A Look At Millions Of Barrels Of Unaccounted For Oil

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Includes: BNO, DBO, DNO, DTO, DWTI, OIL, OLEM, OLO, SCO, SZO, UCO, USL, USO, UWTI
by: Daniel Jones

Summary

Over the past few weeks, I've been trying to look at data that covers all of the U.S' domestic oil production in an effort to plot out future output.

Ultimately, I was able to conduct an analysis of most of the domestic oil picture but around 2.5 million barrels were left unaccounted for.

In this piece, I look at these barrels of oil in an attempt to figure out their nature and what the rig counts seem to be indicating moving forward.

According to the EIA (Energy Information Administration), the organization keeps track of and reports data on seven different oil and gas producing regions in the country (Permian, Marcellus, Niobrara, Eagle Ford, Haynesville, Bakken, and Utica), plus the Gulf of Mexico. In recent months, after seeing a nice drop in domestic oil production, which fell from a peak of 9.694 million barrels per day to just under 9.096 million per day (using weekly data), the amount being produced ticked up to 9.221 million barrels daily. For long-oriented investors like myself, this is proving problematic, but one thing that is making the process of evaluating the oil market more difficult is that the EIA does not provide data relating to about 28.5% of all oil output and 34.5% of all land-based production. To get a glimpse at this invisible production, I decided to dig into the production data a bit.

A look at domestic oil production

Before I get into the fun details, it's important to look at the big picture for oil production in the U.S. Using data provided by the EIA's Short Term Energy Outlook, I placed, in the table below, a breakdown of total domestic oil production (on a monthly basis) for January of 2015 through December. What we see after doing this is that, despite oil prices tumbling throughout much of the year, output rose from 9.345 million barrels per day in January to average nearly 9.694 million barrels per day in April.

*Source: Created by author with data from the EIA's Drilling Productivity Report

The main reason for this uptick in output despite the terrible energy market is that the timing of wells drilled, combined with disparities in decline rates, can allow production to climb, due to a lag, even as rig counts plummet. In the table below, you can see that rig counts have, indeed, plummeted over the past several months. By subtracting rig counts reported for the seven regions the EIA does cover, we can also get a glimpse at the number of units in operation elsewhere. As a note, I'm using total rig counts (oil plus natural gas, pursuant to the EIA's methodology).

Click to enlarge

*Source: Created by author with data from the EIA's Drilling Productivity Report

What we can see from all this is that the overall rig count has fallen, as has the rig count associated with areas not included in these seven regions (though the count there has been fairly volatile). As a result of this decline in the number of oil rigs operating within the U.S., oil production in the seven regions the EIA looks at has also fallen, dropping from a peak of 5.469 million barrels per day to 5.052 million. What is interesting, though, is that oil production from outside of these regions, which you would expect to have the least powerful economies of scale and, therefore, be the least stubborn from a production standpoint, has actually risen materially.

Last January, production from outside these seven regions stood at 4.145 million barrels per day. Due to the delayed effect from falling rigs and the likely low decline rates associated with these wells, production managed to rise to 4.264 million barrels per day by April of 2015 before finally starting their descent. This was, unfortunately, shortly lived due to volatility. If estimates are accurate, production in these regions rose back to 4.136 million barrels per day in December, which is startling given the fact that rig count is down so much year-over-year.

To break this down further, I then looked at production data associated with the Gulf of Mexico. Based on the data provided, crude output in the region is up from 1.497 million barrels per day in January to 1.596 million barrels per day in December (November and December data was calculated by reconciling data from October with expectations for the fourth quarter average according to the EIA Short Term Energy Outlook). By taking this out of the equation, production outside of the seven regions covered fell (with quite a bit of volatility along the way) from 2.647 million barrels per day to 2.540 million.

Click to enlarge

Unfortunately, without further data relating to decline rates, it's impossible to determine how long it will take for oil production in these wells to have a positive impact (aka for output to fall) on the amount of crude being produced in the U.S. but the past does seem to give some clues. If you look at the table below, which is a highlighted and modified version of one of the tables shown above, you can see a general trend that connects rig counts with output. The green squares show periods of declining rig counts and declining oil production, while the red squares show periods where each of these indicators has risen.

Click to enlarge

*Source: Created by author with data from the EIA's Drilling Productivity Report

In the case of the seven regions looked at by the EIA, there doesn't appear to be any relationship, but this isn't the case with areas outside of those. Although certainly not perfect, the drop in rig count in these other regions tends to take place a few months before any sort of decline in output transpires and any sort of increase in rig count has a significant, if delayed, reaction on the amount of crude being produced. The volatility of this trend is both a positive and a negative since it can add to or subtract from the monthly production of oil quite rapidly but, with rig counts falling once again (and at a nice clip), it's probable that, absent a sizable uptick in prices, the drop in output should fall again. Of course, this also suggests that this source of oil output cannot be relied on too much for investors looking for something to balance out the market. Rather, it's the seven major regions covered by the EIA that will have to see a drop in production in order for the market to balance but it is possible that volatility from these barrels could help along the way as rig counts continue their drop.

Takeaway

Right now, the oil market is in a very interesting position. Using the data provided, it's easy to see where the source of the trouble lies right now; persistently high Gulf of Mexico production and volatile data coming from the other miscellaneous areas the EIA doesn't analyze. With the Gulf of Mexico likely to average about 1.62 million barrels of crude per day this year and the other category being hard to predict, investors looking for clues to a sustained downturn in output should focus their attention more on places like the Permian, Niobrara, Haynesville, Bakken, Marcellus, Utica, and Eagle Ford, but these unaccounted-for barrels could provide a bonus on the way toward lower output.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.