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No pain, no gain. That’s the conventional wisdom. People trying to encourage you usually say it with the shrug of a (healthy) shoulder. Going through pain is not how we prefer to recover from a torn ACL, that bad rotator cuff or a hip replacement, but we know arduous rehab works. There’s no magic pill. Rehab can be long and painstaking, and we can endure setbacks along the way, but it works.
Similarly, that’s not how we want U.S. E&P companies and their service providers to recover from these low oil prices, but we know the pain they’re going through now will eventually work. The cure for low oil prices is low oil prices—that’s been the tried-and-true formula over decades, but can we speed up the process? Most experts think sustainable price relief isn’t coming until the second half of 2016.
That belief is predicated on U.S. oil production declining enough to make a difference on the world stage. According to OPEC’s latest estimates, U.S. oil output will decline next year (for the first time since 2008), as U.S. producers continue to reduce their spending. In its monthly report, OPEC cut U.S. 2016 production by 280,000 barrels a day, which would mean about a 60,000 bbl/d decline in 2016 from 2015.
Let’s put 60,000 bbl/d in perspective—that’s not a lot of oil these days. It’s the amount of production from 20 or 30 wells in the Permian Basin and another 20 in the Bakken. It’s negligible compared to total global production and OPEC’s contribution of 31- or 32 million a day—which is increasingly being sold at a discount, by the way, in order to maintain or even grab market share.
All-American crude output is flattening if not declining now. The EIA said Oct. 9 that Lower 48 oil production was up 1.9% year-over-year, but down 0.49% in the last four weeks to that date. Sadly, the decline in Alaska seems to be accelerating—it’s down 3.5% year-over-year, and Shell’s decision to pull out of Arctic exploration does not bode well for the long-term future of domestic supply.
So, ouch. Where’s the massage room? Do I need a reservation to get into the ice-water bath?
Meanwhile, the inventory of crude oil stored at Cushing, Oklahoma, alone is now 54.2 million barrels (MMbbl), up a whopping 175% year-over-year.
In an October report, Richard Hastings, macro strategist for Seaport Securities (formerly known as Global Hunter Securities), likened the U.S. production glut of oil and products to Megabloatasaurus.
“Overall oil stocks are now at 468.56 MMbbl, a 26.4% increase on a year-over-year basis,” he wrote. “With this condition overlaying the crude oil story, then it gets difficult to envision a rebound to $50 per barrel for WTI prices, in our view, or until this bloat outbreak fades into the background.
“U.S. product inventory bloat continued despite the lower production rates by U.S. refineries. Propane stocks increased by 1.82 MMbbl, taking propane stocks to a stunning 102.16 MMbbl, or 20.7% higher on a year-over-year basis. Where is the Polar Vortex to help with the propane bloat? And, if that is not sufficient, then where is the next Ice Age—to do something about propane stocks and Megabloatasaurus?”
What’s more, that dinosaur’s cousin is stomping through the natural gas world too, scaring producers from Pennsylvania to the Piceance Basin. The EIA said total U.S. gas supply will exceed demand by 0.8 Bcf/d this year and will surpass it again next year, by 0.5 Bcf/d. Dry gas production is now expected to be as much as 74.4 Bcf/d (up 4 Bcf/d) by year-end 2015. Dry gas production climbed 4.2 Bcf/d last year.
The pace of that growth is slowing, however, as the EIA is projecting gas output to go up another 1.4 Bcf/d in 2016. That’s easily explained due to the slackened drilling and completion pace in most dry gas plays as producers hoard their cash. Blame it on low wellhead prices and the frustrating delay while waiting on infrastructure bottlenecks to be removed. (For more on these dynamics, see our cover story on Appalachian gas supply in this issue, and look for next month’s cover story on U.S. gas demand that will be coming soon from LNG exports, manufacturing and gas-fired power generation.)
All in, long-term relief is on the way, but the line at the chiropractor’s office is out the door and down the block, as long as Megabloatasaurus is stalking the industry. Where’s Indiana Jones when you need him?
We hope to see you at two Hart Energy events this month, the annual Executive Oil Conference in Midland on Nov. 9-10, and in Houston for our second annual Offshore Executive Conference on Nov. 19.
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