U.S. Crude Production Responds to the Global Oil Supply Surplus

oil rig
Blog April 02, 2020

Amidst Global Oil Market Price Turmoil, U.S. Production to Decline Nearly 1.8 million b/d

In the course of a few weeks, the global oil market has been thrown into turmoil. Market pressure began with OPEC talks of production cuts reversed into a production war, with Saudi Arabia and Russia maximizing crude oil supply. As crude benchmark prices plummeted, the spread of coronavirus turned into a global pandemic. This pandemic rattled the demand sector and U.S. refiners have found themselves in a drastically reduced margin situation, while the U.S. E&P community is ramping down, slashing capex budget and calling to reduce rig and completion activity.

Based on oil and gas prices and our economic models, as of March 20, rigs are expected to decline by 431 rigs through November of this year, bottoming out at 331 total rigs in the Lower 48. This would be a 57% decline from current levels over the next 8 months; for comparison's sakes, the 2014-2015 rig downturn saw a 58% rig drop over eight months from October 2014 to June 2015, and the 2008-2009 rig downturn saw a 61% decline over seven months from October 2008 to May 2009. Oil rigs currently sit at 571 rigs, 350 rigs off the peak in 2018, which occurred on November 23. The most recent overall total rig count peak was in August 2018 at 1,152 rigs and total rigs are currently at 714 rigs.

Our U.S. Crude Oil Production Forecast expectation given the lower prices and rig forecast is that production growth stalls and remains relatively flat in the 12.6 to 12.7 million b/d range before starting to decline in September, reaching 10.9 million b/d in September 2021, nearly a 1.8 million b/d drop from peak to bottom. Regionally, the Permian will see the least declines, with production climbing to just over 5.0 million b/d by August from 4.9 million b/d currently before tapering off and falling to 4.8 million b/d by mid-2021. Other regions such as Oklahoma and the Rockies will see much bigger production responses. Oklahoma production will decline nearly 220,000 b/d from March 2020 to September 2021, while Rockies production including North Dakota will drop by nearly 860,000 b/d in the same time period. South Texas production will fall from 1.4 million b/d to just over 1.0 million b/d by September 2021, nearly a 400,000 b/d decline.

Total U.S. daily oil production and forecast production compared to state benchmarks
Figure 1: Total U.S. daily oil production and forecast production compared to state benchmarks. Source: Genscape

Our assumption is that under $30/bbl completions and rig activity slows significantly, but that we need to get under $20/bbl before there is the potential to see production shut-ins and then many decision factors are at play. The lower producing, higher cost, end-of-life wells are the first wells for operators to look to shut in. Shutting in these wells could accelerate the timeline for decommissioning and associated spend to do so, which may keep the wells producing even though the economics don’t make sense. The next level of shut-ins requires looking at cash operating costs by company and play. The granularity is important since there is a fair amount of variability within each of the plays depending on the operator, their position, and cost structure. Based on the producer cash costs, which considers oil prices only (no uplift from NGLs or gas), we don’t expect any material shut-ins until at least below $20/bbl. Oil and liquids wells are costlier than gas wells to restart and many times require intervention (i.e. workover to get them producing at pre-shut in levels), therefore mid-life wells, even though they may have a higher operating cost, might not be shut-in unless prices fall into the single digits.

Genscape U.S. Daily Oil Pipeline Production Estimate Captures Supply Downturn in Real Time

In addition to forecast analytics, we capture production indicators in real time with the U.S. Daily Oil Pipeline Production product. The highly accurate, real-time production data provides users with advanced notice of production trends, which can provide primary and timely insight into storage balances and resultant market prices. The daily model uses our proprietary monitors on oil pipelines, crude-by-rail terminals, and natural gas nomination points to estimate daily production in 20 individual regions.

Total U.S. Daily Oil Pipe Production capture of current events in real time
Figure 2: Total U.S. Daily Oil Pipeline Production capture of current events in real time Source: Genscape

The daily oil pipeline production can accurately detect new field starts, weather events, outages and shut-ins, maintenances, and more. With this industry-leading product, our clients have been able to make informative decisions.

The primary benefits of the U.S. Daily Oil Pipeline Production are the real-time capture of current events and as a near-term production supplement. State well-level production actuals are lagged by a few months and production forecasts miss some current events, such as short term well shut-ins. These daily nuisances and fluctuations make the U.S. Daily Oil Pipeline Production a powerful tool, and complementary to our U.S. Crude Oil Production Forecast.

A Closer Look: Mother Nature vs. Market Forces

The recent downturn of market prices have placed operators in a negative situation. The price collapse in 2015 happened more gradually, with global oil prices falling in the span of several months, rather than just a few weeks. In today’s environment, E&Ps are adjusting guidance and spending faster than ever before, with almost daily changes to rig counts, completion schedules, and capital expenditure. Due to the unprecedented rate of change, it is difficult to model a future scenario using historical price-shock examples. Instead, let’s examine similar shock related events and crude oil production responses.

Outside of market forces, crude production is at the mercy of natural forces like freezing temperatures and hurricanes. Our Daily Oil Pipeline Production estimate can help to understand how these events will impact crude production as they occur. For instance, in January 2015, the monitor captured a 10% week-over-week decline in production volumes in the Permian Basin, driving down volumes by as much as 370 Mb/d day-over-day. The following week, Pioneer released a statement saying, “severe winter weather in West Texas has significantly impacted production and drilling operations in the Spraberry/Wolfcamp area.” Heavy icing and temperatures as low as 21 degrees Fahrenheit caused some producers in the region to halt operations, which corresponded with quantifiable declines in our data. We’ve identified similar production impacts that correspond with sub-freezing temperatures in years prior.

Permian production impacts due to cold weather
Figure 3: Permian production impacts due to cold weather. Source: Genscape, Custom Weather

This is just one example of how regional production modeling can identify where production changes occur, and how impactful they are. These individual data streams are aggregated into a summative sample that informs our overall U.S. production assessment.

These estimates provide succinct, granular insight into crude production impacts that will prove invaluable when operators begin to shut-in given the current pricing strip. The closest we have come to observing economically driven shut-ins historically occurred when volumes reacted to strong Midland pricing, which traded at about a $1 premium to WTI during two separate instances in February and March 2019. This drove down volumes that would ordinarily flow to Cushing through the Basin pipeline, signaling an operational price response. The unprecedented oversupply scenario that we are witnessing will likely yield more of these responses that we are confident will be captured accurately by our models, given their historic performance. Our users can integrate these models into their workflows in order to capitalize on daily volatility driven by both market and natural forces.

Immediate Opportunity to Capture Production Swings

The combined analytical expertise and powerful daily modeling of our U.S. Crude Production suite will help traders capitalize on upstream uncertainty. Our production forecast synthesizes experienced analytics with a robust, bottom-up methodology to provide an informed five-year outlook of the North American crude landscape. Our Daily Oil Pipeline Production model can capture and quantify production volatility as it occurs, which is at immediate risk given the current price environment. Together, these tools provide a comprehensive and timely solution that evolves as the market does.

We predict that production will begin to decline by the end of Q3 2020, and are watching our daily signals closely to see when, where, and how much existing production will shut-in. Join us in watching how the market moves during this exciting and turbulent time for crude oil production. To learn more about our services or to talk to one of our experts, please click here.