Yesterday (Feb 3) RJ published a new report on global oil supply. If you'd like to read the full report just send me an email: dmsteffens@comcast.net
Here is the summary:
Energy Stat: After Five Strong Years, Global Oil Project Startups Are Set for a Trough Period in 2020-2021
At a time when coronavirus-caused fears about oil demand are crowding out anything related to the supply side of the oil market equation, it nonetheless bears repeating that the supply picture for 2020 and 2021 is looking very bullish. A key reason for that is the sharp slowdown in long-lead-time oil project startups. In this Stat, a collaboration between our U.S. and Canadian research teams, we will provide an update on oil production capacity additions that are on deck. The numbers are smaller than our readers might expect: in other words, the pace of project startups is slowing, and in fact slowing meaningfully. The dearth of new startups adds to our view that non-OPEC ex-U.S. supply is likely to flatten out, or even decline, over the medium-term. Combined with the productivity slowdown in U.S. shale, this points to the need for sustainably higher oil prices to stimulate more industry wide capital spending.
Basically, RJ agrees with my view that the "Right Price" for WTI oil is over $65/bbl.
Raymond James Oil Market Outlook - Feb 3
Raymond James Oil Market Outlook - Feb 3
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: Raymond James Oil Market Outlook - Feb 3
“The base decline production rate for the Permian Basin has increased dramatically, and we expect those declines to continue to accelerate.” Raoul LeBlanc, IHS Market December 12, 2019
If you'd like to read the full report on this topic from G&R, send me an email.
If you'd like to read the full report on this topic from G&R, send me an email.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: Raymond James Oil Market Outlook - Feb 3
Shale Production Has Slowed
From G&R's Q4 Report
The most important issue facing oil markets is slowing US shale growth. As we have discussed
in these pages, the shales have been the only material source of non-OPEC production growth
over the past decade and have been critical in meeting growing global demand. Any slowing in
the shales would materially impact oil balances. We continue to believe this is happening today.
Since we last wrote, the data has confirmed that US shale growth in 2019 was only 50% that
of 2018. Last quarter, we explained how a surge of new wells drilled in 2018 increased the
base decline rate (younger wells decline faster), making it harder to achieve the robust growth
of prior years. Making matters worse, the US oil rig count peaked in late 2018 and has since
fallen by 25%. There is often a three-month lag between drilling and first production, followed
by another two-month reporting lag. As a result, the full impact of the current drilling
slowdown has not yet been felt.
Activity is not expected to accelerate anytime soon and in fact could get much worse. Well
permits (a good leading indicator of drilling activity) plummeted in December reaching
their lowest level since at least 2008 when the dataset began, according to Evercore ISI. For
2019 as a whole, permitting was down marginally, but the decline was mostly weighted to
the second half of the year suggesting activity will be weak as we progress throughout 2020.
The most important question going forward revolves around well productivity, which we
discussed at length in the introduction. In summary, can well productivity grow enough to
offset the activity slowdown or will growth continue to trend lower? Given how much
high-grading has already taken place in the shale plays, productivity gains will be much more
muted than in past downcycles and as a result production growth will continue to slow.
We are beginning to see reports confirming our analysis. In their recent research report,
Bernstein concludes that shale well productivity (as measured by peak-month oil production)
fell last year for the first time ever.
Our dataset (from Shale Profile), along with our neural network, confirms the slowdown
in peak-month productivity across many basins including the Bakken, Eagle Ford, DJ Basin,
and parts of the Permian. We used our neural network to estimate the total ultimate recoverable
reserves per well and observed a slowdown there as well compared with a year earlier.
The median well productivity declined by approximately 2% in 2019 across all oil producing
shale basins. While this may sound modest, the consequences are profound. Not only is well
productivity not growing enough to offset the rig declines, it is now falling outright. As a
result, the impact of less drilling will be much more acute than in past cycles.
From G&R's Q4 Report
The most important issue facing oil markets is slowing US shale growth. As we have discussed
in these pages, the shales have been the only material source of non-OPEC production growth
over the past decade and have been critical in meeting growing global demand. Any slowing in
the shales would materially impact oil balances. We continue to believe this is happening today.
Since we last wrote, the data has confirmed that US shale growth in 2019 was only 50% that
of 2018. Last quarter, we explained how a surge of new wells drilled in 2018 increased the
base decline rate (younger wells decline faster), making it harder to achieve the robust growth
of prior years. Making matters worse, the US oil rig count peaked in late 2018 and has since
fallen by 25%. There is often a three-month lag between drilling and first production, followed
by another two-month reporting lag. As a result, the full impact of the current drilling
slowdown has not yet been felt.
Activity is not expected to accelerate anytime soon and in fact could get much worse. Well
permits (a good leading indicator of drilling activity) plummeted in December reaching
their lowest level since at least 2008 when the dataset began, according to Evercore ISI. For
2019 as a whole, permitting was down marginally, but the decline was mostly weighted to
the second half of the year suggesting activity will be weak as we progress throughout 2020.
The most important question going forward revolves around well productivity, which we
discussed at length in the introduction. In summary, can well productivity grow enough to
offset the activity slowdown or will growth continue to trend lower? Given how much
high-grading has already taken place in the shale plays, productivity gains will be much more
muted than in past downcycles and as a result production growth will continue to slow.
We are beginning to see reports confirming our analysis. In their recent research report,
Bernstein concludes that shale well productivity (as measured by peak-month oil production)
fell last year for the first time ever.
Our dataset (from Shale Profile), along with our neural network, confirms the slowdown
in peak-month productivity across many basins including the Bakken, Eagle Ford, DJ Basin,
and parts of the Permian. We used our neural network to estimate the total ultimate recoverable
reserves per well and observed a slowdown there as well compared with a year earlier.
The median well productivity declined by approximately 2% in 2019 across all oil producing
shale basins. While this may sound modest, the consequences are profound. Not only is well
productivity not growing enough to offset the rig declines, it is now falling outright. As a
result, the impact of less drilling will be much more acute than in past cycles.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: Raymond James Oil Market Outlook - Feb 3
Outside of the US, much attention is being paid to two major non-OPEC projects currently
starting up in Norway ( Johan Sverdrup) and Brazil (Santos Basin), each of which are expected
to pump in excess of 400,000 b/d. The International Energy Agency (IEA) believes these
projects will drive strong non-OPEC ex US growth of 920,000 b/d in 2020. While we agree
these two projects are impressive, the IEA estimates are overly optimistic. As we have
explained in past letters, the IEA has chronically over-estimated non-OPEC ex US production
and this year will likely be no different. In their initial estimates for 2019 (published in
the summer of 2018), they called for non-OPEC ex US growth of 500,000 b/d. Since then,
they have revised that figure lower by 80% to 100,000 b/d and we believe further revisions
are forthcoming. This modest level of net growth was based upon 1.5 mm b/d of gross new
projects starting up in 2019. In other words, base declines amounted to 1.4 m b/d in 2019–a
number that has been fairly consistent over the past few years. Looking at 2020, even with
Johan Sverdrup and the Santos Basin, gross new projects are not expected to surpass 1.9 mm
b/d. Assuming base declines remain consistent at 1.4 m b/d, non-OPEC ex US growth
might only be 450,000 b/d in 2020–half the rate the IEA expects.
starting up in Norway ( Johan Sverdrup) and Brazil (Santos Basin), each of which are expected
to pump in excess of 400,000 b/d. The International Energy Agency (IEA) believes these
projects will drive strong non-OPEC ex US growth of 920,000 b/d in 2020. While we agree
these two projects are impressive, the IEA estimates are overly optimistic. As we have
explained in past letters, the IEA has chronically over-estimated non-OPEC ex US production
and this year will likely be no different. In their initial estimates for 2019 (published in
the summer of 2018), they called for non-OPEC ex US growth of 500,000 b/d. Since then,
they have revised that figure lower by 80% to 100,000 b/d and we believe further revisions
are forthcoming. This modest level of net growth was based upon 1.5 mm b/d of gross new
projects starting up in 2019. In other words, base declines amounted to 1.4 m b/d in 2019–a
number that has been fairly consistent over the past few years. Looking at 2020, even with
Johan Sverdrup and the Santos Basin, gross new projects are not expected to surpass 1.9 mm
b/d. Assuming base declines remain consistent at 1.4 m b/d, non-OPEC ex US growth
might only be 450,000 b/d in 2020–half the rate the IEA expects.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group