U.S. oil production will fall fast in Q4

[dan_s]

I follow a lot of upstream companies. They are all dropping more rigs and completing even fewer wells. I now expect U.S. oil production to drop by 400,000 barrels per day in Q4. Over the 12-month period ending March 31, 2016, United States crude oil production will drop approximately 1.2 million barrels per day (from a peak of 9.6 million BOPD) and it will keep dropping through 2016 no matter where the oil price goes. At 8.5 million barrels per day (early in 2016), the United States will be required to import over 50% of the oil it needs each day. This may explain why refiners are now building inventory; they see short supply next year and the potential for much higher oil prices. - Dan

Large-Cap Exploration & Production: Finding Discipline
Evan Calio – Morgan Stanley
October 29, 2015 4:51 AM GMT
The incremental, early and constructive macro trend in E&P earnings is the emergence of cash discipline. E&Ps with the history, ability and cash returns to outspend are dropping rigs again and willing to decline in 2016. APC and HES dialing back rigs, OXY cautious on 2016 activity.
Good has been bad. The sector trend in US E&P earnings in 1Q15 and more pronounced in 2Q15 was the micro (was so positive that in the aggregate it was bad for the macro). Production beats, massive efficiency gains, improving completion performance and leading industry costs reductions were positive in isolation, yet in aggregate produced a much more resilient than expected US oil production base. We feared a similar outcome into 3Q15 results and while the electric light of capitalism shines bright driving impressive sequential efficiency gains and continued cost savings, E&P producer discipline is slowly emerging. Producers with the history and ability (via balance sheet, DUCs or otherwise) to outspend are cutting activity deeper to cash flows and willing to decline production into 2016. After demand fears threatened to push a recovery into 2017, relief on supply improves sentiment on 2016. The early reporters are, in our view, philosophically more prone to cut yet mark an important inflection.
With four of 11 LargeCap E&Ps having reported, the most notable and incremental takeaway is lower than expected activity plans into year end and into 2016. APC is likely dropping 3 rigs (13%) of its 3Q15 average US fleet, HES is going to 4 rigs from 7 in the Bakken (and deferring some GoM spend), OXY sounding cautious and slowing Permian growth in 4Q15 vs. torrid YTD pace. This is improving the outlook for US production decline and the timing of global crude supply/demand rebalancing vs. our thoughts on 2016 spending behavior into 3Q15 Preview (where we estimated the group would grow total crude production 40Mbld in 2016 on the Strip and moderately down as an industry).