Barrel Of Oil7/25/16 – Daniel M. Steffens : Energy Prospectus Group

The rate of U.S. oil production decline will accelerate in the 3rd quarter. It has already started.

In the last six weeks:

> U.S. oil production has declined 222,000 barrels per day.  

> U.S. oil imports have increased by 512,000 barrels per day. 

Crude oil in U.S. storage facilities has declined 10 of the last 11 weeks, despite a sharp increase in imports.

“The decline curve never sleeps, and always wins.” – David Demshur, Core Labs CEO in their 2nd quarter conference call. “The inevitability of the decline curve guarantees that oil production will slow and the market will find a balance.” Coupled with declining production, we live in a world where demand for oil increases “relentlessly” by 1.0 to 1.5 million barrels per day year after year after year.

From Core Lab’s Q2 press release:

The Company continues to anticipate a “V-shaped” worldwide commodity recovery beginning in the second half of 2016. One indication is that several U.S.-based operators have recently announced rig additions. Further, global demand for hydrocarbon-based energy continues to increase, while worldwide crude oil supply peaked in the second half of 2015 and began a decline that Core believes will continue through all of 2016 and 2017. The Company has observed that U.S. onshore oil production peaked in March 2015 and has fallen since then by an estimated 1,000,000 barrels of oil per day (“BOPD”), some of which was offset by new additions to production in the Gulf of Mexico (“GOM”) as eight deepwater legacy-field developments came on-line in late 2015.

At current activity levels, Core predicts 2016 U.S. onshore oil production will fall approximately 1,100,000 BOPD and will be somewhat offset by deepwater GOM gains of approximately 160,000 BOPD, yielding a U.S. net decline of 940,000 BOPD resulting in a net decline curve rate of approximately 10.1%. Based on currently available worldwide crude oil production data, coupled with internal Core Lab data, Core estimates that the net worldwide annual crude oil production decline rate is approximately 3.3%. That is supported by recent International Energy Agency (“IEA”) reports that worldwide crude oil production continued to fall through the second quarter of 2016. In addition to the U.S., Core expects 2016 production declines in Angola, China, Colombia, Indonesia, Iraq, Mexico, Nigeria, and Venezuela, among others.

On the company’s conference call they said their forecast of a 1.1 MMBOPD decline for the U.S. may be too conservative and if forced to bet, they would take the “over”.

The net worldwide decline rate is predicated on sharper decline curve rates for tight-oil reservoirs and the significant reduction of maintenance capital expenditures for the existing crude oil production base. These factors, together with the continuing decline in global production, the accelerated decline in inventories, and the continuing increase in global energy consumption, should create a tight crude oil supply market for the second half of 2016, and result in increased crude prices and industry activity levels worldwide.

Core Labs has offices all over the world and they know what is really happening in all of the world’s significant producing basins. You should all listen to their 2nd quarter conference call. Their global oil supply/demand discussion starts at about the 5 minute mark and lasts about 6 minutes.

U.S. oil production peaked at over 9.6 million barrels per day in June, 2015: Based on Core Labs’ prediction above, U.S. oil production will fall to under 8.3 million barrels per day by 12/31/2016 and continue falling to under 7.5 million barrels per day sometime in 2017 before it stabilized. The only thing that will stop U.S. oil production from falling is a sharp increase in oil prices.

In my opinion, the only reason for the recent pull back in oil prices is the FEAR that has been created by the Brexit vote.

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