Implied U.S. Oil Production Shows Material Drop And Looks To Be Headed For 10 Mb/D

Summary

• US oil production shut-in is starting to have a real effect on US crude storage balances.
• Implied balance for today suggests US oil production is at or below 11 mb/d.
• We had forecasted a build of ~8+ mbbls, but EIA reported +6 mbbls. We had used implied production of 11.3 mb/d in the report, so the delta is related to production.
• Based on production guidance from companies and our on the ground knowledge of the upstream sector, US oil production is likely headed for 10 mb/d and below in May and June. Production shut-ins in May and June will dwarf April.
• We see a scenario where US oil production finishes the year between 10.5 and 11 mb/d, assuming a restart in completion activity in Q4.
• Looking for a helping hand in the market? Members of HFI Research get exclusive ideas and guidance to navigate any climate. Get started today »

Welcome to the US oil production edition of Oil Markets Daily!

US oil production shut-in is starting to have a real effect on US crude storage balances. Implied balance for today suggests US oil production is at or below 11 mb/d.

Source: EIA, HFI Research

We had forecasted a build of ~8+ mbbls, but EIA reported +6 mbbls. We had used implied production of 11.3 mb/d in the report, so the delta is related to production.

Our volume modified US oil production shows April average to be ~12 mb/d.

Source: EIA, HFI Research

Based on production guidance from companies and our on the ground knowledge of the upstream sector, US oil production is likely headed for 10 mb/d and below in May and June. Production shut-ins in May and June will dwarf April. Wellhead prices have started to recover, but basis differential averages across April were too high, making shut-ins the more viable options for producers in May.

Depending on the price recovery trajectory, we could see lower shut-ins in June. For the time being, we don't see a visible rebound in shut-in production unless WTI recovers back above $30/bbl and holds above that level.

By the end of this year, we expect a small recovery in US oil production. The current drop in production will force market participants to reprice oil prices by the end of Q3. We estimate that as supplies greatly underwhelm in the coming weeks, global inventories will start to top out and move lower throughout the summer months.

By Q4, WTI should recover back to $40 to $50, if not higher, and in this scenario, producers will start completing wells to offset some of the declines in production. We see a scenario where US oil production finishes the year between 10.5 and 11 mb/d, assuming a restart in completion activity in Q4.

Analyst’s 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.

Comments

[damonhill]

$PXD sees oil price recovery continuing:
www.reuters.com/...

A few weeks ago they were begging for Texas to curtail oil production

Keep away from companies selling frack sand to oil producers:
www.reuters.com/...

Oil demand is starting to increase but is it enough to sustain the latest rally?
www.reuters.com/...

[Brian C. Nelson]

"but is it enough to sustain the latest rally"

I have a high degree of confidence (90+%) it will be sustained through at least $50/bbl by year end and am placing my bets accordingly.

[Sir V-i-val]

@Brian C. Nelson I will be higher than 50....wait until there is international travel and the 200.000 barrel a day oil surplus will become a 3 million barrel a day deficit....and no US oil production can't go back to 13 million barrel a day....the reason is simple ...there are about 350 frac spreads left....A new one costs 30 million and an electric one 60 million....

[Petroleum Engineer]

Agreed. Total US production will not make it back to 13 million BBLS / day, for a number of reasons

[SilentRage]

Desperate shale drillers looking to reverse production cuts (Centennial @ $24 and Parsley @ $30) in order to repay principal debt. So much for supply cuts remaining in place, which kills the rally in WTI.

oilprice.com/...

[PT Larry]

Oil production cuts from EOG Resources.

seekingalpha.com/...

@shaner1 @Westexr @kimbillro and others.

[shaner1]

Frac-Spreads at 47 this week @PT Larry @Westexr @kimbillro

[Westexr]

@PT Larry @kimbillro @Rinascimento

Thanks, @shaner1 .

Looks like President Trump is possibly starting the Saudi Arabia "delink." He also said, in so many words, he may have bigger fish to fry.

I suppose with current oil price events, difficulties in Abqaiq and/or losing some tankers in the Straits would actually be a good thing.

I think the bigger fish may be swimming in the the Asia waters.

www.military.com/...

www.zerohedge.com/...

[Rinascimento]

@Westexr
The show is just starting; I am not 100% sure on the "delink' thing; the US, Israel, and KSA are joined at the hip with what is going on in ME with the financing of terrorists in Syria, Iraq, and Yemen; KSA has 100s of $ billions of assets in the West which can be easily frozen and so it has to walk carefully; so the KSA is between a rock and hard place and the US has invested heavily for decades in ME and too much money is involved; how friendly the "divorce" is going to be? is it going to be a Sicilian style with a shotgun fired? personally with crude oil at $20-$25 and falling demand I consider petrodollar close to dead

[Boeing747]

Biggest factor may be next planned edemic. Dr. "Death" Fauci stated in 2017 there would be a pandemic during Trump's first term. How could he know that in 2017? So now, he and other WHO personnel are saying there will be a 2nd wave this winter. Why would they say that unless there is another one already planned? If there is- let's hope they don't shut us down - kill the economy and punch oil again. Maybe they will repent and join a monastery or buddhist temple instead. One of these planned edemics is enough!

[twfry]

Where did he say that, that seems suspect.

I don't think the public will accept another lock down, after this opens back up there isn't going to be a major wave as expected and most people won't put up with this again.

[aaron28a]

Is it possible, just possible, he, as an expert in pandemics, was warning us that they are more likely to happen again. If this was a "plandemic," why would he announce it publicly ahead of time?

[aaron28a]

He said it, but the person who posted it is taking it completely out of context, IMHO. You are right that, if that's what he meant, he'd never say that.

What are you basing your "there won't be another major wave" comment on though?

[Cyclical Trade]

What about worldwide shut ins? How long does it take to restart a conventional well vs. shale (not drill/frack a new one but restart a plugged one)?

[Sir V-i-val]

This is my prediction.....US oil production will be 9,752,000 by December 2020 and oil will trade at 80 dollars a barrel in less than 24 months

[ZamTex]

What would be the driver for the price at that level within 24 months?

[Sir V-i-val]

oil production declines and the lack of drilling by oil majors all over the world....

[Petroleum Engineer]

The two factors you cite are certainly true. Shale development (if prices rise) will be hindered by a scarce resources. Banks and Wall Street have (finally) wised up and will not blindly throw money at shale companies any more. Frac spreads have dropped from close to 500 in 2018 to 55 last week and will likely drop further. Time will tell if any of the thousands of laid off workers ever return.

[PT Larry]

Thanks for the article.

[Sigmund Silber]

I can see shut in wells resume pumping and drilled but uncompleted wells completed but I do not see new wells being drilled.

The breakeven point for new wells is probably about $40 to $45. Saudi Arabia is not likely to allow the price to get that high.

A lot of companies need to restructure. Why buy them now when they will be in more distress later.

I am thinking Chevron or Exxon might be good investments.

[Joe de Mencia]

completing a well need quite a bit more cash than drilling one.

[aaron28a]

The break-even cost is higher if we are using true break-even prices.

[aaron28a]

But what's the point of drilling another DUC?

[Bill James]

I have no justification for it, but get a sense we are experiencing unstable swings between oversupply and shortages. Supply is cutting almost as fast as demand dropped. If there is a surge of demand it seems likely supply will lag. It will be interesting to see what demand looks like over the next 6 months.

[aaron28a]

where's the evidence?

[Joe de Mencia]

once something is shut-in, what, if any, restart costs are?

[LBoss 17]

i would love to see an entire article about this very question.

[PapaWhisky]

@vicx @LBoss 17

Some technical considerations here:

pubs.spe.org/...

[Joe de Mencia]

very, very nice summary, papa. thanks!

[DallasAlice]

My crude buyer called on 5/1 and offered $10. for barrels sold in May. Why would non-hedged operator in his right mind sell for that price? So we are shut in and so is every other like minded operator I know. This will continue until the discounts abate and there is demand for the product. Don’t see crude moving much for months. $40 by year end seems like a pipe dream.

[Brian C. Nelson]

Our crude buyer wanted $10/bbl for the privilege of not picking up our crude.

[Petroleum Engineer]

While wellhead differentials have been high, particularly for May, our crude buyer (one of the largest) is optimistic about wellhead differentials as early as June and is also optimistic about NYMEX prices as early as Q4 2020. For certain regions, they see refiners short of crude by Q4 2020.

[SilentRage]

Production starts ramping back up with WTI above $30. So $30/bbl the new break-even for shale? Saudis and Russians can't be happy about that.

[mjanisch]

How does $30 become the new breakeven? By my math, that would imply
half-cycle capital costs to fall by 60% or more - not sure that all goes around. I am sure there are some locations that earn a return at $30, but to call that the average for shale seems a bit aggressive.

[CK Asia]

Total BS, that is just marketing spin by shale drillers trying bamboozle investors into giving them more capital to destroy. The fact is that the vast majority of the shale was not generating cash to cash returns at $50 - $60/bbl, costs have been reduced to the breaking point, they have drilled out much of the tier one acreage and can't even afford to drill enough to replace volumes lost to the accelerating decline rates... stick a fork in it.

[Andy92]

@SilentSage Only 2 companies are opening the taps to some degree.

[Rafatali]

What will be the impact of this scenario on slb and hal

[nkvbradenton]

The downward production numbers were so swift. It looked quite bleak with where the demand was vs. production in March and April. The storage story took a hysterical proportion and grabbed everyone's attention. The beauty of all this is....ultimately, sanity prevails and market forces take care of supply/demand mismatch. It is still hard to see prices recover so much by the end of the year. Everything is dependent on economies opening up without major hiccups and massive second waves of the virus that force nation shutdowns.

[Brian C. Nelson]

"major hiccups and massive second waves of the virus that force nation shutdowns." This is the only reason in my opinion we do not see $50/bbl by the end of the year

[Mike_Frenchie]

Brian,
Most people dying are old and have pre-conditions... the World will not stop turning to protect the weakest of the boomers. Nobody can afford the disaster we are living in, nobody...

[shaner1]

@Mike_Frenchie - Exactly!

[Dorka]

$40 by end of 2020 instead of 2021? Interesting

[Bluegold Trader]

Commercial stock of refined oil products at five major ports (Amsterdam, Antwerp, Fujairah, Rotterdam and Singapore) has reached a new all-time high of 127 MMbbl (+12.3 MMbbl y-o-y; and +11.55 MMbbl vs 5-Y average) > twitter.com/...

[shaner1]

Thanks @HFIR

[PT Larry]

@shaner1 Guess from here on, looking for an increase in frac spreads.

Be a few months. Meanwhile, how they change will be of interest.

[PT Larry]

@shaner1 To add, Fox Business stated today the average flight has 12 passengers onboard. So, whether partly or fully loaded, it uses the same amount of fuel.

[Krypto]

@PT Larry Weight is very important for the cost of operating an airplane, as is distance. Heavier planes use more fuel per mile. More passengers mean more fuel burned per mile - though I'm not sure how significant it is relative to the other costs.

I've heard fuel averages 30% of the cost of a flight - so I could see an empty plan costing 5-10% less to operate - obviously nowhere near the savings they need to keep them flying, but generally supporting your point about planes in the air burning fuel. I think they have cancelled a lot of flights and that is why fuel consumption is way down.

Nevertheless, I think they used to need the planes at least 80% full to break even, all costs considered.