John Kemp, Reuters
U.S. crude oil production will continue to grow through 2019 and 2020 but at a much slower pace than in 2018, according to the latest forecasts from the U.S. Energy Information Administration.
U.S. crude and condensates production is estimated to have risen by almost 1.6 million barrels per day (MMbbl/d) last year, the largest annual increase in history, according to the agency. But the agency forecasts growth will slow to just over 1.1 MMbbl/d in 2019 and less than 0.8 MMbbl/d in 2020.
Growth from the Lower 48 states excluding federal waters in the Gulf of Mexico is expected to slow even more sharply from almost 1.6 MMbbl/d in 2018 to 0.95 MMbbl/d in 2019 and 0.5 MMbbl/d in 2020.
Surging U.S. production, mostly from onshore shale plays, contributed to the oversupply which emerged in the oil market during 2018 and the consequent fall in prices during the fourth quarter.
Slower growth from the shale plays will therefore have to play an important role in rebalancing the market during 2019 and 2020, even if the global economy avoids a recession.
“The dramatic fall in oil prices in the fourth quarter was largely driven by shale production surprising to the upside as a result of the surge in activity earlier in the year,” oilfield services firm Schlumberger told investors last week.
The shale surge, combined with generous waivers from U.S. sanctions on Iran’s oil exports and the sharp fall in global equity markets, “created a near perfect storm to close out 2018,” according to Schlumberger.
But the company sees a more balanced market ahead as sanctions waivers are not renewed, the United States and China resolve their trade differences, and lower drilling activity in the second half of 2018 impacts production growth.
Benchmark U.S. crude futures peaked at about $75 per barrel in early October and are now trading at less than $55, the largest decline since the slump in 2014/15. U.S. crude futures have fallen to a substantial discount to Brent, and many shale producers are receiving even less, highlighting the extent of the local oversupply.
Lower U.S. crude prices are already helping readjust the market by tempering the onshore drilling and fracking frenzy compared with earlier last year.
Well completions steadied between March and November 2018, after strong growth since mid-2016, as some producers postponed fracking and completing wells owing to disappointing wellhead prices.
More recently, the rising number of drilled but uncompleted wells (DUCs) has prompted producers to scale back drilling programs to avoid an even bigger increase in inventory.
The number of drilling rigs targeting predominantly oil-bearing formations has fallen in each of the first three weeks of 2019. Active oil-targeting rigs have fallen by from a cyclical high of 888 in mid-November to just 852 in the third week of January.
Last week, the active rig count fell by 21, the largest one-week decline since February 2016, when oil prices were still close to the last cyclical trough.
Oil prices usually have a lagged effect on production owing to the time taken to contract rigs, move them to the site and rig them up, bore the well, contract a completion crew, frack, install surface gear and hook the well up to gathering pipelines.
Experience suggests changes in oil prices tend to filter through to changes in reported production with an overall delay of 9-12 months. Recent production trends confirm this lag.
There is a delay of roughly 3-4 months from changes in prices to changes in drilling and another 6-9 months to completion and initial flows.
Changes in prices tend to filter through to changes in the rig count with an average delay of 15-20 weeks; last week’s sudden drop came 15 weeks after oil prices peaked in early October.
Rapid output growth during 2018 was mostly the delayed impact of the sharp rise in prices in 2017 and the first nine months of 2018.
Output is expected to continue growing during the first six months of 2019, as wells planned during the period of high prices and drilled in the final months of 2018 are completed and put into production.
But the recent decline in prices and drilling, if sustained, will likely start to slow production growth during the second half of 2019.