Eighteen months into the downturn and US tight oil production has
undoubtedly proven far 'stickier' than anticipated. On a c60% fall in the
horizontal rig count from its October 2014 peak, US tight oil is estimated to have fallen by little more than 300kb/d from its March 2015 highs with a remarkable 60% uplift in rig productivity offsetting the activity decline.
Yet as the downward move in rigs starts to accelerate once again, productivity gains moderate and US E&P finally starts to guide towards cash-flow enforced volume decline are we becoming too blasé about the impact of faltering activity on the 2016/17 volume outlook? The data argues almost certainly, yes.
The past few weeks have seen a dramatic reacceleration in the lay down of US onshore rigs. From an end 2015 total of 425 horizontal rigs operating across the Big 4 US plays (Permian, Bakken, Eagle Ford and Niobrara) rig numbers by end last week had been cut by a further 22% to just 332.
With the reduction the prospects for a material decline in average US onshore production in 2016 have now largely been cemented, our US onshore model calling for a c700kb/d average y-o-y decline.
As significantly, and on the assumption of no change in rig count or momentum in productivity and decline rates, the outlook for 2017 is now also witnessing material erosion, our production model indicating a similar 0.7mb/d fall.
Importantly, an outlook of material decline is also increasingly supported by a cash-strapped US E&P sector, those reporting to date guiding collectively towards a c10% onshore liquids decline.
In a global oil market that remains towards 2mb/d long supply it is perhaps unsurprising that commodity markets should have paid little heed to the sharp recent acceleration in rig decline. We have after all seen it all before with the aforementioned reduction the US rig count across the 2015 year making decidedly little difference to absolute US onshore production levels so far.
Yet, with annualized productivity gains now also sharply lower - not least as the mix effect so prevalent last year starts to erode - and the average effective production per dropped rig one and a half times the level of a year ago, we find it hard to believe that this latest bout of rig cancellations will not have a more material impact upon production over the coming months.
To the extent that this decline starts to come through at a time when the year-ago production comparatives were still growing (onshore volumes peaked in March/April 2015) this is only likely to augment perception that production momentum in the US onshore (and with it US overall) has at long last sharply changed.
You may read or download the report here:
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My take on this report from DB:
This is a material departure from consensus especially for 2017 - very significant development now.
These types of production declines will get us to above $50, no problem, given a little time.