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Shale producers ramp up production as pipes to Gulf opens

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5 år sedan

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13 augusti, 2019

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Yesterday’s report on US shale oil drilling from the EIA was mostly depressing reading for global oil producers. It showed that the completion of wells rose to 1411 wells in July (+19 MoM) and the highest nominal level since early 2015. As a result the marginal, annualized US shale oil production growth rate rose to a projected 1.0 m bl/d in September which was up from a growth rate of 0.6 m bl/d.

Shale oil producers drilled fewer wells (down 31 to 1311 wells) which is consistent with the ongoing decline in drilling rigs which have declined by 124 rigs to 764 oil rigs since November last year. With a productivity of about 1.5 drilled wells per drilling rig in operation this means that close to 200 fewer wells are being drilled today.

Bjarne Schieldrop, Chief analyst commodities at SEB — Bjarne Schieldrop, Chief analyst commodities, SEB

Instead producers are focusing on completing wells. Drilling less and completing more meant that the number of drilled but uncompleted wells declined by 100 wells to 8,108. The DUC inventory is still 2,850 wells higher than the low point in late 2016. This means that producers can continue to throw out drilling rigs while still maintaining or increasing the number of wells completed per month and thus increase production.

The hope has been that the declining drilling rig count which now has been ongoing for 9 months with investors rioting against producers losing money demanding spending discipline, positive cash flow and profits would now start to materialize into a declining rate of well completions as well. This would naturally lead to softer production growth or even production decline.

In the previous report the estimated marginal, annualized production growth rate was only 0.6 m bl/d. We estimated then that it would only take a reduction in monthly well completions of 109 wells in order to drive US shale oil production to zero growth. I.e. it would not take much to drive growth to zero. Well completions per month would only have to decline from 1383 in June to 1274 and voila US shale oil production growth would have halted to zero. That did not happen. Instead the well completion rose to 1411 in July thus driving estimated the marginal, annualized production growth rate to 1.0 m bl/d in September.

Last year we witnessed that the local, Permian (Midland) crude oil price traded at a discount of as much as $26/bl below the Brent crude oil price as production was locked in both Permian and Cushing. So far this year the discount has mostly been varying between -$15/bl and -$5/bl. The writing on the wall for Permian shale oil producers has been that if they accelerated completions and production they would just kill the local price and the marginal value of production.

Now however transportation capacity out of the Permian is rapidly opening up to the US Gulf. The Cactus II (670 k bl/d) from the Permian to Corpus Christi (US Gulf) opened in early August and much more is coming later this year and early next year. As a result the local Permian crude oil price is now only -$3.4/bl below the Brent crude oil price. And even more important is that Permian producers now know that they can ramp up well completions and production without killing the local crude oil price.

Permian producers are moving from an obvious price setter position locally in the Permian to a perceived global oil price taker. Though in fact they will in the end also be the price setter in the global market place if they just ramp up well completions and production.

Our fear as well as OPEC’s fear and global oil producers fear is that Permian shale oil producers now will focus intensely on well completions. They have 3,999 drilled but uncompleted wells to draw down and they can now accelerate production without the risk of killing the local oil price. Well completions are after all equal to production and production is money in the pocket while drilling in itself is only spending.

There were a few positive elements in yesterday’s numbers seen from the eyes of global oil producers. Increased well completion was basically a Permian thing with completions on average declining elsewhere. Productivity of new wells continued to decline. This is counter to the headline productivity numbers from the US EIA. EIA is calculating drilling rig productivity and not well productivity. In addition they are not adjusting for a build or a draw in the DUC inventory. When the number of DUCs is increasing they under estimate drilling productivity and when the number of DUCs is declining they over estimate drilling productivity. They do not specify well productivity though which is declining in our numbers.

Ch1: The local Permian crude oil price discount to Brent crude has rapidly evaporated as the Cactus II from Permian to Corpus Christi has opened up. Now Permian producers can ramp up well completions without the risk of killing the local oil price.

Ch2: Drilling continued to decline but well completions rose to the highest nominal rate since early 2015. When drilling has declined long enough it is clear that well completions will have to decline as well. With a large DUC inventory we do however seem to be far from that point in time yet. The US DUC inventory stood at 8,108 in July, up 2,850 since late 2016.

Ch3: This is driving estimated new production in September up and away from losses in existing production. Thus marginal annualized production growth accelerated to 1.0 m bl/d in September.

Ch4: Marginal, annualized shale oil production growth rose to an estimated 1.0 m bl/d per year. Clearly down from the extremely strong production growth last year of up to 2 m bl/d growth rate. But still up versus last months report of a rate of 0.6 m bl/d per year with hopes then that the rate would decline further.

Ch5: Overall well productivity continued to deteriorate with latest 7 data points all below the average of the previous 7 points. This could be a function of the DUC inventory draw down. When the inventory rose producers took every 10th well and put it into the DUC inventory. It is logical that producers threw the 10% least promissing wells into the DUC inventory. This then led to an overestimation of the well productivity. Now that the DUC inventory is drawing down producers will have a 20% share of less performing wells. Thus further DUC inventory draw should lead to further overall well productivity.

Ch6: US shale oil production growth has slowed. Could it accelerate again now that pipes out of the Permian are opening up?

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Crude oil comment: Big money and USD 80/b

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20 timmar sedan

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21 januari, 2025

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Brent crude was already ripe for a correction lower. Brent closed down 0.8% yesterday at USD 80.15/b and traded as low as USD 79.42/b intraday. Brent is trading down another 0.4% this morning to USD 79.9/b. It is hard to track and assign exactly what from Donald Trump’s announcements yesterday which was impacting crude oil prices in different ways. But crude oil was already ripe for a correction lower as it recently went into strongly overbought territory. So, Brent would probably have sold off a bit anyhow, even without any announcements from Trump.

Bjarne Schieldrop, Chief analyst commodities, SEB

Extending the life of US oil and gas. The Brent 5-year contract rose yesterday. For sure he wants to promote and extend the life of US oil and gas. Longer dated Brent prices (5-yr) rose 0.5% yesterday to USD 68.77/b. Maybe in a reflection of that.

Lifting the freeze on LNG exports will be good for US gas producers and global consumers in five years. Trumps lifting of Bidens freeze on LNG exports will is positive for global nat gas consumers which may get lower prices, but negative for US consumers which likely will get higher prices. Best of all is it for US nat gas producers which will get an outlet for their nat gas into the international market. They will produce more and get higher prices both domestically and internationally. But it takes time to build LNG export terminals. So immediate effect on markets and prices. But one thing that is clear is that Donald Trump by this takes the side of rich US nat gas producers and not the average man in the street in the US which will have to pay higher nat gas prices down the road.

Removing restrictions on federal land and see will likely not boost US production. But maybe extend it. Donald Trump will likely remove restrictions on leasing of federal land and waters for the purpose of oil and gas exploration and production. But this process will likely take time and then yet more time before new production appears. It will likely extend the life of the US fossil industry rather than to boost production to higher levels. If that is, if the president coming after Trump doesn’t reverse it again.

Donald to fill US Strategic Reserves to the brim. But they are already filled at maximum rate. Donald Trump wants to refill the US Strategic Petroleum Reserves (SPR) to the brim. Currently standing at 394 mb. With a capacity of around 700 mb it means that another 300 mb can be stored there. But Donald Trump’s order will likely not change anything. Biden was already refilling US SPR at its maximum rate of 3 mb per month. The discharge rate from SPR is probably around 1 mb/d, but the refilling capacity rate is much, much lower. One probably never imagined that refilling quickly would be important. The solution would be to rework the pumping stations going to the SPR facilities.

New sanctions towards Iran and Venezuela in the cards but will likely be part of a total strategic puzzle involving Russia/Ukraine war, Biden-sanctions on Russia and new sanctions on Iran and Venezuela. All balanced to end the Russia/Ukraine war, improve the relationship between Putin and Trump, keep the oil price from rallying while making room for more oil exports of US crude oil into the global market. Though Donald Trump looks set to also want to stay close to Muhammed Bin Salman of Saudi Arabia. So, allowing more oil to flow from both Russia, Saudi Arabia and the US while also keeping the oil price above USD 80/b should make everyone happy including the US oil and gas sector. Though Iran and Venezuela may not be so happy. Trumps key advisers are looking at a big sanctions package to hit Iran’s oil industry which could possibly curb Iranian oil exports by up to 1 mb/d. Donald Trump is also out saying that the US probably will stop buying oil from Venezuela. Though US refineries really do want that type of oil to run their refineries.

Big money and USD 80/b or higher. Donald Trump holding hands with US oil industry, Putin and Muhammed Bin Salman. They all want to produce more if possible. But more importantly they all want an oil price of USD 80/b or higher. Big money and politics will probably talk louder than the average man in the street who want a lower oil price. And when it comes to it, a price of USD 80/b isn’t much to complain about given that the 20-year average nominal Brent crude oil price is USD 77/b, and the inflation adjusted price is USD 102/b.

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Donald needs a higher price to drive US oil production significantly higher

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2 dagar sedan

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20 januari, 2025

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Easing a bit towards the 80-line this morning following recent strong gains. Brent crude gained another 1.3% last week with a close of USD 80.79/b. It reached a high of USD 82.63/b last Wednesday. This morning it is inching down 0.3% to USD 80.5/b.

Donald needs a higher oil price to get another US shale oil production boom. Donald Trump declaring an energy emergency with promises of opening up federal land for oil exploration +++, may sound alarmingly bearish for oil. But the days when US oil production (shale) was booming at an average oil price of USD 58/b (2015-19) are behind us. Brent has averaged USD 81/b through 2023 and 2024, and US shale oil is now moving towards zero growth in 2026.

Donald Trump (and the US oil industry) needs a higher oil price to drive US oil production significantly higher over the next 4 years. The US oil industry also needs to know that there will be a sustainable need for higher US oil production. So, someone else in the oil market needs to exit to make room for more oil from the US. Iran and/or Venezuela will be the likely targets for Donald Trump in that respect. But it is still not obvious that the US oil industry will go for another period of strong oil supply growth with natural doubts over how lasting a possible outage from Iran and/or Venezuela would be.

Strong rise in speculative positions increases the risks for pullbacks below the 80-line. The new sanctions on Russia have pushed crude oil higher over the past weeks, but speculators have also helped to drive flat prices higher as well as driving the front-end of the crude curves into steeper backwardation. Speculators typically buy the front-end of the crude curves and thus tend to bend the forward curves into steeper backwardation whey they buy. So, curve shapes are not fully objective measures of tightness. Net-long speculative positions (Brent +WTI) rose 52.4 mb over the week to last Tuesday. In total they are up 415 mb to 577 mb versus the low point in the autumn of 162 mb in early September.

Brent crude has now technically pulled back from overbought with RSI at 65.2 and back below the 70-line. But washing out some long-specs with Brent trading sub-80 for a little while is probably in the cards still.

But this does not look like just a speculatively driven frothy flash-in-the-pan. But do not forget that time-spreads have been tightening since early December and flat prices have risen higher along with them. Thus, this is not just a speculatively driven frothy flash-in-the-pan. The new sanctions on Russia are also having a tightening effect on the market both on Crude, LNG and middle distillates. Add also in that Donald Trump needs a higher oil price to drive US oil production higher. So even if we find it likely that Brent crude will make a pullback below the 80-line, it does not mean that this is the end of the gains.

Net long speculative positions in Brent + WTI in million barrels

52-week ranking of speculative positions in Brent + WTI and 52-week ranking of 1-7mth Brent time-spread.

Brent crude 1mth vs. Dubai 1-3mth time spread. The Dubai time-spread is probably less impacted by speculative positions and thus a better reflection of actual physical conditions. This is rising yet a little more this morning.

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Crude oil comment: A little sideways with new tests towards the 80-line likely

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5 dagar sedan

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17 januari, 2025

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Brent moves into sideways trading around USD 81.5/b with new tests to the 80-line likely. Brent crude traded down 0.9% yesterday to a close of USD 81.29/b and traded as low as USD 80.39/b within the day. This morning it is gaining 0.3% to USD 81.6/b. No obvious major driver for that and the move in oil is well in line with higher industrial metals this morning. The technical picture for Brent 1M is still overbought in terms of RSI at 70.2. But as Brent now has traded a bit sideways for some days the overbought bearish calculus has started to ease a bit. But new tests towards the 80-line seems likely with current RSI at 70.2.

Scott Bessent says he fully supports harder sanctions on Russian oil exports if Donald Trump wishes to use such a tool in the coming negotiations with Russia over Ukraine. That may add some support to oil this morning. The latest US sanctions towards Russia clearly have an effect with one example being the tanker Bhilva which has made a U-turn back towards Russia after having been on course to India (Bloomberg).

US EIA projects US liquids growth of 538 kb/d/y in 2025. The US EIA released its monthly STEO report earlier this week. What is clear is that the boom-years in US oil production are behind us for now. But exactly pinning down at what level US oil production will grow in 2025 is hard. The EIA forecast for US hydrocarbon liquids looks the following:

Estimated US crude oil production growth is projected to be virtually zero in 2026. But including all sources of liquids it still sums up to 312 kb/d y/y in growth. A lot or a little? If global oil demand in 2026 only grows with 1 mb/d in 2026, then the US will cover 30% of global demand growth. That is a lot. For 2025 the EIA expects a total growth in US liquids of 538 kb/d y/y.

Smaller losses in existing shale oil production. If we instead look at EIA estimates for US shale oil production right here and now and how its components are changing, we see that 1) New monthly production is 666 kb/d, 2) Losses in existing production is 622 kb/d and thus 3) Net monthly growth is 44 kb/d m/m which equals 4) A net marginal annualized growth of 12*44 of 523 kb/d/y. What stands out here is that the EIA in its December report estimated that this marginal annualization only equated to 378 kb/d/y. So, it has been lifted markedly in the latest report. It is however on a downward trajectory and as such the EIA estimate in the table above of y/y growth for US crude oil of 331 kb/d/y may be sensible.

US shale oil new production, losses in existing production, net new production and marginal, annualized production growth in kb/d/y.

Change in EIA STEO forecast from Dec-24 to Jan-25. What stands out is that estimated losses in existing production is adjusted lower by 16.8 kb/d since November. That is the marginal monthly change. In other words, production in existing production is falling less agressively than estimated in December. But a monthly decline of 622 kb/d/m is of course still massive.