LONDON, July 2 (Reuters) - U.S. oil production continues

to grow even as gas starts to turn down, with the diverging

fortunes of the two sectors reflecting the much steeper slump in

gas prices and drilling activity since the middle of 2022.

Crude and condensates output from the Lower 48 states

excluding federal waters in the Gulf of Mexico increased to

10.99 million barrels per day (b/d) in April, according to the

U.S. Energy Information Administration (EIA).

Production was running at the third fastest rate on record,

and only insignificantly slower than peaks set in November and

December 2023.

After adjusting for inflation, front-month U.S. crude

futures prices have retreated from a monthly average of $124 per

barrel (82nd percentile for all months since 2000) in June 2022.

But they were still as high as $73 per barrel (42nd

percentile) in December 2023 and have since recovered to $79

(49th percentile) in June 2024.

The relatively moderate decline in prices has caused the

number of rigs drilling for oil to decline by only 22% since the

end of 2022.

Production has continued to increase, though more slowly.

Lower 48 output was up by 0.5 million b/d (4.8%) in April 2024

compared with a year earlier, with growth down from 0.9 million

b/d (9.5%) in April 2023.

There is no strong signal to increase or reduce production,

given current prices are close to the long-tern average in real

terms.

Production growth is mostly being driven by improvements in

efficiency as industry consolidation enables the rationalisation

of drilling sites and boring wells with longer horizontal

sections to drain oil from larger areas.

Chartbook: U.S. oil and gas production

In contrast to oil, the slump in gas prices, drilling and

output has been much sharper, with real prices falling to

multi-decade lows, forcing a brutal adjustment.

Dry gas production slowed to 101.7 billion cubic feet per

day (bcf/d) in April 2024 from 102.7 bcf/d in April 2023, the

slowest for 16 months.

With no equivalent of OPEC+ to pre-empt a decline in prices

by coordinating an output cut, prices have slumped much further

since 2022.

Inflation-adjusted futures prices plunged from an average of

more than $9 per million British thermal units in August 2022

(85th percentile) to a record low of just $1.76 in February

2024.

The number of rigs drilling for gas has slumped almost 40%

since September 2022, twice as far as oil, according to the

weekly survey prepared by field services company Baker Hughes.

Lower production should gradually rebalance the market and

eliminate excess inventories inherited from the mild winter of

2023/24. But rebalancing is taking a bit longer than many

traders anticipated earlier in the year.

Working inventories were still the second-highest on record

for the time of year on June 21, and 568 billion cubic feet

(+22% or +1.44 standard deviations) above the prior ten-year

seasonal average.

Stocks have remained high despite a heatwave across the

central and eastern United States in June which boosted

electricity consumption on the Eastern Interconnection to a

record seasonal high at one point.

But increased air-conditioning demand and gas-fired

generation have so far made only a limited impact on excess

stocks, which means gas drilling and production will have to

remain lower for longer.

The result has been renewed downward pressure on prices,

with front-month prices slipping back to around $2.50 recently

down from well over $3.00 in the middle of June.

Related columns:

- U.S. oil and gas production show signs of flattening (June

6, 2024)

- U.S. gas surplus will be eliminated before end of winter

2024/25 (May 8, 2024)

John Kemp is a Reuters market analyst. The views expressed

are his own. Follow his commentary on X https://twitter.com/JKempEnergy

(Editing by Jan Harvey)