December U.S. Crude Production Drop Is Weather-Related

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Includes: BNO, DBO, DNO, DTO, DWT, OIL, OILK, OILX, OLEM, OLO, SCO, SZO, UCO, USL, USO, UWT
by: Robert Boslego

Summary

December production dropped 91,000 b/d.

North Dakota output caused the weather-related decline.

But rising drilling rig count and Bakken pipeline completion imply rising output in months ahead.

The Energy Information Administration (EIA) reported that actual crude production for December averaged 8.780 million barrels per day (mmbd). This was a decrease of 91,000 b/d from November following two monthly increases. Production had peaked at 9.627 (revised) million barrels per day in April 2015. Production had bottomed this cycle at 8.567 mmbd in September.

The largest decline by far was in North Dakota (89,000 b/d). Production there had recovered in both October and November after a steady decline for over a year. But according to the Director's Cut, "there were three significant precipitation events, fifteen days of wind speeds above 35 mph (too high for completion work), and nine days with temperatures below -10F."

But prospects are better looking forward. According to an attorney for Energy Transfer Partners (ETP), "Dakota Access estimates and targets that the pipeline will be complete and ready to flow oil anywhere between the week of March 6, 2017, and April 1, 2017." Based on my analysis, the pipeline could reduce the break-even cost of 500,000 b/d crude produced in the Bakken by about $5/b, thereby increasing production. And CLR is dedicating 70% of its budget there to completing DUCs in 2017.

Production also dipped by 17,000 b/d in Texas. But that was more than offset by a 47,000 b/d rise in the Gulf of Mexico. The Energy Department predicts that GOM production will rise by more than 400,000 b/d to 2 million barrels per day by the end of 2017.

The December figure is right inline with the weekly numbers reported in EIA's Weekly Petroleum Status Report (WPSR). This is unusual because the weekly numbers have been underestimating the final monthly figures. 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. In the five prior months, the underestimates have been particularly large.

Change

WPSR

Diff

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

Nov-2016

8904

97

8691

213

Dec-2016

8783

-121

8780

3

Average

9,148

9,037

116

Standard Dev

136

95% Confidence Int

266

EIA's Flawed Model

According to EIA's Drilling Productivity Report (DPR), the EIA's model projects production based on one input alone: drilling rigs. One problem is that well completions have exceed wells drilled, and drill rigs used for completion are not counted in the drilling statistics. This would explain why the EIA has been underestimating production.

Another factor is the flaw in the EIA's approach. By using prices (lagged) and recent production (to account for legacy production), I get an r-squared of 95% (goodness of fit) in explaining U.S. production.

Conclusions

The expected rise in domestic crude production has kept a lid on oil prices as a counter to OPEC's cut. Data for December undercut that case to a degree, but the decline appears to be weather-related. With the drilling rig count steadily rising, and the Bakken pipeline ready to ship crude soon, the outlook is good for higher domestic production in the months ahead.

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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