EIA hides catastrophic drop in US shale oil production?
US, WASHINGTON (ORDO NEWS) — The Trump administration claims that the US economy has entered a period of “transition to greatness” and that energy companies will receive “huge benefits.” US Energy Secretary Dan Bruyett notes that “stability” reigns in the oil market and that economic activity will “skyrocket” after the pandemic ends.
However, in reality, US oil production continues to decline as drillers shut down wells and cut costs. Production has already fallen by 1.1 million barrels per day. In the future, losses and reductions are also likely. According to the latest Rystad Energy data, a decrease in US oil production by about 2 million barrels per day is possible by the end of June.
“Actual production reductions are more significant, and they are not only due to shutdowns, but also due to the natural reduction of existing wells, given that new wells and drilling volumes are declining,” Rystad said in a statement.
Expert Philippe Verleger reports that production decline is much larger. According to his latest research, as of May 10, production fell by almost 4 million barrels per day from its peak, as shown in the graph below.
Of course, the US government is doing everything it can to save the oil industry. According to a new report, about 90 oil and gas companies will benefit from the Fed’s corporate bond purchase program. The Trump administration is also gradually changing environmental measures in the oil and gas industry.
But on the verge of a historical crisis in the oil market, even handouts from Uncle Sam will not stop the decline. In two months, the number of rigs has more than halved. Standard Chartered said the decline was particularly acute in Oklahoma, where the number of rigs dropped to 11 across the state, 89% less than the same period a year earlier.
A sharp decrease in the activity of drilling rigs and drilling volumes means that the sharp decrease in rates characteristic of shale drilling will also reduce a small amount of new production. Standard Chartered says that if activity remains the same, by the end of 2020, production in the five major US shale deposits will fall by 2.89 million barrels per day. And these deviations will occur along with the current production cuts. Standard Chartered provides a W-model for deliveries, in which temporarily stopped production will recover in a few months, but after that the structural decline will continue.
Characteristically, the EIA is much more optimistic about the state of supply in the United States. On Tuesday, the agency said that this year, oil production will decrease by only 0.5 million barrels per day compared with the level of 2019. In particular, US Energy Secretary Dan Bruyett says production will increase in Q3 and Q4 when the economy begins to recover.
However, not everyone adheres to such an optimistic attitude. A Wood Mackenzie report released Wednesday said it would take years to restore oil demand.
“US production is plummeting, some producers do not want to sell oil on the forward market,” writes Commerzbank.
But while some oil drillers tried to abandon hedging, others decided to hedge at extremely low prices, not because they could profit at such low levels, but because it would protect against another collapse. “The execution prices achieved during the last hedge surge were low, and they should probably increase the likelihood of survival if the market worsens further,” Standard Chartered analysts wrote.
“In some cases, hedging was carried out at very low prices: one company hedges WTI at around $ 20.73 per barrel for the second quarter, the other at $ 25 for the third and fourth quarters,” Standard Chartered added.
The concern of a number of drillers regarding oil prices is understandable. The energy minister may predict “greatness,” but others expect a long and painful economic recovery.
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