Steady As She Goes … Down

Steady As She Goes … Down

25th September 2015

The U.S. onshore rig count continued its slow but steady downward slide, releasing 6 more rigs this week for a five-week total of 48.  The total number of active rigs now stands at 805, down 1,071 (57%) from a November 2014 high of 1,876.  Across the three major unconventional basins, the oil rig total declined to 388 (down 7 last week), with Eagle Ford and Permian down 3 each, and Williston down 1.  Horizontal rigs decreased by 11, bring the total number to 629.

Total U.S. rig count (including the GOM) declined 4 last week, with rigs targeting oil declining by 4 for a five-week total of 34.

An increase to crude stocks next month (October) that coincides with seasonal refinery maintenance would ordinarily be expected based on historic data; however, with current U.S. crude oil decline trends, it could be that there is little or no change.  Such an outcome would in effect be saying that underneath it all, despite refinery maintenance, production declines are meaning that a stock draw is still having to take place.   

Source: EIA Weekly Update and GCA Analysis

Looking further out into the future, as noted in the Oil & Gas Monitor earlier this month, GCA has been working on updating its future production outlook from the three main LTO plays.  The following chart shows the estimated “steady state” oil production that would be achieved in the Eagle Ford at different levels of rig count.  Eagle Ford production today is around 1.5 million barrels per day according to EIA, with 74 oil rigs running.  If the current level of rig activity were to be maintained, along with all other performance metrics, the GCA model projects that Eagle Ford production should stabilize between 1.0 and 1.1 million barrels per day by the third quarter of 2016. 

Source: GCA Analysis

The blue line on the chart shows that same “steady state” production level for different levels of rig count from 40 to 160.  The rig count in mid-2014 was actually around 220 suggesting, on that trajectory, production would have continued to rise steadily for several years before topping out at between 3 and 3.5 million barrels per day.  The red line on the chart shows where, for the same data assumptions, production would be by the end of 2017.  The gap between the blue and the red indicates the extent of production growth still to be achieved beyond 2017.

A further observation on this highlights the nature of the LTO play in general.  If a rise in oil prices signals a call on more oil production, any activity response to meet that shortfall will inevitably “overshoot” if it is maintained.  It may be some time before that harmonic motion is truly dampened!

Oil Price…..

Global oil markets tumbled on Wednesday, with U.S. crude futures settling down 4 percent after bullish impact from lower crude inventories was offset by large gasoline builds that raised concerns about high autumn fuel supplies.  Overall, the week saw little change, WTI ending at about where it started, US$45.66 per barrel.

U.S. Supply and Demand…..

U.S. crude oil refinery inputs averaged 16.2 million barrels per day, with refineries operated at 90.9% of their operating capacity last week.  U.S. refiners continued to support growth, with inputs staying above the 16 million barrels per day mark and the decline of 310,000 barrels per day from the previous week offset by overall U.S. oil production decline.

Source: EIA Weekly Update and GCA Analysis

Looking on the supply side, U.S. oil production in the Lower 48 held steady at 8.648 million barrels per day. 

As for imports, these were also steady at 7.2 million barrels per day last week, down only 13,000 barrels per day from the prior week.

With demand at 16.2 million barrels per day less U.S crude production and imports, there was a call for U.S. crude oil inventories of 1.9 million barrels, inventories have fallen about 2 million barrels for the 2nd week in row.

 

Authors

Steady As She Goes … Down

P Kevin Galvin

Principal Advisor, Field Development Planning - kevin.galvin@gaffney-cline.com
Steady As She Goes … Down

Bob George

Regional Director: Americas - bob.george@gaffney-cline.com

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