Why U.S. oil production is likely to flatten out - July 15

[dan_s]

At the current active rig count it is highly unlikely that we see an increase in U.S. oil production between now and year-end. We are simply not completing enough new wells to offset the declines of existing wells. The U.S. keeps layering on more and more horizontal wells that have steep decline curves. At today's active rig count it will be difficult to offset the declines of just the horizontal wells completed in the last three years.

"Lower oil price expectations and intense focus on spending within cash flows has led Public E&Ps to be very vocal about their rig activity reductions in 2019. This has been visible throughout 2019 as Public independents have seen their rig counts fall by 10% since the beginning of the year. Historically, these E&Ps have revised budgets at mid-year, largely dependent on where oil prices have changed. Recall, 2018 budgets for the public independent E&P group increased by more than 15% over the course of the year. While oil prices today are significantly higher than where budgets were set ($60 vs $53/bbl), we believe "the ship has sailed" for operators to ramp activity meaningfully in 2H19. With the recent volatility in oil prices we see it as unlikely that E&Ps set budgets higher."
- Raymond James July 15, 2019

Completion of DUC wells will not offset the decline. There was a large inventory of drilled but uncompleted ("DUC") wells at year-end. However, many of them have been completed and the DUC inventory is back to a normal level; meaning the number of wells being drilled during 2H2019 will be about the same as the number of wells being completed. BTW EIA grossly overstates the DUC inventory because (per RJ) they include approximately 2,100 "Dead DUCs" (well that will never be completed).

Raymond James' oil price forecast ($75/bbl by year-end) is based on three primary reasons:
1. U.S. and OECD crude oil inventories will decline approximately a million barrels per day in Q3. < This happens each year because of a spike in demand for transportation fuels each summer.
2. Flat U.S. production will be a "Paradigm Shift" for the market. EIA, IEA and even OPEC supply/demand forecasts depend on constantly rising U.S. shale oil production.
3. IMO 2020 Regulations will take at least a million barrels per day off the market.

Obviously, if RJ's oil price forecast is correct, there is significant upside for 12 of our Sweet 16. Higher oil prices are actually a negative for the "gassers" because increased drilling activity in 2020 will just produce more associated gas.