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Steve Brown

Steve Brown

Steve Brown is a petroleum engineer with over thirty years of experience with BP, Halliburton, Challenge Energy, Petrofac, Exile Resources, Setanta Energy and now The…

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Crashing Oil Prices And Dropping Rig Count Take Their Toll On U.S. Output

Crashing Oil Prices And Dropping Rig Count Take Their Toll On U.S. Output

The EIA has just published its latest update to the Drilling Productivity Report (DPR), and soon we will get their update to the Short Term Energy Outlook. These are the two documents in which the EIA take a stab at estimating where US production is going, as opposed to where it has been.

Weakness in the Chinese economy has hung like a pall on the oil market since the turn of the year and there is nothing putting a floor under the oil price just yet, but to my eyes the decline of US shale production is now well established and that will eventually feed through into some support for the oil price.

Not that we will get an early spike in the price; if Iran and Saudi Arabia rattling scimitars across the Persian Gulf didn't get us a spike, nothing will. There is the small matter of three hundred million barrels of excess inventory to get through. But once the market sees that US shale is flagging and that supply and demand are heading back towards balance despite weakness in Chinese growth, some respite for hard pressed oil producers will come. Related: Was Iran’s Claim About Ramping Up Oil Production Just Hype?

Here is the latest data from the drilling productivity report, the EIA estimate January and February production for the key shale producing basins based on rig counts and well productivities.

(Click to enlarge)

Data from EIA's January 2016 Drilling Productivity Report and STEO

I have plotted the key oil producing regions of the Permian, Bakken, Eagle Ford and Niobrara in varying shades of green and even the most optimistic believer in the U.S. shale miracle has to admit the tide has turned. The rig count continues to fall sharply in these plays and that will keep undermining the levels of shale production in months to come. Related: Rig Count: Capitulation?

The other, roughly four million barrels per day of oil production from the rest of the U.S. has stayed pretty steady - I plot that twice on the chart once in pale yellow but also as an orange line, so that you can see what is happening to the rest of the U.S. oil business. The experts say that there are a million barrels per day of stripper well production that just isn't economic at today's prices but folks are reluctant to shut in the oil well in their back yard and I suspect that will remain sticky for a few months to come, and of course there should be some natural decline in these conventional plays. Counterbalancing that trend there are a number of big offshore projects scheduled to start up in the third and fourth quarters of 2016 so the "Other" line might actually rise.

But for sure U.S. shale is declining, it is already down by 640,000 barrels per day from its peak in March 2015. It seems likely that these four regions will be producing about 4.1 to 4.2 million barrels per day by the end of year, a good million barrels per day less than the peak and probably two million barrels per day less than could have been produced, if the Saudi's had let the U.S. shale drillers carry on eating their lunch.

By Steve Brown for Oilprice.com

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  • CPR on January 11 2016 said:
    Unfortunately, the information in the article does not lead to the conclusion of higher oil prices. The reason oil is languishing is due to the strong dollar. That alone can drag the price of crude substantially lower. If I had to choose between lower rig counts/shale production and QE4' I would choose the latter. More dollar printing could easily add 30% to oil in less than a month.

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