U.S. Crude Production Rebounded As DUCs Get Completed, EIA Underestimating Response

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Summary

US crude production rose by 232,000 b/d in October.

The EIA had underestimated October production by 302,000 b/d in weekly stats.

ND increased its production by 72,000 b/d.

Continental Resources added completion crews.

There is a rise in completions which may be signaling U.S. production has already bottomed out.

Data from the Energy Information Administration (NYSEMKT:EIA) showed that crude oil production for October averaged 8.807 million barrels per day (mmbd). This was an increase of 232,000 b/d from September, which had been the lowest level (8.575 mmbd) from the peak in April 2015 (9.627 mmbd).

During September, Tropical Storm Hermine affected Gulf of Mexico (GOM) production, and so the increase of 84,000 b/d there was expected. But the 232,000 b/d increase reflected a much broader rebound. The October estimate, based on survey data in the EIA's Petroleum Supply Monthly (PSM), was 302,000 b/d higher than initially reported by the EIA in its Weekly Petroleum Status Reports (WSPR), which is based on the EIA's model. (This figures is 25% of the size of OPEC's announced cut.)

As I have explained previously, EIA's model is flawed because it is based solely on the Baker-Hughes (B-H) rig data. B-H defines an active rig as follows:

To be counted as active a rig must be on location and be drilling or 'turning to the right'. A rig is considered active from the moment the well is "spudded" until it reaches target depth or "TD". Rigs that are in transit from one location to another, rigging up or being used in non-drilling activities such as workovers, completions or production testing, are NOT counted as active."

The EIA has been systematically underestimating production because of "Drilled But Uncompleted" wells (DUCs), a new category created by the shale industry. I have compiled a listing of EIA's figures from the Petroleum Supply Monthly (PSM) to compare against the interpolated values from its WPSR since the beginning of 2015. The EIA's underestimate for October tied for with the highest one in September 2015.

MBD

Change

WPSR

Diff

Month

PSM

Jan 2015

9379

9180

199

Feb 2015

9517

138

9278

239

Mar 2015

9566

49

9398

168

Apr 2015

9627

61

9381

246

May 2015

9472

-155

9431

41

Jun 2015

9320

-152

9599

-279

Jul 2015

9418

98

9520

-102

Aug 2015

9384

-34

9324

60

Sep 2015

9423

39

9121

302

Oct 2015

9358

-65

9126

232

Nov 2015

9304

-54

9182

122

Dec 2015

9225

-79

9189

36

Jan 2016

9194

-31

9222

-28

Feb 2016

9147

-47

9117

30

Mar 2016

9174

27

9041

133

Apr 2016

8947

-227

8922

25

May 2016

8882

-65

8769

113

Jun 2016

8711

-171

8630

81

Jul 2016

8693

-18

8484

209

Aug 2016

8744

51

8514

230

Sep 2016

8575

-169

8490

85

Oct 2016

8807

232

8505

302

Average

9,176

9,065

111

Std Dev

139

95% Conf Interval

272

For example, Continental Resources (NYSE:CLR) stated in its update to investors in December that it was beginning work to capitalize on Uncompleted Bakken wells. It had added two stimulation crews and was planning to have four stimulation crews working by YE 2016. It claims it can earn a 100% ROR for completing wells at $50 WTI.

As of year-end 2016, it projected it would have 175 uncompleted wells in inventory, up from 135 at the end of 2105, and that does not include the 15 wells that it had stimulated but not produced with first sales in 2017.

The October production data reported an increase in production in North Dakota of 72,000 b/d (7.5%). This appears to be reversing the downtrend in output that had begun in early 2015.

As the demand for well stimulations is on the rise, so are the prices. It was recently reported that "some well stimulation firms implemented a 10% increase for services based on a tightening market and longer waits for crews and equipment, while multiple Williston Basin well stimulation firms are actively signaling a post-Jan. 1 price increase across the board for pressure pumping services… Outside the Bakken well stimulation providers continue adding incremental crews nationwide in anticipation of increased demand in 2017 even as pressure pumping fleets rotate through regional markets in search of steady employment."

Conclusions

I had noted that neither the Saudi energy minister nor OPEC believes that American shale oil can respond in 2017. It already began responding in the fourth quarter of 2016.

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.

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