OPEC Crafts Production Deficit for 2017 – But with a 2018 Production Bounce?

OPEC Crafts Production Deficit for 2017 – But with a 2018 Production Bounce?

16th December 2016

The onshore rig count increased 13 this week, bringing the total to 615, now down less than 10% on the 685 a year ago.  Energy companies extended their recovery into an eight month this week as they continued to add rigs targeting oil as crude prices firmed above WTI US$50, albeit declining steadily across the week as the exuberance of a week ago waned a little. Drillers added 12 oil rigs; bring the total to 510 compared to 541 a year ago. 

Assuming that OPEC and non-OPEC producers following through as promised on supply cuts starting in January, oil markets are expected to swing from surplus to deficit in the first half of 2017.  Any immediate impact is likely to be masked at first by a draw on stockpiles, with these expected to decline by about 600,000 barrels per day in the first half of 2017 based on the cuts announced.  Over the first six months of the year this would remove almost 50% of the record 300 million barrel stockpile.

Added to this, the IEA increased its forecast for global oil demand in 2017 by 100,000 barrels per day; consumption is now forecast by them to be 97.6 million barrels per day, a rise of 1.3 million barrels per day (1.4%) above 2016.

Thus, the big question that follows this, is what will happen to oil prices?

U.S. shale production is forecast to transition from five month decline to stay (more or less) flat, based on the steady increase in drilling seen since May.  This change (the EIA forecasts an increase of 2,000 barrels per day) would be the first since July and the second rise this year, albeit the earlier one in fact just have been a statistical correction.

All this has taken place in the context of a tepid oil price.  If the crude production cuts do encourage further price increases in 2017, this should further encourage U.S. shale oil drillers to continue to add oil rigs and ramp up crude output, not just on the back of the daily oil price but by taking advantage of hedging.

As noted above, since bottoming in May 2016 U.S. shale oil drillers have added 170 rigs, a 58% increase over the last six months with such rigs sit at 486 at the end of November. The addition of these has reduced the U.S. crude decline to near zero and stabilized production at around 8.5 to 8.7 million barrels per day.

At the end of November 2016, 65% (315) of the active oil rigs drilling in the U.S. were located in the three major oil basins; Permian, Eagle Ford, and Bakken.  Assuming the announced cuts lead to a WTI price between US$50 and US$60 per barrel, U.S. oil rig growth is still likely to be limited to these three major oil shale basins.

Using its in-house oil shale model, GCA has modeled two rig growth (mid and high) scenarios for these basins to see the potential impact on U.S. crude production by mid-2018.

The lesser of these adds ~250 (~50% increase, in line with the rate of growth seen over the past six months) rigs over 18 months and shows U.S. production growing from 8.5 to 8.8 million barrels per day by June 2018.  However, the additional 300,000 barrels per day increase does not begin to impact U.S. crude production significantly until the end of 2017.

The higher scenario adds ~450 (almost doubles) rigs over 18 months and shows U.S. production growing from 8.5 to 9.3 million barrels per day by June 2018. The additional 500,000 barrels per day increase begins to impact U.S. production by mid-2017 and the rate of growth accelerates significantly at the end of 2017; in line with the growth rate seen in 2014, when U.S. production added 1.5 million barrels per day.

Results from the model therefore indicate that a continued increase in oil rigs will have little impact on U.S. production in early 2017, and perhaps not at all until 2018.  However, the issue then becomes circular as the increase in production itself starts to influence price.  The higher the price, the more likely the higher scenario to be dominant, holding back or pushing down price.  Déjà vu all over again?

Since stockpiles are most transparent and reported with the highest frequency in the U.S., sharp focus will be placed on tracking cuts in crude stockpiles on U.S. territory to provide the market clear evidence as to whether the OPEC agreement is working. 

Sources: EIA Weekly Update, GCA In-House Oil Shale Model and GCA analysis

In terms of gas news this week, the material gains in Henry Hub have continued after a slight weakening earlier this week as a combination of storage figures showing a decline of 50 bcf, more than expected, came on the back of colder forecasts. 

With HH closing nearly US$1 higher than a year ago and the United Kingdom’s NBP broadly unchanged, US LNG sales to Europe are under some pressure and this is a theme GCA will be returning to in the New Year

Weekly Recaps

Oil Drilling Activity

The total number of active onshore rigs increased to 615.  When compared to a November 2014 figure of 1,876 active rigs, the current level is approximately 67% below the 2014 high.

Across the three major unconventional oil basins, the oil rig total increased to 327 (up 12 last week), with Eagle Ford up 1, Permian up 12 and Williston down 1.

Total U.S. rig count (including the Gulf of Mexico) stands at 637, up 13 last week, with rigs targeting oil up 12. The horizontal rig count increased to 512, up 9 last week.

Oil Price

Brent, the global benchmark for oil, was up US$1.05 to US$55.15 a barrel, reflecting a gain of 1.94% on the week.

WTI crude rose US$0.50 to US$51.90 a barrel, up 0.97% on the week.

U.S. Supply and Demand

Sources: EIA Weekly Update and GCA analysis

U.S. crude oil refinery inputs averaged 16.5 million barrels per day, with refineries at 90.5% of their operating capacity last week. This is 57,000 barrels per day more than the previous week’s average.

U.S. gasoline demand over past four weeks was at 8.9 million, down 3.0% from a year ago. Total commercial petroleum inventories decreased by 2.0 million barrels last week.

On the supply side, EIA data indicated that total domestic crude production increased 99,000 barrels to 8.796 million barrels a day. The Lower 48 crude production now stands at 8.276 million barrels per day, up 101,000 barrels a day.

U.S. crude imports averaged about 7.4 million barrels per day last week, an decrease of 0.943 million barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 7.7 million barrels per day, 2% below the same four-week period last year.

Crude oil inventories decreased 2.6 million barrels from the previous week and remain at historically high levels. The crude stored at Cushing (the main price point for WTI) was up 1.2 million barrels; total storage is 66.5 million barrels (~74% utilization).


OPEC Crafts Production Deficit for 2017 – But with a 2018 Production Bounce?

P Kevin Galvin

Facilities/Cost Engineer - kevin.galvin@gaffney-cline.com
OPEC Crafts Production Deficit for 2017 – But with a 2018 Production Bounce?

Nick Fulford

Global Head of Gas/LNG - nick.fulford@gaffney-cline.com
OPEC Crafts Production Deficit for 2017 – But with a 2018 Production Bounce?

Bob George

Global General Manager - bob.george@gaffney-cline.com

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