The EIA reported continued gains in oil inventory coming in slightly above expectations at 4.8MB. But for the first time this year production actually dropped 36,000BD overall and 37,000BD in the lower 48. This runs contra to almost every media report and sell side analyst that has been spouting off that production would continue to rise thru at least 3Q rising 500,000-700,000B/D for the year. And, as a reminder, the lower 48 production is an EIA estimate which I guarantee will be revised downward in the coming quarters as actual data gets processed. The oil over rail data bears this out especially in TX where it dropped 25% recently as already reported here, while the EIA assumed production in the Permian would continue to rise. What was amazing is how shell shocked the talking head media were on this surprise turn of events. These two videos bear the obvious media bias that is occurring (though in fairness CNBC has been more level handed than others such as Bloomberg)…..
Notice how the commentator takes on the speakers repeatedly on the negatives thrown at them. Also noteworthy is Goldman once again back tracking on its $30 oil prediction as the normalized price for Brent is expected to reach $70 late this year. Today oil is down despite a weaker dollar and lower production because the media has now refocused attention to the threat of a resumption of Iranian oil exports tied to ongoing nuclear talks. What is mostly likely to occur is some sort of toothless resolution that’s vague so that the US can save face and say we got something done. The US administration seems hell bent on accomplishing something despite Iran repeatedly making sensationalistic comments on Israel’s destruction and the necessity to continue nuclear research as well as Yemen conflict which they support. Regardless it seems unlikely that we will see Iran flooding the market with oil in 2015. Just another media driven fear that will be dispelled.
So is the EIA data a blip or the beginning of a trend? It is likely signaling a production top given how virtually everyone has ignored the effects of decline rates which common sense stated would start kicking in right about now on wells brought online 3-6 months ago. The recent lower rig decline rates are a reflection that producers know this and have basically cut to bone. Until hedges roll off in 2H2015 from producers, look for rig count declines to moderate from here on out unless prices remain under $50 for WTI. In the most prolific regions, such as the Williston Basin, decline rates reach 50% in some cases within 6 months. Thus production has likely topped and, with refiners slated to ramp production this month as maintenance season ends, demand will pick up even more.
What was more interesting from the EIA data is that NGL production was also flat this week, possibly reflecting a decrease in natural gas production finally. Chesapeake recently reduced anticipated natural gas out guidance for 2015 by 2%; in part tied to the reality that most basins for new production are unprofitable at $2.65MMBTU spot except maybe Marcellus and parts of Utica. Natural gas is a byproduct from oil drilling as NGLs are from natural gas drilling.
One last point to note is that producers are focusing on the lowest cost regions that produce the most oil. These types of supplies aren’t endless and will deplete in next 12-18 months which will pose more challenges for producer’s balance sheets if prices don’t rise. But in all likelihood they will as producers are forced to go beyond the bounds of these regions to find supply. Watch for analysts to begin to wake up to this reality as 2015 plays out.
By Leonard Brecken for Oilprice.com
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