I have a few good news items for you, at last. First, production looks to be rolling over in the major oil basins, according to the Energy Information Administration. Overall U.S. production is down only slightly, a nudge that just a few good new wells could offset, not to mention the thousands of drilled but uncompleted wells.

But the EIA says that Bakken output has gone down for the fourth month in a row and Eagle Ford is down for the seventh month. Only Permian Basin oil output is still increasing. Another couple of months of these low oil prices and we’ll really start to see a change in production. It’s taken longer than OPEC thought, a testament to great shale rock quality, U.S. companies’ efficiency and their persistence.

Yet more spending cuts lie ahead, which will further lessen production numbers next year. Barclays recently released an updated spending survey that estimated upstream capex in North America will fall by 35% to about $126 billion in 2015.

“This is slightly worse than the 30% decline we estimated back in February, and could fall even more as we note most E&Ps have based their 2015 budget on a $50-$60/bbl WTI oil price that is higher than current levels today,” Barclays said.

Look for more cuts in 2016, as the firm said spending next year is forecast to drop another 10% to 15%, although so far only a few E&Ps have given much detail on their possible 2016 capex.

Here is a great new economic indicator if ever there was one: Greg Armstrong recently spoke to the Houston Producers Forum, on September 15 in fact—and every time he has done so in the past 16 years (five times), ultra-low oil prices began going back up soon thereafter. He has the charts and old Power Points to prove it, dating from his first remarks to this group in January 1999—a year when oil averaged $14.40/bbl. So just wait for the exact timing of the upturn.

Apparently Greg’s ability to call the bottom is as good as anyone else’s.

Of course he joked about this, but on the other hand, he is one of the most respected men in the Houston oil patch. He sits on the board of the Dallas Fed, for one. But even more germane, he is the chairman and CEO of Plains All American Pipeline, so he has a lot of oil and gas data at his fingertips. The company moves some 4.2 million barrels of oil (MMbbl) and NGL products every day, has a fleet of 990 trucks bringing oil off the leases, 125 MMbbl of storage capacity (full, I believe), and purchases MMbbl/d at the wellhead. It owns infrastructure in every major demand fairway and production hub.

“We have a lot of data and engineers and analysts on staff and we’re in the market every day,” he said. “They do a lot of well-by-well economics and have data in every basin in North America.”

Armstrong said Plains is bullish for the intermediate and longer terms, but very cautious for the near term (he defined that as the next 12 to 15 months). If prices and then drilling activity do not recover as much as people have predicted they would within 24 to 36 months, we will not need as much pipeline capacity as people first thought would have to be built, and that which has been built recently will have no barrels in it, he warned. “We have excess capacity in some areas and not enough in others.”

But his biggest near-term worry is the huge amount of oil in inventory versus historical norms. “You cannot ignore inventory issues. It’s going to be a challenge for a while … and the only way to reduce inventory is to reduce imports or reduce production. We are very concerned.”

Armstrong was positive that supply and demand will balance, eventually, because world oil demand is 94 MMbbl/d, yet OPEC has less spare production capacity than during the last downturn. “…We think there are more downs to the supply side than ups. OPEC has only 4 MMbbl/d of capacity, so it doesn’t take much for oil to come back into balance.”

What price outlook does he have? He showed a chart that laid the Nymex strip prices over actuals for the last 10 years, and sure enough, the strip was nearly always wrong. Armstrong noted that most forecasts are seldom right, and the futures strip is usually far off as well. “If you want to figure out where prices aren’t going to be, look at the forward curve,” he said. “It may be an effective tool for hedging but it is not an effective way to predict commodity prices.”

When someone asked him about the possibility of crude oil exports being approved soon, Armstrong said, “If you gave me a choice between predicting the weather or what the government will do, I’d rather predict the weather. It’s a lot more erratic but it’s much more rational.”

Please mark your calendars and join us later this month, on Oct. 26 and 27, for the DUG Eagle Ford Conference in San Antonio, where we’ll hear from some of the major players and astute observers of this big play that has more than 10 years of locations left to be drilled. And, join us next month for two events: the Executive Oil Conference in Midland on Nov. 9 and 10, and the Gulf of Mexico Offshore Executive Conference in Houston on Nov. 19. We’ll have lots to talk about, questions to ask and guest speakers to see. Does their outlook jive with yours?

Comments