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Is EIA Data Disguising A Disastrous Decline In US Shale?

Production

The Trump administration claims that the U.S. is “transitioning to greatness,” and that energy companies are going to see “massive gains.” U.S. Secretary of Energy Dan Brouillette says there is “stability” in the oil market, and that economic activity will “explode” on the other side of the pandemic.

Meanwhile, back in reality, U.S. oil production continues to decline as drillers shut in wells and cut back spending. Output has already declined by 1.1 million barrels per day (mb/d), and more losses are likely. New data from Rystad Energy predicts U.S. oil production declines of roughly 2 mb/d by the end of June.

“Actual production cuts are probably larger and occur not only as a result of shut-ins, but also due to a natural decline from existing wells when new wells and drilling decline,” Rystad said in a statement.

Energy expert Philip Verleger, in an article for Energy Intelligence reports that the magnitude of output declines is much larger. His latest research shows that production as of May 10 is down by almost 4 million bpd from its peak as the below chart shows.

Source: PK Verleger LLC

To be sure, the U.S. government is doing quite a bit to try to bailout the oil industry. A new report finds that some 90 oil and gas companies will benefit from the Federal Reserve’s corporate bond buying program. The Trump administration is also quietly reversing environmental protections on the oil and gas industry.

But in the face of a historic meltdown in the oil market, even handouts from Uncle Sam won’t stop declines. The U.S. oil industry continues to idle drilling rigs at a tremendous clip, and the rig count is down by more than half in two months. “[W]e think that the last time there was so little drilling activity in the US was the 1860s during the first decade of the Pennsylvania oil boom,” Standard Chartered analysts said. The investment bank said that the contraction was notably acute in Oklahoma, where rigs fell to just 11 across the state, down 89 percent from the same period a year earlier.

The sharp decline in rigs, drilling and completion activity means that the steep decline rates endemic to shale drilling will overwhelm what little new production comes online. Standard Chartered said that if activity were to remain stuck at current levels, U.S. production in the five main shale basins would fall by 2.89 mb/d by the end of 2020.

Those declines would come on top of the output that has only been shut in temporarily. Standard Chartered envisions a “squashed-W pattern” for supply, in which temporarily idled output comes back online in a few months, but more structural declines continue thereafter.

The EIA, characteristically, is much more optimistic about the state of U.S. supply. The agency said on Tuesday that it only sees a 0.5 mb/d decline in oil production this year, compared to 2019 levels. Notably, Secretary of Energy Dan Brouillette says production will increase in the third and fourth quarters as the economy roars back.

Others aren’t so sunny. A report from Wood Mackenzie released on Wednesday says that oil demand will take years to recover.

“Production is falling sharply in the US, and some producers are reluctant to sell forward,” Commerzbank wrote in a note.

But while some oil drillers have hesitated to lock in hedges, others have decided that they can stomach hedges at extremely low prices, not because they can profit at such low levels, but likely only to guard against another meltdown. “The strike prices achieved in the latest surge of hedging have been low, these appear to be hedges designed to improve the probability of survival should market conditions deteriorate further,” analysts at Standard Chartered wrote in a report.

“Some of the hedges have been fixed at very low prices: one company has a USD 20.73/bbl WTI hedge for Q2, another has three-way collars for Q3 and Q4 with a floor of USD 25/bbl Brent,” Standard Chartered added.

The unease from some drillers regarding oil prices is understandable. The Secretary of Energy may predict “greatness” ahead, but others see a long, protracted economic recovery.

By Nick Cunningham of Oilprice.com



3 Comments on "Is EIA Data Disguising A Disastrous Decline In US Shale?"

  1. Theedrich on Sat, 16th May 2020 12:39 am 

    Like fake news, the virus shutdowns are contrived. A startling and extremely cogent article on this has been published by actuary Gail Tverberg on her Our Finite World site Understanding Our Pandemic — Economy Predicament, 2020 May 13.

    Among other things, she points out some hitherto unknown tidbits about godlet Dr. Fauci, the éminence grise of the viral pontificate, facts which should be considered by everyone concerned about the excessive overreach by governmental potentates high and low:

    We also know that Dr. Fauci, a well-known COVID-19 advisor, had his hand in this Chinese research activity.  Fauci’s organization, the National Institute for Allergy and Infectious Diseases, provided partial funding for the gain of function experiments on bat coronaviruses in Wuhan.  While the intent of the experiments seems to have been for the good of mankind, it would seem that Dr. Fauci’s judgment erred in the direction of allowing too much risk for the world’s population.”

    [9] A person wonders whether Dr.  Fauci and members of the World Health Organization are influenced by the wishes of vaccine and big pharmaceutical companies.

    The recommendation to try to ‘flatten the curve’ is, in part, an attempt to give vaccine and pharmaceutical makers more time to work on their products.  Is this really the best recommendation?  Perhaps I am being overly suspicious, but we recently have been dealing with an opioid epidemic which was encouraged by manufacturers of Oxycontin and other opioids.  We don’t need another similar experience, this time sponsored by vaccine and other pharmaceutical makers.

    The temptation of researchers is to choose solutions that would be best from the point of their own business interests.  If a researcher gets much of his funding from vaccine and big pharmaceutical interests, the temptation will be to ‘push’ solutions that are beneficial to these interests.  In some cases, researchers are able to patent approaches, even when the research is paid for by governmental grants.  In this case they can directly benefit from a new vaccine or drug.

    When potential solutions are discussed by Dr.  Fauci and the World Health Organization, no one brings up improving people’s immunity so that they can better fight off the novel coronavirus.  Few bring up masks.  Instead, we keep being warned about ‘opening up too soon.’  In a way, this sounds like, ‘Please leave us lots of customers who might be willing to pay a high price for our vaccine’.

    Mrs. Tverberg also mentions reasons unrelated to the virus that governments everywhere like shutdowns:

    – Lockdowns give an excuse for closing borders to visitors and goods from outside.  This was a direction in which many countries were already headed, in an attempt to raise the wages of local workers.
    – Lockdowns can be used to hide the fact that factories need to be closed because of breaks in supply lines elsewhere in the world.
    – Many countries have been faced with governmental protests because of low wages compared to the prices of basic services.  Lockdowns tend to keep protesters inside.
    – Lockdowns give the appearance of protecting the elderly.  Since there are many elderly voters, politicians need to court these voters.

    But don’t expect such facts to be seriously discussed in any public source.  It is more important for prole Wiley E. Coyote to keep running full speed toward the cliff.

  2. Paul on Sat, 16th May 2020 4:34 pm 

    “Since there are many elderly voters, politicians need to court these voters.”
    As we can all see with our current enforced inertia, politicians don’t need voters anymore. They can do what they please.

  3. printbabyprint on Mon, 18th May 2020 2:09 pm 

    Eia has been telling the lies for years . Birolli at the one moment told the true , that we have peak oil, and never mentioned it again . Don’t have to be rocket scientist if you want to help economy , put the price of gasoline down and you will have growth . It didn’t happen and it won’t happen , why because there is no more cheap oil for relentless growth

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