80 Million Barrel Correction To U.S. Crude Production Outlook

by: Robert Boslego

Summary

EIA revised its U.S. August production number up 266,000 barrels per day.

EIA's revised its U.S. production forecast up 80 million barrels through 2017.

EIA revised U.S. net crude oil imports down 107 million barrels through 2017.

EOG claims it can increase production 10% annually at $50 (WTI) and 20% p.a. at $60.

Expect more upward revisions to U.S. crude production.

In a recent article, Big Correction Coming For Weekly Crude Production, Estimates, I wrote that U.S. "August production going to be much higher than 8,220 mbd forecast." There were skeptics, one commenting, "You will be proven wrong."

In two follow-up articles, Is U.S. Crude Production Leveling Off? and Crude Oil Prices May Once Again Be At A Tipping Point, I noted that the Energy Information Administration (EIA) had reported last week that crude production in the lower 48 states was unchanged. I have written many times that their weekly number is only a model estimate, so we should not accept it as fact. But because it is their model estimate, it revealed a likely change to the model: unchanged production instead of a continuing decline.

The reason this issue is so important is that much of the bullish thesis depends on a large decline in production from non-OPEC countries, primarily the United States. And the EIA had been forecasting a sharp drop: from 8.9 million barrels per day (mmbd) in May to 8.2 mmbd in August.

This morning, the EIA released its Short-Term Energy Outlook (STEO). It did indeed significantly revise its U.S. crude oil production forecasts. For August, the EIA's new forecast is 8.49 mmbd, 266,000 b/d higher than in its July STEO. Moreover, its forecasts going out to December 2017 have been revised 80 million barrels (mmb) higher than in the July Outlook.

U.S. Crude Oil Production (MMBD)

July

Aug

Revision

Million Barrels

May-16

8.81

8.89

0.09

2.70

Jun-16

8.63

8.75

0.12

3.67

Jul-16

8.47

8.57

0.11

3.28

Aug-16

8.22

8.49

0.27

8.24

Sep-16

8.10

8.29

0.19

5.72

Oct-16

8.19

8.39

0.20

6.23

Nov-16

8.26

8.47

0.20

6.14

Dec-16

8.25

8.45

0.20

6.27

Jan-17

8.23

8.43

0.19

5.96

Feb-17

8.23

8.41

0.18

5.11

Mar-17

8.25

8.42

0.17

5.33

Apr-17

8.26

8.42

0.16

4.70

May-17

8.21

8.36

0.16

4.86

Jun-17

8.16

8.29

0.13

3.76

Jul-17

8.19

8.28

0.10

2.90

Aug-17

8.06

8.14

0.07

2.26

Sep-17

8.00

8.06

0.05

1.64

Oct-17

8.17

8.20

0.03

1.03

Nov-17

8.31

8.32

0.02

0.50

Dec-17

8.35

8.34

-0.01

(0.25)

Total

80.06

However, its forecasts for U.S. crude oil inventories have only been revised higher by a fraction of that change to U.S. output. For example, crude stocks are projected to be 18 mmmb higher at the end of 2016, closing at 500 mmb.

Crude Oil Stocks (MMB)

July

Aug

Million Barrels

May-16

533.4

540.5

7.08

Jun-16

524.4

524.4

0.00

Jul-16

506.6

520.8

14.25

Aug-16

498.1

513.2

15.17

Sep-16

495.6

511.6

16.00

Oct-16

500.0

516.7

16.73

Nov-16

495.5

512.8

17.38

Dec-16

482.5

500.4

17.96

Jan-17

490.9

507.3

16.47

Feb-17

496.5

511.1

14.65

Mar-17

505.7

518.8

13.03

Apr-17

510.5

522.0

11.59

May-17

506.4

516.7

10.31

Jun-17

493.8

503.1

9.37

Jul-17

480.2

488.5

8.33

Aug-17

474.3

482.1

7.80

Sep-17

474.2

481.6

7.36

Oct-17

479.4

486.4

6.99

Nov-17

475.6

482.2

6.68

Dec-17

463.0

469.4

6.42

A basis for this apparent discrepancy is the downward revision to net crude imports of 107 mmb.

Net Crude Imports (MMBD)

July

Aug

Revision

Million Barrels

May-16

7.20

7.28

0.08

2.47

Jun-16

7.44

7.44

0.00

-

Jul-16

7.73

7.66

-0.07

(2.22)

Aug-16

8.11

7.78

-0.32

(9.97)

Sep-16

8.03

7.78

-0.25

(7.48)

Oct-16

7.67

7.43

-0.24

(7.41)

Nov-16

7.92

7.67

-0.25

(7.50)

Dec-16

7.97

7.72

-0.25

(7.90)

Jan-17

7.66

7.35

-0.31

(9.67)

Feb-17

7.52

7.21

-0.31

(8.62)

Mar-17

7.91

7.62

-0.29

(9.12)

Apr-17

8.10

7.83

-0.27

(8.11)

May-17

7.92

7.65

-0.27

(8.49)

Jun-17

7.98

7.76

-0.22

(6.56)

Jul-17

8.16

7.97

-0.19

(5.76)

Aug-17

8.40

8.27

-0.12

(3.77)

Sep-17

8.37

8.28

-0.10

(2.86)

Oct-17

7.85

7.78

-0.07

(2.07)

Nov-17

8.05

8.00

-0.05

(1.55)

Dec-17

7.98

7.96

-0.03

(0.85)

Total

(107.43)

This implies OPEC has to sell those barrels elsewhere.

Crude Production Growth

Separately, EOG Resources, Inc. (NYSE:EOG) reported late last week that it has

Increased its targeted number of well completions for 2016 from 270 to 350 net wells. Many of the additional well completions are scheduled for late 2016. In addition, due to increased drilling productivity, the company expects to drill 250 net wells, 50 more than in its original 2016 plans. This increase in activity will be accomplished while maintaining 2016 capital expenditure guidance of $2.4 to $2.6 billion, excluding acquisitions."

EOG went on to claim that "assuming a flat $50 West Texas Intermediate crude oil price (WTI), EOG would expect 10 percent compound annual crude oil production growth through 2020. Assuming flat $60 WTI, EOG would expect 20 percent compound annual crude oil production growth through 2020."

Conclusions

Expect more upward revisions to EIA's crude production outlook. The rise in oil prices was attributed to expectations for rebalancing, largely due to the expected decline in U.S. crude production. I do not think that will materialize as previously expected.

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.