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U.S. Oil, Gas Drilling Activity Slows

U.S. Oil, Gas Drilling Activity Slows

The total number of active…

Oil Prices Could Crash Hard This Summer

Less than two weeks ago we warned that based on the current oil production trend, the US may run out of storage for crude as soon as June.

StorageQ2Chart

USCrudeStorageUtilization

This is what we said back in early March when the BTFDers were hoping WTI in the low $40s would never again be seen:

Come June, when all available on-land storage is exhausted, each incremental barrel will have to be dumped on the market forcing prices lower and inflicting further pain on the entire US shale complex (just as Q1 results are released which will invariably show huge writedowns as companies will no longer be able to hide behind the SEC-mandated accounting trick that made Q4 results appear respectable). Here's Soc Gen: "...oil markets can be impatient and prices could drop considerably lower. As we have written previously, we are currently more concerned about downside risk than upside risk."

Since then, as expected, crude tumbled to new post-Lehman lows, confirming the global deflationary wave is raging (for more details please see China), and WTI only posted a rebound on quad-witching Friday as another algo-driven stop hunt spooked all those who were short the energy complex.

Related: Oil Price Speed Limit Presaging An Age Of Austerity?

The problem is that despite the latest "dead oil bounce" we have since had to revise our forecast for full US oil storage, and pulled forward the date when this will happen in the aftermath of the latest API inventory data.

Recall that earlier this week API reported, and EIA later confirmed, that for the 10th week in a row there was a "massive 10.5 million barrel build (far bigger than the 3.1 million barrel expectation) and a 3 million barrel build at Cushing. If this holds for DOE data tomorrow (and worryingly API has tended to underestimate the build in recent weeks) it will be the biggest weekly build since 2001."

DOECrudeInventoryChange

The DOE indeed confirmed all of this:

DOECrudeInventoryChange2

It also means that at the current rate of record oil production, storage will be exhausted in under two months, some time in mid-May. At that point, with no more storage to buffer the record oil production, the open market dumping begins and prices of WTI will crater as every barrel will have to be sold at any clearing price, since the producers will have no other choice than to, literally, dump the oil.

In other words, a perfect storm is shaping up for oil some time in late May, early June.

And then we learned something even more startling.

As the Platts oil blog reports, even as oil prices continue to fall amid flat demand and near-record supply, "North Dakota is likely to see a “big surge” in production this June, potentially besting another supply record even if prices continue to crater, according to Lynn Helms, director of the state’s Department of Mineral Resources."

Related: US Energy Storage Market Could Triple This Year

What makes things worse is that this time the production "surge" will have nothing to do with game theory, or beggaring thy oil producing neighbor in hopes that the other, more levered guy goes bankrupt first.

This surge will be largely propelled by two factors: a state-mandated time limit on drilling and the expected trigger of a major oil tax incentive, Helms said.

Here is how Bakken production has looked like in recent months:

Helms, the state’s top oil and gas official, reported last week that North Dakota oil production fell about 3%, or about 37,000 b/d, to 1.190 million b/d from December’s all-time high of 1.227 million b/d. The reduction was expected as sweet crude prices averaged $31.41/barrel in January, down from $40.74/b a month earlier and the statewide rig count fell by 21 to 161.

But Helms said he doesn’t expect production to tumble dramatically, even as prices continue to fall, and even though he expects the statewide rig count to “bottom out” at about 100 rigs. Production, he said, will likely remain between 1.1 million b/d to 1.2 million b/d over the next few months.

Nothing surprising.

And then this will happen: "Bakken production could suddenly skyrocket, by nearly 10%, or an additional 75,000 b/d, to 100,000 b/d in June, Helms said." This means that despite low prices and production curtailments throughout much of North America, oil production in North Dakota could actually shatter a new record this summer!

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This is mainly due to a backlog of between 800 to 1,000 uncompleted wells statewide, about 125 of which need to be completed by the end of June in order to comply with state requirements to complete drilling within a year.

At the same time, operators may wait until June, when a major oil tax incentive known as the “large trigger” is expected to go into effect. The large trigger, which is aimed at boosting Bakken production at times of low crude prices, enters into force when the WTI crude price averages below $55.09/b for five consecutive months.

If that incentive is triggered, which Ryan Rauschenberger, North Dakota’s tax commissioner, said he expects will happen, the majority of wells will be exempt from a 6.5% oil extraction tax for as long as two years.

With that tax break in effect and hundreds more wells running up against one-year state deadlines, production in North Dakota could continue to surge even beyond the summer.

Related: Majors Could Be The Big Winners Of The Oil Price Crash

“We’re going to ride these waves of production increases,“ Helms said.

And that, coming just as US spare oil capacity hits its limit, is precisely what all those BTFDers who bought first junk bonds, and most recently, a desperate scramble in follow-on equity offerings by the universe of cash burning US shale companies, is precisely what they did not want to hear. Because no amount of Fed ramblings about the ever weaker US economy will offset what is about to be a veritable oil tsunami.

The time to buy assets may be when there is blood on the streets, but the moment to dump crude (and buy deep OTM puts) will be precisely when the majority of investors and algo-programming math PhDs realize that in just about two months the streets are about to become black, covered entirely in oil.

By Zerohedge

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  • platinumshore on March 24 2015 said:
    Energy forecasting must be one of the few economic groups not to measure their key indicators in net terms ie net energy. It's amazing what happens when you do eg one third of 'glut' due to refinery gain disappears (eg more oil in production, but less from a net energy weighting as more energy goes into expanding volume - likely whipping cream). I could state 3 reasons why prices will soar this year, all as likely as a crash, and most would involve the reality of net energy weighted forecasting.

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