Why U.S. oil production is likely to decline - Aug 26

[dan_s]

Below are comments from the Raymond James Energy Research Team on 8-26-2019
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What would a flattening U.S. well productivity trend mean for the ability for the U.S. to grow production in the future?

Here is the historical context: Prior to 2010, U.S. oil production had generally declined for nearly fifty years. Starting in 2010 everything changed. U.S. oil/liquids production growth erased fifty years of declines by increasing 7.5 million bpd from 2010 to 2018. This U.S. growth accounted for 59% of the global supply increase during this time period and was all made possible by the sharply rising U.S. well productivities.

Given this U.S. oil supply surge, the oil futures market is clearly convinced that the U.S. can satisfy all future global demand growth at an oil price of around $50/bbl. Our model disagrees with this conclusion. The graph below left shows that annual U.S. supply growth from 2020 - 2025 would average less than 1.2 million bpd (see the annual growth estimates above the bars) even if the U.S. rig count surges by over 40% from here (U.S. rig count estimates below the bar). Given the recently declining U.S. rig count (and overall activity) at a mid-$50/bbl oil price, there is no way producers would increase activity by 40% without a substantial increase in oil prices. Also keep in mind that we are assuming the U.S. well productivity increases by 10% this year and 5% per year in perpetuity.

So, what happens if we lower the U.S. well productivity assumptions to 5% this year and no growth thereafter? As shown in the graph (below right) the average annual U.S. oil liquids supply growth slows to an average of less than .7 million bpd from 2020 -2025. < In my opinion, this is still way too optimistic. This is about half the growth achieved if U.S. well productivities increase 5% annually.

Given that global oil demand typically grows about 1.4% per year (20 year average) or about 1.4 million bpd, it is clear that U.S. supply growth will likely fall well short of demand over the next five years if well productivities flatten out. Again, recent parent-child data suggests that U.S. well productivity could actually turn negative over the next few years which would be even more bullish for global oil prices.

But wait, there is more!
The U.S. E&P industry’s increasingly evident capital discipline is likely to compound what is happening with well productivity. The fact that U.S. E&P companies are much less willing to outspend cash flow than they have been historically is translating into a more subdued rig count and thus fewer wells drilled and lower U.S. supply growth at a given oil price. Put together fewer new wells with slower productivity gains, and the result is obvious: much slower production growth than consensus is modeling tham the oil market is pricing into oil.

Again, our 5% per year productivity gain model also assumes that the U.S. rig count would reach 1,300 by 2022, which compares to our (already above-consensus) assumption of 1,120 in 2020 and a current U.S. rig count of 916. Needless to say, the level of cash flow that the industry would need in order to cover such high capital spending is not compatible with anything close to current oil prices.
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MY TAKE: At the current active drilling rig count there is NO WAY that U.S. oil production can keep growing. Raymond James' much lower U.S. production forecast than what EIA is telling the market assumes a much higher active rig count. I believe that if WTI spiked to $100/bbl tomorrow the upstream companies would not run out and increase their drilling budgets. Clearly, $55/bbl WTI is an unsustainable oil price. If oil stays in the mid-$50s there will be a significantly under-supplied oil market in 2020.