Less than two weeks ago we warned that based on the current oil production trend, the US may run out of storage for crude as soon as June.
This is what we said back in early March when the BTFDers were hoping WTI in the low $40s would never again be seen:
Come June, when all available on-land storage is exhausted, each incremental barrel will have to be dumped on the market forcing prices lower and inflicting further pain on the entire US shale complex (just as Q1 results are released which will invariably show huge writedowns as companies will no longer be able to hide behind the SEC-mandated accounting trick that made Q4 results appear respectable). Here’s Soc Gen: “…oil markets can be impatient and prices could drop considerably lower. As we have written previously, we are currently more concerned about downside risk than upside risk.”
Since then, as expected, crude tumbled to new post-Lehman lows, confirming the global deflationary wave is raging (for more details please see China), and WTI only posted a rebound on quad-witching Friday as another algo-driven stop hunt spooked all those who were short the energy complex.
The problem is that despite the latest “dead oil bounce” we have since had to revise our forecast for full US oil storage, and pulled forward the date when this will happen in the aftermath of the latest API inventory data.
Recall that earlier this week API reported, and EIA later confirmed, that for the 10th week in a row there was a “massive 10.5 million barrels (far bigger than the 3.1 million barrel expectation) and a 3 million barrel build at Cushing. If this holds for DOE data tomorrow (and worryingly API has tended to underestimate the build in recent weeks) it will be the biggest weekly build since 2001.”
The DOE indeed confirmed all of this:
It also means that at the current rate of record oil production, storage will be exhausted in under two months, some time in mid-May. At that point, with no more storage to buffer the record oil production, the open market dumping begins and prices of WTI will crater as every barrel will have to be sold at any clearing price, since the producers will have no other choice than to, literally, dump the oil.
In other words, a perfect storm is shaping up for oil some time in late May, early June.
And then we learned something even more startling.
As the Platts oil blog reports, even as oil prices continue to fall amid flat demand and near-record supply, “North Dakota is likely to see a “big surge” in production this June, potentially besting another supply record even if prices continue to crater, according to Lynn Helms, director of the state’s Department of Mineral Resources.”
What make things worse is that this time the production “surge” will have nothing to do with game theory, or beggaring thy oil producing neighbor in hopes that the other, more levered guy goes bankrupt first.
This surge will be largely propelled by two factors: a state-mandated time limit on drilling and the expected trigger of a major oil tax incentive, Helms said.
Here is how Bakken production has looked like in recent months:
Helms, the state’s top oil and gas official, reported last week that North Dakota oil production fell about 3%, or about 37,000 b/d, to 1.190 million b/d from December’s all-time high of 1.227 million b/d. The reduction was expected as sweet crude prices averaged $31.41/barrel in January, down from $40.74/b a month earlier and the statewide rig count fell by 21 to 161.
But Helms said he doesn’t expect production to tumble dramatically, even as prices continue to fall, and even though he expects the statewide rig count to “bottom out” at about 100 rigs. Production, he said, will likely remain between 1.1 million b/d to 1.2 million b/d over the next few months.
Nothing surprising.
And then this will happen: “Bakken production could suddenly skyrocket, by nearly 10%, or an additional 75,000 b/d, to 100,000 b/d in June, Helms said.” This means that despite low prices and production curtailments throughout much of North America, oil production in North Dakota could actually shatter a new record this summer!
This is mainly due to a backlog of between 800 to 1,000 uncompleted wells statewide, about 125 of which need to be completed by the end of June in order to comply with state requirements to complete drilling within a year.
At the same time, operators may wait until June, when a major oil tax incentive known as the “large trigger” is expected to go into effect. The large trigger, which is aimed at boosting Bakken production at times of low crude prices, enters into force when the WTI crude price averages below $55.09/b for five consecutive months.
If that incentive is triggered, which Ryan Rauschenberger, North Dakota’s tax commissioner, said he expects will happen, the majority of wells will be exempt from a 6.5% oil extraction tax for as long as two years.
With that tax break in effect and hundreds more wells running up against one-year state deadlines, production in North Dakota could continue to surge even beyond the summer.
“We’re going to ride these waves of production increases,“ Helms said.
And that, coming just as US spare oil capacity hits its limit, is precisely what all those BTFDers who bought first junk bonds, and most recently, a desperate scramble in follow-on equity offerings by the universe of cash burning US shale companies, is precisely what they did not want to hear. Because no amount of Fed ramblings about the ever weaker US economy will offset what is about to be a veritable oil tsunami.
The time to buy asset may be when there is blood on the streets, but the moment to dump crude (and buy deep OTM puts) will be precisely when the majority of investors and algo-programming math PhDs realize that in just about two months the streets are about to become black, covered entirely in oil.
shortonoil on Sun, 22nd Mar 2015 7:00 am
“This is mainly due to a backlog of between 800 to 1,000 uncompleted wells statewide, about 125 of which need to be completed by the end of June in order to comply with state requirements to complete drilling within a year.”
This is a little bit of a hyped article. There are less than 1,500 uncompleted oil wells in the entire United States, and there are certainly not 1,000 in the Bakken. Completing 125 by the end of June is just exactly what is already happening. There will be no huge surge out of the Bakken over the next three months, maybe a little one, but declines in the EF, and Permian will more than compensate for it. Most likely this article is being used to sucker investors into short positions, then Goldman goes long just before prices start to recover. Same old, same old.
Mike989 on Sun, 22nd Mar 2015 11:22 am
Capitalism, or Unregulated Capitalism.
The Stupidest System Ever Devised.
Pump as much as possible in to a price declining Over Supplied Market.
Are they Stupid? Yes, they are VERY STUPID.
With no oversight of current market price and supply? You continue to PUMP? You must be RETARDED IDIOTS.
Davy on Sun, 22nd Mar 2015 11:45 am
Mike, you got another option? This really goes to show us humans are incapable of a global complex economy per our human nature. Any system option you mention has a trade off.
Humans are a tribal species not meant to be civilized. It is possible after a destroyed world and the corresponding pain and suffering we may be enlightened into an awakening. This awakening would be with residual spiritual complexity but without the economic and technical complexity.
The economy, technology, and corresponding complexity will quickly suffer entropic decay. There may even be a movement of rejection of BAUtopian man as a failure which it clearly is. Our current system is nothing more than an extinction event and global ecosystem degradation event. Who here want to tell me there is anything to feel exceptional about with that accomplishment?
Mike989 on Sun, 22nd Mar 2015 12:36 pm
I believe it’s Denmark avoided a Mad Rush to exploit it’s oil resources, stretched out it’s pumping and exploration to 20 years. Result, higher prices through out the period.
Clearly “Government Regulation” in the fracking states would have resulted in: Lower Expenses and Higher Profits.
Isn’t that ironic? Government Regulation would have made the industry More Money at Lower Cost.
Mike989 on Sun, 22nd Mar 2015 12:38 pm
I’m starting to see a pattern here:
The Dumbest CEO’s are Right Wing Trools.
And the Dumbest CEO’s are Republican.
There may be a bit of Brain Damage research that needs to be done, on what drives incompetence to the Republican Party. And why these CEOs are incompetent, genetic defect?
penury on Sun, 22nd Mar 2015 3:14 pm
I really disagree with the premise of the entire article. I don’t see the U.S. running out of storage and I fail to see a deluge of oil appearing in a couple of months. Yes, there is currently more production than demand. But I thin that that will be taken care of by the over production creating lower selling prices. Then everyone will be happy that we have the oil in storage to offset some of the price rises. The world will experience energy shortages before it experiences real excess.
coffeeguyzz on Sun, 22nd Mar 2015 4:48 pm
Hey, shortonoil, I do not spend much time on this topic, but, if you do, only a couple of minutes online research would show there are thousands of horizontal wells drilled/being drilled without producing.
Couple of weeks back, Lynn Helms stated in the Feb. Director’s Cut, that the Bakken had 825 wells awaiting fracturing as of the end if January. Modestly extrapolating the ensuing six weeks as per drilling activity, one would expect a current 900 wells in ND alone.
In the Pennsylvania Marcellus, as of December 31, 2014, there were over 9,000 wells either drilled or in the process … 6,200 of which were producing.
rockman on Sun, 22nd Mar 2015 5:39 pm
Folks need to do some simple math. First, there is an inventory of wells waiting to be frac’d. Different estimates on that number. Let’s assume it’s close to shorty’s number, 1500. But what no one can predict is how quickly they’ll be frac’d and produced. The normal lag time is 3 to 6 months. OTOH operators might want to wait for higher prices. OTOOH frac’ng costs have come way down and those wells represent a ready cash flow. Additionally for the pubcos they can convert those wells to PDP…Proved Developed Producing. That is a very critical metric Wall Street uses to value their stock.
But back to the simple math. Set aside thoughts about unfrac’d wells and lets focus on UNDRILLED WELLS. The cornies rightfully brag how tweakīng the technology has increased rig productivity. Now that stat is about to bite them in the ass. The numbers varies but let’s be conservative and assume each rig could drill one well a month. Of course with pad drilling they do much better but lets low ball the number. Since the price collapse at lead 500 rig have gone idle. Assume (probably incorrectly) that it won’t fall further. So the simple math: if the rig count doesn’t improve the 6,000 shales won’t be added to the production.
What does that mean with expectaions of future drilling? Let’s use the latest EIA estimate of productivity in the major shale plays. Here’s the initial production of new wells:
Bakken:600 bopd
EFS: 690 bopd
Niobrara: 450 bopd
Permian Basin: 250 bopd
Utica: 218 bopd
Since I’m feeling a little lazy on a Sunday afternoon I won’t try to tag the rig drop in each of those plays. But we do know that 80% of the unconventional oil production is from just the Bakken and EFS.
So please indulge me and lets use 400 bopd as the average production from the wells THAT WON’T BEVDRILLED as a result of the rig count falling. So simple math again: 6,000 rigs X 400 bopd/rig = 2.4 MILLION BBLS OF OIL PER DAY that won’t be added to the shale production talky if the current rig count holds for the next 12 months.
And lets use those same assumptions for wells drilled in 2014. About 1400 rigs. So 1400 rigs x 12 wells/year/rig X 400 bopd per well = 6.7 million bopd.
Of course that math is flawed because it assumes all the wells start producing on the same day. And it lo ignores the fact that wells drilled in Jan 2014 will be producing much less than 400 bopd by Dec 2014.
But it doesn’t make the point: those wells that attributed greatly to record production by the beginning of 2015 will also show the greatest decline of all shale wells. Add that to the cumulative effect of 2.4 million bopd (stretched our during 2015, of course) it should be reasonable to expect a significant reduction īn the daily oil rate from the shale plays.
If someone wants to do the details have at it. But I think I’ve offered a good sense of the magnitude.