Art Berman (Jun 18) has an article up on OilPrice where he forecasts that US oil production will decline from 12.5 mb/d to less than 8 mb/d by mid-2021. His argument, that probably everyone who follows the oil market can assume, is that it is driven by declining rig counts. In November 2018, rig counts hit 888. Since then, rig counts were in a steady decline throughout 2019, which then went into quick decline starting in late March 2020. By June, rig counts had dropped to less than 200.
Here's what he has to say about rig counts and production:
It takes several months between an upward price signal and a signed contract for a drilling rig. It takes another 9-12 months from starting a well to first production for tight oil wells. With pad drilling, usually all wells on the pad must be drilled before bringing in a crew to frack the wells.
. . . Approximately 600 rigs are needed to maintain 7 mmb/d of tight oil and 12.5 mmb/d of U.S. production.
. . . After the last oil-price collapse, it took 2.5 years for tight oil rig count to increase from 193 in May 2016 to 618 in November 2018 . . . There were thousands of DUCs during the last oil-price collapse in 2014-2017 but they didn’t have much effect on production decline.
I think I've grabbed most of the key data points.
1. It takes 9 - 12 months for a start of a rig to go into production.
2. 600 rigs are needed to keep US oil production level with the recent highs of 12.5 mb/d. We've been 3 months and going where rig counts will be below 600 rigs.
3. It isn't like shale producers can immediately get back to 600 rigs. Last time, it took 2.5 years for tight oil rigs to get back to 600. I'm going to assume that it should take longer for oil rigs to get back to those levels. We are starting a recession due to coronavirus. Oil demand has taken a hit, which I would assume that banks would take into consideration before providing capital. There are probably growing concerns about debt repayments across many industries. Banks need to be careful regarding which industries they provide lending to.
FUTURE OIL SPIKE?
CNN (Jun 19) reports on a JP Morgan forecast that predicts a future oil spike coming between 2022 - 2025:
Though demand remains depressed, JPMorgan still thinks a bullish oil supercycle is on the horizon. A huge amount of supply has been taken offline and the industry could have major trouble attracting future capital.
The report didn't spell out a price target for its bull case scenario -- yet [Christyan Malek, JPMorgan's head of Europe, Middle East and Africa oil and gas research] told CNN Business that JPMorgan's $190 bullish call from March still stands. In fact, he thinks it's even more likely now.
. . . Global upstream investments are expected to plunge to a 15-year low of $383 billion in 2020, according to a recent Rystad Energy report.
Those spending cuts, Rystad said, will make it "more challenging to maintain existing production" and will potentially impact the "stability" of supply in the long run.
Art Berman has a tweet that shows the decline in capital investments.
Global E&P investments expect to fall around -30% this year.— Art Berman (@aeberman12) June 11, 2020
Shale/tight oil down -52%, oil sands down -44%.https://t.co/MbL3LYwZUE#OOTT #oilandgas #oil #WTI #CrudeOil #fintwit #OPEC pic.twitter.com/MQwpzkBiSH
I'm relying on my memory here, but I believe I've read that the last greenfield projects from the 2014 investment high has since come online. So new oil supply should be lower from this point onwards. Any spike in investments would take 5 plus years to come online (assuming the 2014 to early 2020 lag). So any major oil finds that are discovered due to any increase in capital expenditures won't interfere with JP Morgan's time frame.
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