With some 500,000 to 700,000 barrels per day of Iranian crude anticipated to come online around year-end following the agreed-upon lifting of sanctions, stakeholders in the global oil glut could use some good news, right? Leave it to the U.S.A. to lead the charge to balance the world oil markets.
U.S. Lower 48 oil production growth is shortly destined to—or already has—rolled over, according to two industry analysts.
Bernstein Research analyst Bob Brackett in a May report challenged the belief that shale oil growth is on a trajectory to climb 10%, an assumption based on projections of increased efficiencies and rig ramps, among others. Refuting this, he instead portends “that shale production will modestly decline, balancing global oil markets and driving higher oil price.”
Here’s why: A mere eight counties account for half of U.S. shale oil volume, four in North Dakota in the core of the Bakken Shale, and four in Texas in the best of the Eagle Ford Shale. Another 19 counties, including those within those basins and adding the Permian, D-J, Powder River and Anadarko, account for another 30% of total volume. And a mere 10 operators delivered half the wells drilled in those counties.
Brackett noted this concentration of operators has important implications for the structure of the shale industry. Most notably, that five of the Top 10 have specifically guided to a 3% decline in production, vs. fourth-quarter 2014, consistent with the observable rig count decline.
Brackett thus concludes, “I believe flattening to falling supply growth will balance global oil markets and allow oil prices to rise back toward $85/bbl in 2016.”
Similarly, Raymond James analyst Marshall Adkins, in a late June report, rhetorically asks, “When will U.S. production roll over? It already has!” He took to task EIA projections that oil supply is still on a growth trajectory.
“The EIA’s weekly data shows U.S. oil supply continuing a steady climb to all-time highs, while our production-by-play model shows U.S. oil supply has been falling at an increasing pace since March. …We think the EIA’s weekly inventory data is not only overestimating U.S. oil production, but has completely missed the U.S. oil supply rollover.”
EIA estimated June production of 9.1 MMbbl/d, while RayJay pinned it at 8.8.
The EIA’s big miss, in Adkins view, was due to a “plug-in” number—or estimate—for unaccounted-for oil that it plugs into its weekly oil supply report to explain the gap between supply data and its own projected demand. These “missing barrels” between production and imports on the supply side, vs. refinery runs on the demand side, are assumed to be from practices such as stockpiling or noncrude refinery inputs.
However, that plug-in number flipped on its head in “a shocking transformation,” said Adkins, going from a positive 362,000 bbl/d in first-quarter 2015, to a negative 113,000 bbl/d in June. In other words, a whole lot of barrels of EIA projected oil production went missing in the second quarter.
“So what happens if we assume that the unaccounted-for oil plug is really [a declining] U.S. Lower 48 supply?” Adkins postulated. “Put simply, it says U.S. oil supply is already rolling over.”
Adkins backed up his theory with Raymond James’ own production model, which unlike EIA models, incorporates decline curves by basin and rig counts. “According to our model, production began to fall during the March-April time frame” with forecast slowing rates of decline through year-end.
But not for long, he warned. “We expect initial production rate efficiencies to ramp quickly as high-grading takes full effect. …Even with the relatively low exit rate from 2015, our model shows 2016 U.S. crude-only production should rebound reasonably quickly and yield approximately 70,000 bbl/d growth in 2016.”
For the record, Raymond James forecasts WTI to steadily rise to $68 by year-end 2016.
I suppose the price of oil next year comes down to those Top 10 shale oil producers, and how they guide growth into 2016. Should they hold the line on U.S. supply declines, and put the U.S. in position to be the world’s swing producer? Or would we rather U.S. E&Ps hone efficiencies to be able to drill forward profitably in most any price environment? The latter is more likely, and to the detriment of some lesser players.
But one thing is certain. Come December, the OPEC meeting to welcome Iran’s production back into the fold should be interesting. Will Saudi’s production finally roll over too?
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