Energy Prospectus

RJ's Energy Stat dated 9-3-2019

"As discussed last week, we believe the single most important longer-term driver of oil prices and energy markets over the next five years will be changes in U.S. well productivity. We visited this issue in a stat (Can the 2018 U.S. Well Productivity Surge be Repeated This Year?) earlier this year, but it now seems U.S. well productivity are tracking WAY below our model and this underperformance may reflect a significant inflection point in future global oil supply/demand balances. Specifically, over the past seven months, U.S oil supply growth is tracking WAY below the same period last year (up less than 100,000 bpd this year vs. up nearly 600,000 bpd the same period last year). Furthermore, for the past eight years, our model has typically predicted the highest U.S. supply growth on the street while actual production has generally come in even higher than our model . So far this year, however, U.S. oil supply growth has significantly undershot our model."

I just opened the report and I'm going blind staring at this computer screen, so I will have more comments on this tomorrow.

I do believe that when the Wall Street Gang wakes up to the FACT that U.S. oil production simply CANNOT keep growing at the pace that EIA and IEA have been forecasting it will be a "Paradigm Shift". There is plenty of oil still left to produce, but not at $55/bbl. As I have posted here a zillion times, the "Right Price" for oil is much higher than where we sit today.

More from the Raymond James' 9-3-2019 Energy Stat.

This is VERY IMPORTANT, so read it twice and let it sink in.

Are U.S. well productivity gains really slowing?
"The short answer is YES! Since 2010, productivity per new U.S. oil well drilled (as measured by initial 30 day production per well or IP-30) has
increased, on average, by nearly 30% annually over the past eight years. These gains were largely driven by the "bigger hammer" approach
as the industry drilled longer laterals with higher proppant loadings (on a per ft. basis) and increased the number of frac stages per well. Yes,
improvements in reservoir imaging, wellbore placement, and other technological advances have helped, but most of the U.S. well productivity
gains have simply been driven by the "more, longer, and bigger hammer". That said, the "law of large numbers" still applies to percentage
increases. As shown in the graph below, the magnitude of annual well productivity percentage improvement has clearly slowed meaningfully
over the past eight years from over 40% per year in the beginning of this decade to mid-teens over the past few years. Furthermore, we also
know that there is a practical economic limit to "more, longer, and bigger". Note in the graph below that our initial 2019 U.S. well productivity
gain "guess" called for a 10% increase this year followed by additional 5% annual gains in perpetuity. For the first half of this year, however, we
estimate that U.S. well productivity gains have only amounted to about 2% (vs our 10% growth estimate). We believe that this represents
clear evidence that U.S. well productivity gains are beginning to reach maximum limits and may even roll over in the coming years as the
industry struggles to offset well interference issues and rock quality deterioration."

MY TAKE: First let me point out that RJ's report is talking about total liquids production, which is crude oil + NGLs. Although total liquids production is up slightly, crude oil production is down. The IMPORTANT POINT is that at the current active drilling rig count there is now NO WAY THAT U.S. OIL PRODUCTION IS GROWING ANYWHERE CLOSE TO EIA's LOFTY FORECAST.

If you'd like to read the Raymond James report yourself, send me an email and I will forward it to you. dmsteffens@comcast.net

Conclusion: All the signs are pointing towards a decline U.S well productivity, which is VERY bullish for oil prices.

Outside of short term OPEC+ supply gyrations, the single most important driver of the oil market over the next decade will be trends in U.S.
well productivities. Over the past eight years, rapidly increasing U.S well productivities have reversed multiple decades of production decline,
completely disrupted global oil markets and made the U.S the lowest cost energy provider in the world. With that said, U.S productivity growth
has actually slowed to mid-teens growth rates in recent years. More importantly, our analysis of monthly production data so far this year
appears to indicate a sharp deterioration in U.S. well productivity growth this year. So far this year, 30 day initial production rates (IP-30's)
have grown just 2% in 1Q19 versus our assumption of 10% and IP-90 rates have actually declined 2% relative to last year. A stagnation in
horizontal lateral lengths, sand volumes and frac stages have combined to slow U.S. well productivity growth. Going forward, pressure drawdown
consequences from parent-child interference and reservoir communication damage from the "bigger hammer" approach appear to not only be
significant headwinds for productivity growth, but actually provide a solid case for future U.S. well productivity declines. Furthermore, as operators
eventually venture further away from "core" acreage and into less productive rock, it's likely that will have negative effects on U.S. productivity
as well.

As far as what this means for U.S. production? To begin with, we see way below consensus U.S. oil supply growth at current oil prices and
activity levels over the next several years. Adjusting our model from 5% U.S. well productivity growth in perpetuity to no growth in
perpetuity cuts future U.S. oil production growth to essentially nothing over the next five years. That tells us that U.S. oil prices need to
move substantially higher than today's $50/bbl levels