The oil-bears continue their romp across the energy markets with various grades of crude reaching lows not seen in almost twenty years. There will come a point where I can sit down and pen the following words, "We've reached bottom, and this is as bad as it gets." There is a ways to go before it will be possible to make that statement. We are writing off the notion of any recovery in the broad oil and gas market for the next couple of quarters, and probably the rest of 2020. The situation will likely get worse before it gets better, very rapidly. 2021...who knows… things might begin to improve. We will discuss the mechanics of a possible recovery early next year.
The world is awash in cheap oil right now. Goldman Sachs is calling for a final demand decline in March (now) of ~10.5 mm bod, and a projected demand decline of 18.5 million bpd for April. Folks that's ~20% of total EIA projected global demand.
As discussed in prior OilPrice articles, OPEC and the Russians have drawn a bead on U.S. shale production as the world’s marginal producer. We are beginning to see how rapidly this status may be stripped away as these low cost producers strive to regain their market share lost to American shale production.
In this article we will run down the early indicators the market is sending on where the tipping point will be for shale production. Finally we will include an early estimate for the decline in U.S. shale production by year’s end.
Quick status check for shale
In an OilPrice article last week, I argued that a few things would need to happen before we saw any potential improvement in the market for the oil price. One of them was a reduction in capex across the board for shale. This metric is starting to manifest itself in a couple of ways.
I've pointed out that while the rig count has been declining for the past couple of years, Drilled but Uncompleted- DUC, wells withdrawal has helped production to continue its almost inexorable climb. That's coming to an end as noted by Primary Vision, publishing a drop in Frac Spreads to 255 as of Friday.
I think the rate of decline in Frac Spreads-equipment used to fracture the reservoir, will accelerate in the month of April reaching ~200 by months end.
My analysis of the upward trend in the Frac Spread line to February was that prices...in the mid-$40s through Feb, were still attractive for DUC withdrawal to March 6th. I've been thinking for some time that the next logical step would be for uneconomic producers to....BEGIN SHUTTING IN WELLS ALREADY ON PRODUCTION.
I actually put forward this notion in an Oilprice article on the Marcellus gas play. That article focused on the gas glut that led Chevron, (NYSE:CVX) to write down its assets in the Marcellus to focus on the Permian. The Permian is more oil-prone, and is part of the reason operators have focused on it so intensively.
Now this idea is becoming mainstream with analysts putting out estimates for how much shale oil might have to be shut in. Here's a quote from one of these analysts from a recent article in JPT.
“Uday Turaga, the chief executive officer of oil and gas consultancy ADI Analytics, offered two reasons. The first is that many shale players have hedged large volumes of oil sales in the $50-range through 2020. The other is that shale producers remain too optimistic on the chances of a price recovery coming by year’s end
“We don’t see prices and demand rising before 2021,” shared Turaga. “So this approach of cutting just drilling and not completion of wells in inventory is insufficient—they need to go beyond and have a material impact on production volumes.
ADI Analytics is running several forward-looking models, including one that suggests US shale players need to cut as deep as 2 million B/D from year-over-year production. Such a dramatic reduction would be needed to keep oil prices from remaining locked at marginal cash costs. “We could potentially get there just with capex declines,” said Uday, “but not all operators will cut capex, so a little bit of shut in will be necessary.”
Journal of Petroleum Technology
