US Oil Production Could Plunge in Summer

The oil market has been very weak over the past seven months. The price of a WTI contract went down more than 50% from its 2014 peak of $107 per barrel. Part of the reason for this dramatic sell-off is a resurgent US dollar, which is dragging down oil and commodities in general. However, oil got cheaper in virtually all major currencies (see graph below), meaning that other, more fundamental factors are also at play.

Most analysts agree that the main reason for the collapse in oil prices is a fundamental misbalance between supply and demand. While global consumption has remained broadly stable, global output went up. In fact, there has been a fundamental shift in the marketplace, as the growth in US shale oil production took off in 2011, leading to the erosion of OPEC’s global market share. Indeed, the United States has seen the most significant increase in oil production over the past four years thanks in large part to the technological breakthrough of hydraulic-fracturing and horizontal drilling.

US oil output rose from 5.2 million barrel per day (bpd) in January 2011 to 9.3 million bpd in February 2015. That whopping 67% increase could not have gone unnoticed for the global balance, especially given that US is the biggest consumer and second biggest importer of crude oil in the world. But now that oil lost half of its value, the big question is – can US oil companies sustain their production at current levels?

Analysts have disagreed as to the level of break-even pricing for US shale. What is indisputable, however, is that oil companies are already cutting on future capital investments and curtailing drilling activity. Still, the latest figures from EIA indicate that field production of crude oil reached a record of 9,324,000 barrels per day, even as the number of oil rigs declined 43% from the recent peak (see graph below). What is the reason behind this seeming divergence?

One possible explanation is that oil production does not fall together with rig count. There is a time lag.

If we look at the typical oil-well production curves (graph below), we will see that the output is huge during the first 30-60 days of operation. Production then slows and after about 150 days of operation, the output from the fracked wells falls dramatically (to about 50% of initial output).

Based on this information I have created a simple graph with just two variables: weekly oil production (from EIA) and oil rig count (from Baker Hughes). I then calculated a quarterly change in those variables and I assumed production to rig count lag of 140 days. Thus, the quarterly change in the number of rigs for April 8, 2011 corresponds with the quarterly change in oil production for August 26. This graph allows us to get a feeling of what to expect in future.

If these calculations are correct, than oil production has already reached its peak and from now on should only decline. Of course, a 40% plunge in rigs should not translate into a 40% decline in production in 140 days. What this graph shows is that we may be approaching a period when oil production growth starts running out of steam. We should probably see first q-o-q decline this spring and potentially witness a significant drop in output this summer.

– See more at: http://forexmagnates.com/us-oil-production-plunge-summer/#sthash.rTWIwjKE.dpuf

13 Comments on "US Oil Production Could Plunge in Summer"

rockman on Tue, 10th Mar 2015 3:40 pm 



finally some one how gets time lag. IMHO 140 days is a reasonable factor. But I think they still are a bit optimistic about a relatively small change in production. It isn’t just the lag time from the new wells that ARE NOT being drilled but also the high decline rate of wells drilled in the last half of 2014. OTOH those wells helped push US oil production to record levels. But if those wells decline the typical 30% to 60% much of the gain the in volume the last six months will disappear coincidental with the new production that WON’T materialize because of the lower rig count.

Plantagenet on Tue, 10th Mar 2015 3:55 pm 



140 days is almost 5 months. Thats too long. Its only 3months to the “summer driving season” when US oil demand typically kicks up. I think we’ll see prices firm up by then.

shortonoil on Tue, 10th Mar 2015 4:31 pm 



“finally some one how gets time lag. IMHO 140 days is a reasonable factor.”>/i>

Come on rockman — 90% of the folk here at PO News knew that months ago. What you meant was a writer that “gets it”. But seriously, it may take longer than 5 months for well completions to get caught up. The Bakken had 750 drilled wells still to be completed at the end of December. Other plays probably had similar situations. In that case we may not see the collapse until September, or October. But, its coming, as sure as Christmas!

antaris on Tue, 10th Mar 2015 4:48 pm 



But are they being completed?

GregT on Tue, 10th Mar 2015 4:57 pm 



Does anybody have a best guestimate of what kinds of numbers we are talking about here?

40% of gains in US output since 2011?

Mark Ziegler on Tue, 10th Mar 2015 4:59 pm 



There is still much tunnel vision in the Forex morons. Iranian oil could come online or anything else could happen.

viewcrafters

shortonoil on Tue, 10th Mar 2015 8:12 pm 



But are they being completed?

The industry press seems to say that they are, and common sense tells us that with a 65% annual decline rate the oil must be coming from somewhere! If drilling costs are considered sunk costs, even with oil at the well head in the $30’s, some of these outfits can still pretend that they have positive cash flow. The option is to close their doors, and go home. Instead they are praying for a miracle that will suddenly jack up prices. Short of a miracle, they don’t have much hope!

rockman on Tue, 10th Mar 2015 8:37 pm 



shorty – I wasn’t referring to our illustrious crew here but the stories that were repeatedly posted about the high production level in the face of a falling rig count.

JuanP on Tue, 10th Mar 2015 8:44 pm 



Interesting article. I particularly liked that last graph, the relationship between rig count and later oil production becomes clearly apparent in it.

These seems to confirm what we’ve discussed in the past regarding this issue. I have no idea how large the fall in US shale oil production will ultimately be, but it will be significant.

Investments in deep offshore, tar sands, Arctic, and other expensive forms of oil production is decreasing, too.

How will this affect gas production in the Marcellus field now that associated liquids are yielding smaller or no profits?

JuanP on Tue, 10th Mar 2015 8:53 pm 



Hey, experts, how long do Bakken and Eagle ford wells stay open on average? I was wondering what the cash flow would be for a two year old well at these prices? In other words, for how long do these wells produce a positive cash flow at today’s prices after drilled and finished?

Davy on Wed, 11th Mar 2015 7:06 am 



I am curious to those who think a sustained oil price rise will occur at some point. Can prices rise and find a sustained level? Is there a new goldilocks range now that QE has been curtailed? These econ 101 people see the rig count go down. They understand the shale decline rates. They know the production numbers over the last few years with US shale coming on strong and the rest of the global production stagnating. This is clearly pointing to an econ 101 moment of supply pressure in the works.

I say this because obviously the glut will have been worked down at some point with new supply pressured unable to lift off again until a sustained higher price environment. Let’s not argue a demand or supply glut definition that is irrelevant here. I am not going to deny a higher price in the offing from an econ 101 supply and demand moment. I am questioning will there be sustained high prices to return high price production to the market that is currently being destroyed. I am wondering what the new goldilocks range for oil is ex QE.

My concerns are if real aggregate demand was so good why do we see 20 plus countries cutting rates despite low oil prices? Why is the Fed stuck wanting to raise rates but being unable to? Every time the Fed mentions rates going up the market gets hiccups.

We know higher oil prices and or rate hikes are a tax on the economy. Their results are in somewhat different areas. High oil prices will most certainly impact the real economy more and rates the financial economy. We know the dollar is on a terror up creating huge dislocations in the global FX system with dollar shorts and dollar carry. Higher Fed rates will worsen the distortions and dislocations from a higher dollar.

My question is are we in a bumpy descent. Has diminishing returns and limits to QE ended the high oil prices? It is obvious we need higher prices to bring unconventional production growth back. Is production destruction going to limit increased supply and demand growth destruction leading to the inability of the economy to promote the necessary higher oil prices to stimulate productions?

Timing is an issues too with lag and lead times. We have a hugely complex interconnected system with human nature a foundational component. This complex system is effected by the consequences and unintended consequences of actions with leads and lags. I see a trend developing where the conditions are not favorable to supply and demand growing. I see leads and lags mixing poorly further complicating a healthy economy.

I see overall aggregate growth stagnating. This current growth is really faux growth of debt and rate repression. There is huge mal-investment in Asia stagnating Asian growth with a consumptive west stagnating from choking on debt. This Asian mal-investment will never produce returns hence China’s unprecedented credit creation. China has a world class bad debt problem with extend and pretend policies. The west has a market bubbly that is finding diminishing return issues with further levitation.

In such an environment how the hell is a sustained healthy higher oil price possible? If sustained higher rates and higher oil prices appear unlikely are we not at the end of growth? Is that not the true Peak oil moment. If real sustained growth is over are we not within a year in a noticeable bumpy descent?

We know growth and oil supply are directly related. Since we are in a cloud of repression of indicators, markets, and MSM reporting we will not feel it much. This is a bumpy and undiscernible by most because the effects are subtle.

We know the feeling of a roller coaster climbing for that climaxing run. We all know the topping the climb. There is a feeling of normal right at the top before a quickening of the descent. This descent begins slow and only becomes quick with gravity. We appear to be nearing that top now. https://www.youtube.com/watch?v=9yFvlcw8YtY

Davy on Wed, 11th Mar 2015 7:20 am 



http://www.zerohedge.com/news/2015-03-11/china-reports-worst-industrial-production-data-ever-outside-global-financial-crisis

“overnight it was China’s turn to remind the US that things can always get worse when it reported retail sales, industrial production and fixed asset investment all of which slid about as fast as the C:\China\economy\goalseek.xls would allow them, and wildly missed expectations, suggesting that China will struggle significantly even with hitting its downward revised 7% growth bogey. Putting this ugly data in context, China’s overall industrial production just saw its weakest year-over-year reading ever outside the global financial crisis.”

Revi on Thu, 12th Mar 2015 7:15 am 



September or October. Very interesting.