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Nick Cunningham

Nick Cunningham

Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. 

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Is EIA Data Disguising A Disastrous Decline In U.S. Shale?

The Trump administration claims that the U.S. is “transitioning to greatness,” and that energy companies are going to see “massive gains.” U.S. Secretary of Energy Dan Brouillette says there is “stability” in the oil market, and that economic activity will “explode” on the other side of the pandemic.

Meanwhile, back in reality, U.S. oil production continues to decline as drillers shut in wells and cut back spending. Output has already declined by 1.1 million barrels per day (mb/d), and more losses are likely. New data from Rystad Energy predicts U.S. oil production declines of roughly 2 mb/d by the end of June.

“Actual production cuts are probably larger and occur not only as a result of shut-ins, but also due to a natural decline from existing wells when new wells and drilling decline,” Rystad said in a statement.

Energy expert Philip Verleger, in an article for Energy Intelligence reports that the magnitude of output declines is much larger. His latest research shows that production as of May 10 is down by almost 4 million bpd from its peak as the below chart shows.

Source: PK Verleger LLC

To be sure, the U.S. government is doing quite a bit to try to bailout the oil industry. A new report finds that some 90 oil and gas companies will benefit from the Federal Reserve’s corporate bond buying program. The Trump administration is also quietly reversing environmental protections on the oil and gas industry.

But in the face of a historic meltdown in the oil market, even handouts from Uncle Sam won’t stop declines. The U.S. oil industry continues to idle drilling rigs at a tremendous clip, and the rig count is down by more than half in two months. “[W]e think that the last time there was so little drilling activity in the US was the 1860s during the first decade of the Pennsylvania oil boom,” Standard Chartered analysts said. The investment bank said that the contraction was notably acute in Oklahoma, where rigs fell to just 11 across the state, down 89 percent from the same period a year earlier. Related: Has Demand For Oil Already Peaked?

The sharp decline in rigs, drilling and completion activity means that the steep decline rates endemic to shale drilling will overwhelm what little new production comes online. Standard Chartered said that if activity were to remain stuck at current levels, U.S. production in the five main shale basins would fall by 2.89 mb/d by the end of 2020.

Those declines would come on top of the output that has only been shut in temporarily. Standard Chartered envisions a “squashed-W pattern” for supply, in which temporarily idled output comes back online in a few months, but more structural declines continue thereafter.

The EIA, characteristically, is much more optimistic about the state of U.S. supply. The agency said on Tuesday that it only sees a 0.5 mb/d decline in oil production this year, compared to 2019 levels. Notably, Secretary of Energy Dan Brouillette says production will increase in the third and fourth quarters as the economy roars back.

Others aren’t so sunny. A report from Wood Mackenzie released on Wednesday says that oil demand will take years to recover.

“Production is falling sharply in the US, and some producers are reluctant to sell forward,” Commerzbank wrote in a note.

But while some oil drillers have hesitated to lock in hedges, others have decided that they can stomach hedges at extremely low prices, not because they can profit at such low levels, but likely only to guard against another meltdown. “The strike prices achieved in the latest surge of hedging have been low, these appear to be hedges designed to improve the probability of survival should market conditions deteriorate further,” analysts at Standard Chartered wrote in a report.

“Some of the hedges have been fixed at very low prices: one company has a USD 20.73/bbl WTI hedge for Q2, another has three-way collars for Q3 and Q4 with a floor of USD 25/bbl Brent,” Standard Chartered added.

The unease from some drillers regarding oil prices is understandable. The Secretary of Energy may predict “greatness” ahead, but others see a long, protracted economic recovery.

By Nick Cunningham of Oilprice.com

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  • Mamdouh Salameh on May 14 2020 said:
    The US Energy Information Administration (EIA) is not above manipulating US shale oil production figures. It has been doing exactly that since the inception of the US shale industry and will continue well into the future.

    Long before the onset of the coronavirus outbreak, the EIA was claiming shale oil production figures of 12-13 million barrels a day (mbd) and I have always argued that these hyped figures are inflated by at least 4.65 mbd.

    Putting the hype aside, output has declined so far by 1.1 mbd and more losses are likely. New data from Rystad Energy predicts US oil production will be down by almost 2 mbd by the end of June while latest research by the more reliable energy expert Philip Verleger shows that production as of May 10 is down by almost 4 mbd.

    How could it be otherwise when the US shale oil industry continues to idle drilling rigs at a tremendous clip, and the rig count is down by more than half in two months.

    Still, shale oil will survive the coronavirus ordeal but it will be on a life support machine provided by US tax payers. However, sooner or later even US tax payers will eventually see the futility of continuing to support a bankrupt industry.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Seth D on May 15 2020 said:
    LOL it is the Mamdouh and Nick show again.

    Of course Shale is in the gutter as "News Flash" there is a global pandemic, have you heard?! Saudi and Russian oil have never been able to kill Shale and, in fact, it is the Saudis who are suffering the most as Oil is almost their entire economy. They just tripled VAT taxes in Saudi Arabia and when things are back to normal, Shale will rule supreme again and, with distressed oil prices, Saudi Arabia financiers will not have the same ability to finance Wahabi extremists like we saw shortly after the start of the new Millennium.

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