At a time when volatility in crude prices is the order of the day—with West Texas Intermediate (WTI) surging 7% one day, only to fall back 8.5% the following day—it’s sometimes useful to just sit back and ponder the fundamentals.

Of course, energy equities followed suit—up one day and down the next. But what are some key fundamentals affecting the sector? Are energy equities these days mainly just about money flows, fueled by the occasional short-covering rally and a fleeting belief in currency markets that the dollar may falter from an upward path?

Decline rates may be a point to ponder. Bob Brackett, senior analyst with Bernstein Research, has long held a belief that investors underestimate the decline rate of U.S. production and, in particular, shale. Brackett estimates that Lower 48 production, making up some 80% of the U.S. total is declining by about 33% per year. He says this means roughly two-thirds of capex is spent simply to keep production flat.

Brackett projects capex dropping around 30% in 2015, and other research firms come in with similar numbers. Simmons & Co., for example, estimates that drillbit capex for the independent E&P sector is on track to fall 32% this year.

Obviously, the combo of sharply lower capex and higher than expected declines rates can set the stage for a much anticipated slowing in U.S. oil production, which is needed to help restore better equilibrium in the global oil demand/supply balance. That’s what will help prices.

Brackett maintains that the prior liquids production growth rate of about 1 million barrels per day (MMbbl/d) for the U.S. could slow to roughly half that level in 2015, adding: “We may find ourselves a quarter or two away from a world of flat U.S. production if price doesn’t recover.”

FBR Capital Markets sounds a similar theme, suggesting investors could be overlooking the impact of “harsh decline curves” and “hefty maintenance capex.”

FBR calculates maintenance capex required to keep U.S. unconventional oil production flat at about $10,000 per flowing barrel of oil equivalent (boe). It then takes an estimate of capex per rig per year and uses it to gauge the oil rig count needed for flat production, which it estimates to be 610 rigs. As of late January, when the horizontal/directional oil rig count stood at 1,136 rigs, FBR noted it would take only three months—assuming rigs are dropped at a rate of 45 per week—to reach the 610 minimum rig level at which output would fall.

Baker Hughes data showed a recent weekly drop of 80 horizontal rigs.

But does it make sense to focus so much on U.S. shale, when this is estimated to make up only about 5 MMbbl/d, or under 6% of worldwide supply? What about non-OPEC, ex-U.S. liquids supply, accounting for more than 40 MMbbl/d? Don’t their decline rates add up, too?

The answer is yes—eventually.

According to Raymond James research, more than 70% of the non-OPEC, ex-U.S. production comes from longer lead-time projects such as in deepwater. These typically have substantial sunk costs that dictate spending continues in the face of short-term oil price volatility. As a consequence, it is mainly short-term projects in the U.S. unconventional sector, dependent largely on near-term cash flows, that end up bearing the brunt of production declines.

“It is not necessarily the least economic projects that are most likely to slow down, or be suspended, during an oil price downturn, but rather the short-cycle projects,” commented Raymond James.

There is a curious aspect to the non-OPEC, ex-U.S. segment, made up of producers from around the world. While production in the short term is typically impacted only modestly by low crude prices, the group as a whole has failed to show production growth, even if individual producers are occasionally capable of significant growth. From 2009 to 2014, production from the group declined by 0.2%, noted Raymond James.

Worse still, the non-OPEC, ex-U.S. segment failed to grow during a five-year commodity environment of $100/bbl oil.

Hopefully, in an improving commodity environment, as global demand and supply come closer to equilibrium, it will be U.S. producers that are capable of growth who will most benefit. And maybe markets will be less focused on the day-to-day gyrations of macro trends, including what one brokerage described as “the long U.S. dollar/short commodities trade that global funds were happy to ‘ride’ very hard to accelerate downward corrections in oil markets.”

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