U.S. Tight Oil Production Gaining Influence in Global Market

  • Financial Times – Surging exports propel US to bigger impact on global oil market
    Outbound shipments of more than 1.2m barrels a day present challenge to Opec nations
    Outbound shipments of crude have surpassed 1.2m barrels a day, more than last month’s daily production of Algeria, Ecuador or Qatar — each a member of Opec.  The foreign sales underscore how the US has become more integrated into the world oil market since Washington lifted 40-year-old constraints on crude exports at the end of 2015. The US continues to import much more than it exports but its oil companies now have the freedom to market barrels abroad when it makes economic sense. The situation presents a further challenge to Saudi Arabia and other Opec members, which historically held the power to turn supplies on and off when needed.
  • Bloomberg – U.S. Shale Surge Threatens OPEC Strategy
    OPEC’s output agreement may have put a floor under prices, but it has also prompted the return of U.S. shale.OPEC’s Nov. 30 output agreement to cut production by 1.2 million barrels a day may have put a floor under the oil price, but has also awakened U.S. shale. Exploration and production companies have added 77 rigs this year to Feb. 24, according to the latest figures from Baker Hughes, while U.S shale production is forecast to reach about 4.87 million barrels a day in March, according to the Energy Information Administration’s latest Drilling Productivity Report. That’s the highest since May 2016.
  • Bloomberg Brief – Investors Betting Oil Will Break Out of Narrow Range (PDF)
    Oil has traded above $50 a barrel since OPEC and 11 other countries started trimming supply on Jan. 1, which has in turn helped fuel a revival in U.S. shale drilling. American explorers have almost doubled the number of rigs targeting oil since May, according to Baker Hughes. The mixed signals have locked WTI in its narrowest range since 2003 this month.
  • Bloomberg – Bizarre oil trades pose menace for OPEC in its prized market
    “Asian refiners have the choice to buy crudes from North America, the North Sea, the Caspian as well as North and West Africa,” said Ehsan Ul-Haq, an analyst at KBC Advanced Technologies. “Refiners will certainly look at arbitrage economics but with all key benchmarks showing a narrow spread with each other, there are numerous possibilities to meet their requirements.”

Comment

U.S. tight oil producing regions have seen a surge in drilling activity and production even as crude oil prices stagnated in 2017. Spot WTI has traded in a sub-$5 range over the past three months, unable to break above $55.

Despite the failure to break above $55, oil production has begun climbing again as prices settled into this narrow range. The chart below shows total U.S. oil production is once again approaching 5 million barrels per day.



Rig counts rose quickly into year-end 2016 and are continuing to accelerate in 2017. The next chart shows rig count by region and highlights the rapid growth in the Permian Basin of west Texas. The sharp rise in drilling activity is remarkable given the modest price gains that crude oil has seen in the past 3 months.

As the next chart shows, improving efficiency is helping tight oil producers in the U.S. squeeze more oil and gas out of each well. New technologies allow faster completion time for wells, and allow drilling rigs to complete clusters of wells in close proximity to each other with minimal setup costs. With production per rig accelerating higher, costs per barrel produced are falling. These falling breakeven rates are helping U.S. tight oil producers fill the gaps in global supply creating by the pullback in OPEC production.

There is another critical component in the U.S. tight oil supply picture. A growing inventory of drilled but uncompleted (DUC) wells allow tight oil producers to respond very quickly when spot prices rise above their breakeven rates. DUC wells are ready to begin producing oil and only await fracturing. The Energy Information Agency produces estimates of the inventory of these drilled but uncompleted wells for each region. These are estimates and a full explanation of the methodology can be found here (PDF).

The chart shows the estimated inventory of DUC wells for each region, and once again highlights the growing supply in the Permian Basin. Total DUC inventory is nearing the all time highs from 2016 with over 5000 wells completed and awaiting fracturing to begin production.

Conclusion

  • Drilling activity and production are surging higher in key tight and shale oil regions in the U.S. Advanced techniques and improved efficiency are helping tight oil producers reduce costs and bring dormant production online once spot prices rise above breakeven rates. Falling costs allow U.S. tight oil production to expand further into the global supply chain as OPEC producers pull back and oil comes out of long term storage.
  • A large and growing inventory of drilled but uncompleted (DUC) wells stand ready to begin producing oil if prices rise. This weakens OPEC’s position as U.S. tight oil producers are increasingly able to step into global markets at lower prices.
  • While this shadow inventory of potential oil production isn’t sufficient to drive prices lower, it may be sufficient to keep oil prices from rising further as OPEC producers struggle to enforce production limits and maintain their market share.

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