Analys
US shale oil production growth to slow sharply in 2020
Baker Hughes US oil rig count has declined by 178 rigs since the recent peak of 888 rigs in mid-November 2018 with latest count now at 710. If anything the rig count decline has accelerated since July as investors have closed their pockets for debt based production growth with no profit to show for.
US oil rig count is now drawing down by about 3.5% per month. US shale oil producers are now completing more wells than they are drilling. As a consequence the DUC inventory of Drilled but uncompleted wells which ballooned from 5400 wells in late 2016 to a peak of 8246 in March 2019 has now been drawing down since April and is now drawing down at an accelerating pace.
The more the rig count falls the faster will be the DUC inventory draw-down be as producers work hard to maintain the monthly rate of well completions. In the end producers will have no other choice than to reduce the monthly rate of completed wells or to increase drilling activity and that is the point in time when US shale oil production growth will start to slow sharply. We think that in the end a higher oil price is needed to drive drilling activity higher.
If we assume that the drilling rig count continues to fall by 20 rigs per month to the end of this year and then stabilizes then marginal US shale oil production growth is likely to slow sharply from March 2020 before contracting in September 2020.
The US EIA has a very simplistic method of calculating shale oil drilling productivity. The consequence is that they underestimate productivity in periods when the DUC inventory is growing (Dec-2016 to Mar-2019) and overestimate it when the DUC inventory is declining as it has been doing now since April. As a consequence they also have too high production forecasts when the DUC inventory is drawing down like it is now.
The US EIA is now probably overestimating US oil production for 2020 by some 300 k bl/d with a projection that production will average 13.17 m bl/d in 2020 (US EIA STEO report released yesterday). They did reduce their 2020 US production forecast yesterday from 13.23 m bl/d in their September STEO forecast to 13.17 m bl/d yesterday but they are probably still some 300 k bl/d too high.
US shale oil production is still growing by a marginal, annualized pace of 0.9 m bl/d (75 k bl/d/mth) now in October according to the latest US EIA DPR report in September. Thus the current very strong marginal US production growth still gives a very strong bearish impulse to the global oil market. This bearish impulse is however going to slow sharply from March onwards next year and potentially go to neutral and turn to bullish in September next year.
Year on year production growth in the US is still going to be significant in 2020 due to base effects. The US EIA STEO report yesterday projects a US liquids production growth of 1.56 m bl/d y/y from 2019 to 2020. We think that this is probably in the ball-park some 0.3 m bl/d to high. That still leaves a very strong 1.2 m bl/d y/y average growth in 2020. The monthly production growth and thus marginal bearish impulse to the global oil market is however likely going to slow sharply from March next year. On a Jan-2020 to Jan-2021 basis the US crude oil production is probably not going to increase by more than 100 k bl/d unless drilling picks up.
In order to instigate an expansion again in US drilling rig count the shale oil players will need a higher oil price than we have now. The Permian oil price has averaged $56/bl during the oil rig draw-down since January. The WTI price has averaged $57/bl and the 18 month forward WTI price has averaged $55/bl. These prices probably need to move up to $65-70/bl in order to instigate an expansion US shale oil drilling again. Right now we have Permian = $54/bl, WTI 1mth = $53/bl and WTI 18mth = $49.9/bl. I.e. all these prices are today lower than what they have been on average during the rig count draw down since January so further draw down in US oil rig count should be expected.
Ch1: Local Permian oil price in USD/bl versus 4 weeks change in US oil rig count. The Permian oil price has averaged $56/bl during the draw-down phase and probably needs to move up by some $10/bl in order to instigate drilling rig count expansion again. Latest Permian oil price is $54/bl
Ch2: The US EIA’s latest STEO report is also forecasting a sharply lower marginal, annualized production growth in US Lower 48 states (excl GOM) which is mostly shale oil production. They are forecasting a marginal, annualized production growth rate of 0.3 m bl/d/yr on average in 2020 versus an average growth rate of 0.84 m bl/d in 2019. Thus the US EIA is also forecasting a sharply slower production growth for US shale next year. However, we do think that their projections are probably too high and needs to be adjusted lower towards zero marginal production growth through 2020.
Ch3: US marginal, annualized production growth is still very strong with an annualized growth rate of 0.9 m bl/d according to the US EIA September DPR report. The estimate of 0.9 m bl/d/y for October is probably a bit on the high side. Nonetheless it is in decline. Shale oil players are probably going to start to reduce monthly well completion rates from January onwards as the DUC inventory starts to decline. That will rapidly drive the marginal production growth rate lower
Ch4: The US inventory of DUCs has now been drawing down since April and the draw down is accelerating. It will probably draw down to about 5,500 at around the end of 2020.
Ch5: US shale oil well productivity has halted its historical relentless productivity growth and has pulled back a little.
Ch6: Official US EIA drilling rig productivity measure has risen strongly since the end of 2018. In our view this is primarily due to the accelerating draw down in the US DUC inventory which technically is leading to an overestimation in drilling productivity according to the EIA’s methodology of calculating it as [New production at time T]/[Rig count in T-2]. If a significant amount of new production stems for the DUC draw down then production will be high while the rig count number will be low thus leading to an overestimation of the rig productivity
Ch7: US shale oil production is growing strongly but slowing and the slowing will accelerate in March 2020 onwards
Ch8: US production growth is likely to slow sharply in Q2-2020 onwards as well completions are likely to decline along with the declining DUC inventory
Ch9: US oil rig count is falling sharply and the decline seems to accelerate. Completions of shale oil wells per month has managed to hold up due to the DUC inventory but impact is likely to be significant in Q2-2020 leading in the end to lower well completion rates
Rebounding after yesterday’s drop but stays within recent bearish trend. Brent crude sold off 1.8% yesterday with a close of USD 77.08/b. It hit a low on the day of USD 76.3/b. This morning it is rebounding 0.8% to USD 77.7/b. That is still below the 200dma at USD 78.4/b and the downward trend which started 16 January still looks almost linear. A stronger rebound than what we see this morning is needed to break the downward trend.
Saudi won’t break with OPEC+ to head calls for more oil from Trump. OPEC+ will likely stick to its current production plan as it meets next week. The current plan is steady production in February and March and then a gradual, monthly increase of 120 kb/d/mth for 18 months starting in April. These planned increases will however highly likely be modified along the way just as we saw the group’s plans change last year. When they are modified the focus will be to maintain current prices as the primary goal with production growth coming second in line. There is very little chance that Saudi Arabia will unilaterally increase production and break the OPEC+ cooperation in response to recent calls from Trump. If it did, then the rest of OPEC+ would have no choice but to line up and produce more as well with the result that the oil price would totally collapse.
US shale oil producers have no plans to ramp up activity in response to calls from Trump. There are no signs that Trump’s calls for more oil from US producers are bearing any fruits. US shale oil producers are aiming to slow down rather than ramp up activity as they can see the large OPEC+ spare capacity of 5-6 mb/d sitting idle on the sideline. Even the privately held US shale oil players who account for 27% of US oil production are planning to slow down activity this year according to Jefferies Financial Group. US oil drilling rig count falling 6 last week to lowest since Oct 2021 is a reflection of that.
The US EIA projects a problematic oil market from mid-2025. Stronger demand would be the savior. Looking at the latest forecast from the US EIA in its January STEO report one can see why US shale oil producers are reluctant to ramp up production activity. If EIA forecast pans out, then either OPEC+ has to reduce production or US shale oil producers have to if they want to keep current oil prices. The savior would be global economic acceleration and higher oil demand growth.
Saudi Arabia to lift prices for March amid tight Mid-East crude market. But right now, the market is very tight for Mid-East crude due to Biden-sanctions. The 1-3mth Dubai time-spread is rising yet higher this morning. Saudi Arabia will highly likely lift its Official Selling Prices for March in response.
US EIA January STEO report. Global demand and supply growth given as 3mth average y-y diff in mb/d and the outright 3mth average demand diff to 3mth average supply in mb/d. Projects a surplus market where either US shale oil producers have to produce less, or OPEC+ has to produce less.
Forward prices for ICE gasoil swaps in USD/ton. Deferred contracts at very affordable levels.
Bearish week last week and dipping lower this morning on China manufacturing and Trump-tariffs. Brent crude traded down 4 out of five days last week and lost 2.8% on a Friday-to-Friday basis with a close of USD 78.5/b. It hit the low of USD 77.8/b on Friday while it managed to make a small 0.3% gain at the end of the week with a close that was marginally below the 200dma. This morning it is trading down 0.4% at USD 78.2/b amid general market bearishness. China manufacturing PMI down to 49.1 for January versus 50.1 in December is pulling copper down 1.3%. Trump threatening Colombia with tariffs.
Rebound in crude prices likely as Dubai time-spreads rises further. The Dubai 1-3mth time-spread is rising to a new high this morning of USD 3.7/b. It is a sign that the Biden-sanctions towards Russia is making the medium sour crude market very tight. Brent crude is unlikely to fall much lower as long as these sanctions are in place. Will likely rebound.
Asian buyers turning to the Mid-East to replace Russian barrels. Amin Nasser, CEO of Saudi Aramco, said that the new sanctions are affecting 2 out of 3.4 mb/d of Russian seaborne crude oil exports. Strong bids for Iraqi medium and heavy crudes are sending spot prices to Asia to highest premiums versus formula pricing since August 2023. And Europe is seeing spot premiums to formula pricing at highest since 2021 (Argus).
Strong rise in US oil production is a losing hand. A lot of Trump-talk about a 3 mb/d increase in US oil production. Occidental Petroleum CEO Vicki Hollub commented in Davos that it is possible given the US resource base, but it is not the right thing to do since the global market is oversupplied (Argus). Everyone knows that OPEC+ has a spare capacity of 5-6 mb/d on hand. The comfort zone is probably to have a spare capacity of around 3 mb/d. FIRST the group needs to re-deploy some 3 mb/d of its current spare capacity and THEN the US and the rest of non-OPEC+ can start to think about acceleration in supply growth again. Vicki Hollub understands this and highly likely all the other oil CEOs in the US understands this as well. Donald Trump calling for more US oil will not be met before market circumstances allows it. Even sanctions on Iran forcing 1.5-2.0 mb/d of its crude exports out of the market will first be covered by existing surplus spare capacity within OPEC6+ and not the US.
US oil drilling rig count fell by 6 to 472 last week and lowest since October 2021. Current decline could be due to winter weather in the US but could also be like Hollub commented in Davos arguing that US oil production growth is not the right thing to do.
1-3mth time-spreads in USD/b. Dubai to yet higher level this morning. Even Brent and WTI are rebounding. Could be some extra spike since we are moving towards the end of the month. But it is still indicating a very tight market for medium sour crude as a result of the latest Biden-sanctions.
US oil drilling rig count down 6 last week to lowest level since October 2021
Non-OPEC, non-FSU production to grow 1.4 mb/d in 2025. Third weakest in 4 years. Though still a bit more than total expected global oil demand growth of 1.1 mb/d/y (IEA)
Brent touching down to the 200dma. Brent crude traded down for a fifth day yesterday with a decline of 0.4% to USD 70/b. This morning it has traded as low as USD 78.6/b and touched down and tested the 200dma at USD 78.6/b before jumping back up and is currently trading up 0.2% on the day at USD 79.1/b.
The Dubai 1-3mth time-spread is holding up close to recent highs. The 1-3mth time spreads for WTI and Brent crude have eased significantly. The Dubai 1-3mth spread is however holding up close to latest high. Indian refiner Bharat is reported to struggle to get Russian crude for March delivery (Blbrg). The Biden-sanctions are clearly having physical market effects. So, the Dubai 1-3mth time-spread holding on to recent high makes a lot of sense. I.e. it was not just a spike on fears.
US oil inventories may have risen 6 mb last week (API). Actual data later today. The US DOE will release US oil data for last week later today. The US API last night indicated that US crude and product stocks may have risen close to 6 mb last week. This may be weighing on the oil price today.
Brent and WTI 1-3mths time-spreads have fallen back while Dubai is holding up
Brent crude is no longer overbought. Down touching the 200dma before bouncing back up a lilttle.
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