1st April 2016
The onshore rig count saw another significant decline this week, down 12 (3%). However, in the three key oil basins (Eagle Ford, Permian, and Williston), the drop was only 2 (net) oil rigs.
25 Mar 2016 - Capitulation by Light Tight Oil Operators as Rig Count Continues Its Descent
18 Mar 2016 - Bottoms Up! But The Glass Will Refill More Slowly Than Some May Think …
11 Mar 2016 - U.S. Crude to Decline to ~8.2 MMBbl/d in 2017; Steep Drop from Record ~9.7 MMBbl/d in April 2014
A recent Bloomberg article, quoting IHS, espoused a view that light tight oil (LTO) would be extremely responsive to an oil price increase:
“If prices keep going up, U.S. production from shale producers is extremely responsive,” Jamie Webster, Vice President of Crude Markets at IHS Energy, said in a Bloomberg Television interview.
However, GCA’s analysis indicates that, while responsive in the medium term to a meaningful price increase, LTO production response in the near term will not be that quick.
Over the past 18 months, imports to the U.S. have grown by about 600,000 barrels per day (from 7.2 million barrels per day average in 2015 to 7.8 million barrels per day in 1Q 2016). If this 600,000 barrels per day of additional imports were to be replaced by LTO production (in other words, LTO production were to grow by that amount from where it is at today), GCA’s LTO model suggests that it would take 18 to 24 months to achieve this.
Doing so would also require a heroic turnaround in activity levels, requiring substantial price support to do so. The reasons why it would take that long (which also include good arguments why it could also take a lot longer) include:
Physics: at the current level of drilling, LTO production is declining at approximately 100,000 barrels per day per month. That decline needs arresting before building back up.
Mobilization: the time taken to return the sector to any semblance of the capacity that it had at the end of 2014 (see 18 March Monitor).
Emotion: the time taken for market sentiment to change from a “temporary spike” mentality, to one of “maybe this is for real” and actually start getting after it. That is exactly what we saw in the early 2000s – and it took 3 to 4 years then for the mindset to change!
Much is made of the ability of drilled but uncompleted (DUC) wells to “plug the gap”. GCA’s time estimate includes depleting an inventory of about 2,500 wells; while helpful, they are simply not sufficient on their own to make a meaningful difference.
If imports were fixed (for the purposes of this illustration) at 7.2 million barrels per day, then any shortfall in LTO production to meet refinery demand is going to show up in a reduction in inventories. Like a slow turning supertanker, it is not until 2018 before this is likely to occur.
The total number of active onshore rigs now stands at 424, down 1,455 (~80%) from a November 2014 high of 1,876. Across the three major unconventional basins, the oil rig total decreased to 211 (down 2 last week), with Eagle Ford up 2, and Williston and Permian down 2. The horizontal rig count is now 346, down 13 last week.
Total U.S. rig count (including the Gulf of Mexico) stands at 450, down 14 last week, with rigs targeting oil down 10 for a 31-week total decline of 312. The average weekly decline rate remains at ~10 rigs per week.
After putting a floor under oil prices this winter, the proposed crude-production freeze appears to be headed for a spring thaw.
Brent, the global benchmark for oil, was down US$1.10 to US$38.67 a barrel, reflecting a loss of 3% on the week.
WTI crude slid US$1.83 to US$36.92 a barrel, down 5% on the week.
U.S. Supply and Demand
U.S. crude oil refinery inputs averaged 16.2 million barrels per day, with refineries at 90.4% of their operating capacity last week. There was an increase of 2% above last week and a 700,000 barrel per day increase in refinery demand above the same period last year.
On the supply side, EIA data indicated that U.S. oil production in the Lower 48 was down 27,000 barrels per day, with total production at 8.504 million barrels per day. The past ten week decline total stands at 224,000 barrels per day (an average of ~22,400 barrels per week). The weekly reported data continue to confirm that U.S. LTO production is diminishing.
U.S. crude imports averaged 7.7 million barrels per day last week, a decrease of 636,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 8.0 million barrels per day, ~9.8 % above the same four-week period last year.
Crude oil inventories increased ~2.3 million barrels from the previous week and persist at historically high levels. The crude stored at Cushing (the main price point for WTI) deceased 0.2 million barrels, taking the total storage to 66 million barrels (~87% utilization).
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