- October 13, 2016
- Posted by: Art Berman
- Category: The Petroleum Truth Report
World oil production is in balance and U.S. marketed natural gas output fell for the first time since 2005.
The EIA (U.S. Energy Information Administration) published its Short Term Energy Outlook (STEO) today. Here are the highlights.
World oil (liquids) output for September was 96.47 mmbpd (million barrels per day) and consumption was 96.39 mmbpd. That resulted in a slight surplus of 80,000 bpd, about as close to balance as it gets (Figure 1). That’s bad news considering that the Brent price of $52 per barrel acts like there are a few million bpd of surplus. So much for the global economy.
EIA forecasts an average production WTI price of $50/barrel in 2017 with Brent $1/barrel higher.
The long decline in U.S. crude oil production appears to be over. September output increased 60,000 bopd (Figure 2).
Natural gas marketed production fell from 3.2 Bcf/d (billion cubic feet of gas per day) in 2016 but EIA expects it will magically gain 1 Bcf/d before the year is over (I doubt that).
Natural gas production continues its decline and total supply is projected to go into deficit in December 2016 (Figure 3).
This is the first annual decline in gas production since 2005. But never fear–EIA projects a 3.7 Bcf/d increase in 2017.
I’m not sure where that will come from given that their gas forecast is an average price of $3.07 for 2017 and the best shale gas areas need $4 while the other plays need more like $6/mmBtu.
I guess that hedges and awesome increases in productivity explain the expected production rally.
EIA forecasts gas prices to average $3.04 for fourth quarter. Too bad the price is $3.31/mmBtu today!
“The long decline in U.S. crude oil production appears to be over. September output increased 60,000 bopd (Figure 2).”
Art
Do you believe in this assertion is true?
Carlos,
Yes, I believe it is true. The U.S. rig count has increased for many months reflecting the flow of capital to E&P companies so flattening production makes sense to me.
All the best,
Art
Hi Art,
The STEO revision vindicates your position, and the entire 2017 strip has just shifted up now that more market participants are starting to see the supply demand imbalance that has been baked in for the next 12 months. Interstingly 2018 and beyond remains stuck around $3. Would this be because of illiquidity and inertia, or does the market think we will get a massive (say 5-6 bcf/day net increase in production) response in 2017?
Do you have any sense how Q3 will be for the Appalachia names? prices have been mighty low there despite a rising HH price.
Thanks as always
Alex,
I am not a price forecaster but in this case, I think that EIA’s forecast of $3.07 for 2017 is overly conservative. Based on supply and consumption, I would not be surprised to see mid-$3 prices this winter. I expect some increase in shale gas rig count but do not believe that overall existing decline of gas production is likely to be reversed in the near term. I also do not see environmental pressure on pipeline construction letting up.
All the best,
Art
Art,
Do you believe that US shale producers have also hit their lows in August 2016 (along with US production lows at 8.34 mmbpd)? And do you think US shale production will increase along with US production as depicted in your Figure 2 graph?
Figure 1 caption “EIA world liquids production surplus: +0.8 mmb/d.” I assume that typo should read +0.08 mmb/d.
Since the world is essentially in balance now, I assume prices of crude will not increase upward until the bloated inventories are brought down also. So, we are in balance, but that will not help crude prices until inventories are first reduced and then demand increases until we are in a slight deficit situation putting pressure on prices to increase. This all assumes that crude prices can/do increase/decrease as a result on news from OPEC, Russia, and/or the futures market. Regards.
Daniel,
I think that EIA’s oil production forecast is reasonable based on rig counts and capital flows. Sorry about the typo–I am out of the country with limited internet access so will probably not correct it for a bit.
You are exactly right about inventories holding oil prices down. The effect of an OPEC-Russia cut are still quite unclear and may disappoint markets. Still, prices in the low $50-range would not surprise me. I worry a lot about China’s economic landing complicating what some believe to be an ever- if slowly improving oil-price story.
All the best,
Art
Art,
so if you break down latest 10/14 gas rig count in Baker Hughes chart:
+2 Haynesville
+2 Marcellus
+7 Other
the rigs coming online mostly aren’t from US tight gas plays, anyone know what “Other” denote? (not GOM, I looked) if the well aren’t located in shale plays or offshore then how can we estimate production level from them?
Hi Art,
A lot of people seems rather confident that rig count in LTO represents the output rate (in Mbbls/d). But due to the fast depletion nature of new LTO wells, I think the rig count represent in facts the output growth rate, with a lag of a few months due to the time between the drilling and the well addition.
This means that at a certain amount of rigs (between 600-700), there is a growth rate of 0 (production is stable). Any rig count over makes an increase in ouput while being under means a decrease in ouput, with a lag of 4-6 months. So, IMHO, the turnaround in LTO will happen when the rig count get to the balance level, not just only when it rises. My thoughts come from the analysis of shale oil from this website: http://oilpro.com/post/27778/five-major-shale-developments-2016
Kind regards
Tita
Tita,
I have read Enno Peters’ post. I have been pointing out the high decline rates for shale plays since 2006.
The rig count is nothing more than a measure of capital flows. Rigs don’t produce oil, wells do. The important measure is the number of new producing wells added each week and month. The decline in rig count has had a relatively minor effect on the number of new wells added. Some may point to this as a miracle of technology but when you add up the amount of capital being expended in new producing wells, the miracle is minimized.
So, this is the problem. Also, U.S. production stopped declining in September according to the EIA STEO report documented in my latest post.
There is another that Matt and I will detail in an upcoming post namely, that a considerable proportion of the light oil from tight oil and deepwater plays cannot be refined because of limited refinery capacity for this gravity of oil and because of limited export markets (for the same reason).
This means that approximately 2 million barrels of light oil per week is accumulating in storage with nowhere to go. Declining production of tight oil plays–if it continues and it probably will not–will still result in growing storage volumes.
It is ultimately unavoidable that tight oil decline rates cannot be reversed and that declining production will require a massive drilling campaign that may be beyond capital availability but we will have to wait to see about that.
All the best,
Art
Art
My question is can increase oil extraction by fracking if prices are below 50 us?
Are not we playing break point cost?
Best regards from Argentina, and thank to you by answer our questions
Art,
Interesting article regarding how the KSA exported oil is down about 300 kbopd.
“Today, Reuters reported that Saudi Arabia’s crude exports fell in August to 7.305 million b/d from 7.622 million b/d. Oil production also dropped from 10.673 million b/d to 10.63 million b/d. This goes directly against what Saudi Arabia said in August.”
The reason noted for the drop is that KSA is exporting crude from their storage which ends up pumping up US onshore inventory, thus KSA storage is down, and US inventory is still way up. We are just seeing OPEC storage shifted to US storage, and KSA cannot keep up their exports since they are drawing down their own storage to low levels since they cannot produce the high level that they export. Just a big shift in storage from KSA/OPEC to US storage.
Since/if these high levels of world production are relying on tapping into storage inventories resulting in US inventory increases, the US inventory should drop as other countries drain their storage inventories. Just a interesting thought Art.
Art,
“The decline in rig count has had a relatively minor effect on the number of new wells added.”
I don’t have the same opinion here. In 2014, there was almost 1’200 wells addition per month, while this number falls to 400 in H1 2016 (from the work of Enno Peters). There is of course operations between the drilling and the completion of a well, which can delay more or less the correlation between rig count and wells addition on the short term (the famous DUCs).
There will be more wells additions (reflecting the increasing rig count of last months). But IMO we need a lot more to reverse the decreasing production.
Hi art,
this week we have seen a decrese of oil inventory due mainly to lower import. you think this impact could balance in the next future the increse of production in the US and bring the oil price higher?
thanks for your reply
Regards Marco
Marco,
Net imports were down almost 0.5 mmbopd last week and 1.6 mmbopd since early September. This, along with lower refinery runs–down 1.5 mmbopd since early September–because of maintenance season are the main factors.
I suspect that all the hedging that is going on lately will depress the futures strip and be a weight on further oil price increases.
All the best,
Art
Excellent analysis Arthur , good for you to share your insights . I think the political tinderbox in the Middle East is the next issue , best , Jerry , Mundiregina Resources Canada
Art,
October is generally the month for builds in crude stocks because of, as you mentioned, refinery maintenance. However, this year is the first year since 2009 we have seen a net drawdown. In fact, over the last 16 years we have seen a draw during October only 4 times and this year is the second largest.
Do you think we are beginning to see signs of undersupply?
Many thanks,
Todd
Todd,
It is a combination of longer-term lower production, and reduced imports going into refinery maintenance season. The big import interruption from Hurricane Matthew was the trigger in early September.
Also, EIA is tinkering with the data and has removed lease stocks from the U.S. total beginning in October–that’s about 30 mmbo that’s been magically removed from crude oil inventories. It does wonders for making it seem like everything is returning to normal. No way that could be in time for elections, right?
All the best,
Art
Thanks for the update on natgas. I think you analysis is spot on. I am no expert in the field, but the weather has hid the fact that production is in decline. The thing with low prices, in the long run, they create new sources of demand. Just like high oil prices led to increased fracking, today’s natural gas prices will attract new sources of demand, eventually. As usual, we are hostage to weather conditions, so that will make things interesting.
Vince,
You are spot on for not being an expert!
Low prices plus EPA regulations forcing more fuel switching from coal plus increased exports to Mexico and Canada have boosted consumption. It’s a great plan if you believe that gas supply is infinite as it’s promoters have claimed but not so good if supply is closer to what a few of us have cautioned for many years.
All the best,
Art
In 2010 you said shale natgas needed $8-10. We’ve had 6 years of WAY lower prices than that. And volume has grown like crazy (not a declining demand–the opposite).