U.S. Oil Production Hits New Record High, But The Data Shows The Growth Has Flatlined Since

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Includes: BNO, DBO, DNO, DTO, DWT, OIL, OILD, OILK, OILU, OILX, OLEM, OLO, SCO, SZO, UCO, USAI, USL, USO, USOD, USOI, USOU, UWT, WTID, WTIU
by: HFIR
Summary

EIA reported that US oil production hit a record of 11.9 mb/d in November.

But this fell short of the weekly + adjustment figure of 12.124 mb/d.

The trued-up US oil production chart shows US oil production to be flat to down for the last three months. This is in line with our estimate for stalled growth in Q1.

But US oil production growth year-over-year will still be high given the elevated exit production level.

In order for US shale to keep the same momentum of growth into 2019, it will need to complete more wells with the same or higher productivity. That's going to be a tough task with WTI in the $50s.

Welcome to the growth has stalled edition of Oil Markets Daily!

The highly anticipated EIA-914 report came out on Jan. 31, showing US oil production surging to 11.9 mb/d for the month of November. Oil markets initially sold-off on that, but close followers of the fundamentals know that the adjustment + weekly actually showed the production figure to be over ~12.1 mb/d for the month of November, so the 11.9 mb/d was actually a "disappointment" versus what the data showed.

But more importantly, the important data to watch going forward is where is the trend of production going. According to the weekly + adjustment, the trend in US oil production for the last three months has been flat to down. This chart illustrates that the growth we saw from US shale over the summer is starting to stall. This is in line with our global oil supply & demand model indicating that Q1 will show stalled US production growth over Q4.

However, for those that track the data closely, if you take the exit production of ~12 mb/d, the y-o-y growth in 2019 will likely be closer to ~1.8 mb/d, again assuming US oil production exits 2019 at around ~12.9 mb/d. This shouldn't be a surprise because a higher exit production volume gives you a higher base for the upcoming year, so the year-over-year calculation will skew to the upside. But in reality, the growth this year may just be ~800k b/d to 900k b/d exit-to-exit, which is a big slowdown from the +2 mb/d we saw last year.

In addition, it's important to look at the EIA-914 data to see where the growth came from. This is what we saw in November:

  • Gulf of Mexico +188k b/d m-o-m
  • Texas +115k b/d m-o-m
  • New Mexico +32k b/d m-o-m
  • Colorado +15k b/d m-o-m
  • Alaska +10k b/d m-o-m

North Dakota saw a decline of 11k b/d m-o-m, and December should show another decrease in production.

Based on our shale basin analysis, it appears that basins outside of the Permian are now starting to see well productivity growth stall/moving lower. You can see our report here which detailed some of the findings.

If US shale well completions are flat this year versus last year, a higher percent of new well production will go towards replacing declines last year. So in order to keep the same momentum going forward, US shale needs to complete more wells with either the same productivity or higher productivity. It's akin to a runner running a treadmill, but that treadmill is getting faster and faster. US shale needs to complete more and more wells each year just to stay flat, which will be a tall order considering 2018 broke the record by a mile.

With WTI in the $50s and private equity capital drying up, we think PE firms will be the hardest hit in 2019, resulting in much less growth from that group. Oil majors will likely keep Permian growth strong, so that will still boost Permian production this year. Other public companies in the Permian have already announced a reduction in capex and lower growth targets. So far, the things are aligned with our model.

For readers, the key will be to keep watching the trend in the weekly production + adjustment figure. If we see the trend reversing or staying the same, we will post the update in next month's EIA-914 report.

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.