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OPEC Production Cut May Not Be Needed After All

OPEC Production Cut May Not Be Needed After All

U.S. tight oil production may fall 600,000 barrels per day by June 2015 based on reasonable projections of current rig counts.

I compared the decrease in rig counts that began in late 2014 to the rig count decrease in 2008 and 2009 following the Financial Crisis. I projected current total rig counts according to three scenarios out to June 5, 2015 shown in the chart below. I then applied those decline rates to rig counts and production in the 4 major tight oil plays: the Bakken, D-J Niobrara, Eagle Ford and Permian basin.

RigDecrease0809AndNow

Comparison of rig count decrease in 2008-2009 and 2014-2015. Source: Baker Hughes

In 2008-2009, the U.S. rig count dropped from 2,031 to 876 over a period of 283 days. As of February 13, 2015, the rig count has fallen from 1,931 to 1,358 over a period of 151 days. The current rate of decrease is greater than in 2008-2009. I used the 2008-2009 rig count trend as a general guide for rate of change and duration recognizing that there are differences between the two events. Other than the rate of decrease, the most notable difference is that in 2008-2009, there was more vertical drilling than in 2014-2015 and that rig efficiency was lower in 2008-2009 as a result. Related: Why Oil Prices Must Go Up

I believe that I have accommodated that difference by using EIA production per rig and legacy production change data from the February 2015 Drilling Productivity Report. I used that data in conjunction with projected rig count decline rates to forecast future production for each play. The results are summarized in the following table.

ForecastTable

Summary table showing forecasted production and rig counts for the base, high and low cases for key tight oil plays. Source: Labyrinth Consulting Services, Inc. Related: Will Texas Survive The Downturn?

Production for these four tight oil plays alone may fall by approximately 582,000 barrels of oil per day by early June 2015 in the base case. A decrease of about 536,000 barrels per day is estimated for the high case and a decrease of about 665,000 for the low case. Production decline will also occur outside of these plays so the total drop in U.S. production will be greater.

This is significant because the EIA world liquids production surplus for January 2015 is 0.97 million barrels per day and the estimate for June 2015 is 0.63 million barrels per day (EIA February STEO). In other words, the estimated decline in U.S. tight oil production should correct a substantial proportion of the world supply surplus by mid-year.

This suggests that prices may rebound strongly in the second half of 2015 even without an OPEC production cut assuming that demand does not falter.

By Art Berman for Oilprice.com

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  • Lee James on February 18 2015 said:
    I don't doubt that a decline in U.S. oil production will contribute to higher oil prices, soon.

    More significantly, world conflict will interfere with oil production. New supplies of oil are not only more expensive than used to be, they are also more risky and volatile.

    This is "no way to run a railroad" -- an expression no one uses any more. Fossil fuels are like steam railroads of old.

    We need to deliberately and intentionally move away from fossil fuel dependency.
  • Jerry Spetseris on February 18 2015 said:
    Art, I tried but cannot replicate your EIA February 10 STEO results. It would be helpful to add a table. You have a very aggressive decline in rig count within the 4 shale plays of 21, 25 and 30 rigs on average per week for your Low, Base and High cases, respectively for 22 weeks until June 1, 2015. Will WTI price drive this? Something else? Your base and high case rig counts are lower than any prediction I have read lately. Does your base case assume no change in WTI price over the 22 weeks? What assumptions are you using for each of the cases? In what way, if any, or you accounting for the backlog of drilled but uncompleted shale wells that EIA in January opined would take 3-7 months to work off? I cannot predict what operators are going to do about this frac and complete backlog. Just today EOG announced it will delay completing its backlog. Other operators have largely not disclosed their plans concerning their backlogs of completions. What about additional pipeline capacity to more cheaply get production to market? Production may drop as you predict but price pain would be the reason. Prognosticators should start to forecast the WTI price that will drive U.S. shale production to its nadir and how long that will last until equilibrium in global demand and supply is reached. In the Feb 10 STEO EIA publishes 2015 WTI price of $47.74 for Q1, $51.83 for Q2, $57 for Q3 and $63.50 for Q4. I am more bearish than this and believe the price scenario envisioned by Goldman-Sachs is likely to occur. Still, EIA prices are 90-day average price. Can such prices for the rest of this quarter and Q2 prove your forecasts right for rig counts and production? Will you miss due to omission of other factors? Time will tell.
  • george gest on February 19 2015 said:
    Art:

    Facts are stubborn things. In the FWIW column we are of a similar mind. I figure 50% declines of the current production per rig in 12 to 18 months for each rig that goes down starting on the day it drops. Of course, rigs that have been drilling longer achieve a greater per rig production from the wells drilled but there is a plateau rate and it varies on the drilling rate per well and IP.

    Couple decline of shale, increase in consumption when the weather breaks, general global increases in consumption, natural well decline, decline in domestic strippers with dropping oil price and frozen water disposal and you have a balance point somewhere mid-year without too much trouble getting the numbers to fit.

    We are contrarian to many. Buffet I can't figure today.
  • thecrud on February 20 2015 said:
    What makes anyone think when we slow OPEC wont increase to take that share.
    In June I bet they dont decrease but instead increase.

    There is nothing there trust worthy.

    Market share and money.
  • Mick on February 21 2015 said:
    News flash, when companies run into financial difficulties, as in, their product price was cut in half; they don't try to reduce their revenues further by reducing production. They increase production, even at a loss, in order to create cash.

    Wow, you guys are clueless as to how business works. Keep dreaming, reality will keep slapping you upside the head.

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