Real-Time U.S. Oil Production Suggests U.S. Oil Production Is Nowhere Near 13 Million B/D In May

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by: HFIR
Summary

Real-time US oil production show flat to higher production in Lower 48 since March putting production at ~12 to ~12.3 mb/d.

Even if we take into account maximum error of ~300k b/d in our dataset, US oil production is at 12.3 mb/d today.

No material increase in Permian flaring activity indicating to us that oil production has been flat in the Permian since March. NG production in Permian has been flat to down.

The takeaway from this is that US oil production is not at ~13.1 mb/d as implied by the EIA, and positive adjustment factor comes from terrible counting timing on imports/exports.

Welcome to the "where's the oil coming from" edition of Oil Markets Daily!

One of the most important variables to understand today is how much US shale production is growing. So there are a lot of methods one can use to gauge just where production is. Historically, if you compare US oil production to US natural gas production, the correlation is basically 1:1. The reasoning is because as shale wells come into production, the initial production mix is mostly oil, but over time, it shifts to gas. So this is called the gas-to-oil ratio. The higher the ratio, the more gas the well has in proportion to oil.

So if we see a massive increase in natural gas production, then we would also see the oil side increase as well.

Source: PointLogic, EIA, HFI Research

For example, we created this chart to illustrate the close correlation.

The key figure to watch is the Permian basin, which is where most of US shale growth is coming from. So you can gauge this data via natural gas production and add ~0.66 Bcf/d of flaring to it:

Source: PointLogic, EIA, HFI Research

This data suggests Permian was flat since March. This makes a lot of sense on the natural gas side considering Waha basis is showing prices at negative to zero.

Source: ICE

This means that the only way for oil production to diverge from natural gas is if an incredible amount of flaring took place. But judging from satellite data tracking flaring, the m-o-m change between February, to March, to April, and to May show very little divergence:

Jan 1, 2019

Feb 1, 2019

March 1, 2019

April 1, 2019

May 5, 2019

If you look at the 5-month chart differences, April appears to have the highest amount of gas flaring, which also coincides with the peak in Permian gas production. This means production has since dropped.

Secondly, we know that the fracspread count in the Permian has actually declined since March indicating no massive drawdown in DUCs has taken place.

Source: Bloomberg, (thank you robdefcon1)

Lastly, the largest tracking error in using the natural gas data was only ~300k b/d to the extreme. This implies that US oil production is at most ~12.3 mb/d today versus the ~13.1 mb/d implied by the weekly + adjustment.

Inverting the question: If US oil production is at 13 million b/d, where would natural gas production be?

If we were to invert the question and ask if US oil production was ~13 mb/d, where would US Lower 48 natural gas production be? It would be ~95 Bcf/d (after accounting for pipe loss of ~10 Bcf/d).

Source: PointLogic, EIA, HFI Research

But yet, Lower 48 natural gas production has been more or less flat for the year. Keep in mind that there are pipeline outages, so the figure could be understated. But it would not be understated by ~5 Bcf/d even if we assume max production volume of ~90 Bcf/d.

But yet, Lower 48 natural gas production has been more or less flat for the year. Keep in mind that there are pipeline outages, so the figure could be understated. But it would not be understated by ~5 Bcf/d even if we assume max production volume of ~90 Bcf/d.

To add salt to the wound, Lower 48 natural gas production never even got a whiff of ~95 Bcf/d let alone get projected there.

This leads us to believe that this week's EIA data is hardly explainable, and as much as this painstakingly feels for our readers, we suggest a few more weeks of the report before we can get clarity.

We are also reaching out to the EIA personnel that compiles this report to ask for clarification.

The takeaway from this...

Here's the takeaway from all this:

  • There's a high probability (90%+) that US oil production is not more than 12.5 million b/d.
  • With the exception of massive flaring, Permian production is likely closer to flat since March than up in any substantial manner.
  • US oil production has been flat since March and flat YTD.
  • Builds in US crude storage are entirely explained by disappointing refinery throughput the last 2-months.
  • Positive adjustment in the weekly reports reflects terrible counting on imports/exports by EIA.

Going forward, we will keep using natural gas data as a proxy for production as we believe this best tells the trajectory we see going forward. Gas-to-oil ratio increases over time as shale wells get older, so this is one of the best proxies to use.

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.