comparison, natural gas production was essentially flat in 2024 due to weak prices.

Midstream operates volume-driven businesses, so investors often assume that more production is better for these companies. However, when U.S. oil production was skyrocketing in 2018-2019 (i.e., growing by roughly 1.5 million barrels per day each year), midstream equities did not perform that well. The Alerian Midstream Energy Index (AMNA) was up 7.6% on a total-return basis during the two-year period, while the Alerian MLP Infrastructure Index (AMZI) was down 6.1%.

In recent years, moderate oil production growth has been a goldilocks scenario for this space, and performance has been solid as companies generate free cash flow and return excess cash to investors. Companies have executed well on dividend growth over this time period as well.

If oil prices can mostly stay above $60/bbl, moderate oil production growth likely continues. If oil falls below $50/bbl and stays there for weeks, production may see more of an impact in time as producers weigh further cuts to activity. In that scenario, it is important to remember that midstream operates infrastructure under long-term contracts with solid protections like take-or-pay agreements and minimum volume commitments. These features help ensure midstream providers still gets paid, even if a customer were to change plans in response to lower prices.

Finally, it is important to distinguish between the fundamentals for oil and those for natural gas. Natural gas has its own drivers. Tariffs and geopolitics have less bearing on domestic natural gas. Midstream companies focused on natural gas infrastructure, particularly large pipeline systems supplying demand centers, have little direct read-through from oil price volatility. Generally, gathering and processing companies ­­­— which operate closest to the wellhead ­­­— tend to be more sensitive to oil and gas production trends.

While producers are cutting back on spending and drilling activity in response to lower prices, modest production growth is still expected this year. That should be just fine for midstream.

AMZI is the underlying index for the Alerian MLP ETF (AMLP) and the ETRACS Alerian MLP Infrastructure Index ETN Series B (MLPB).

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