Can U.S. Shale Oil Offset OPEC Production Cuts?

Between about 2000 and 2008, U.S. oil rigs doubled from around 200 to 400, but oil production hardly responded (though that was before the spread of modern shale drilling technology.) The rig count plunged in 2008 along with oil prices, but once oil rallied the rig count began a steep climb. Production did eventually respond, but there was a lag of more than a year between the start of the rig rush and a meaningful increase in oil production.

However, if you look at the last six months of the above graph, you will notice that the rig count began to climb again after bottoming last May. Meanwhile, oil production, which had been steadily falling since about mid-2015 reversed course and began to climb in October 2016.

This rapid turnaround is likely a result of a backlog of drilled but uncompleted wells (DUCs), which can be brought online faster than a new well can be planned, drilled, and completed. Data from the Energy Information Administration shows an uptick in completions over the past year in the four oil-dominant regions of the Bakken, Eagle Ford, Niobrara, and Permian Basin, where the DUC inventory in December stood at 4,509 wells. This uptick in completions helps explain why recent oil production responded more quickly than during the previous rig surge that began in 2009.

Considering this data, how soon might the U.S. manage to offset 1.8 million bpd of production cuts? If the impressive production gains since early October could be maintained, it would amount to ~1.5 million bpd over the course of a year. It’s going to be very important in coming months to see if these fast gains were a short-term response to $50 oil, or if they are sustainable.

My opinion is that the DUCs that are being completed with oil prices at $50/bbl will be among those with the highest production rates. After all, higher production rates are what enables a well to be economic to produce at lower prices. Thus it is likely that the most promising wells are being completed first, and that completion of additional DUCs is unlikely in my view to maintain that production growth for an extended period of time.

However, if by mid-year U.S. producers have added another half million bpd, OPEC may once again find themselves facing the difficult decision of responding with another round of production cuts.

Link to Original Article: Can U.S. Shale Oil Offset OPEC Production Cuts?

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