The slightly negative tone to oil prices (WTI trading down $0.90/b as of 7am mountain time) this morning is being driven by the first indications that the major US shale/tight oil basins are returning to growth with the EIA’s estimate that major shale/tight oil production is higher in Jan and Feb to make three consecutive months of increasing oil production. Plus there is an increasing inventory of DUCs to support further 2017 oil growth. We say slightly negative because this growth is expected with the increasing US oil rig count, plus the reality that biggest near term factor on oil prices is the OPEC and non-OPEC production cuts of 1.731 million b/d effective Jan 1. Oil prices should continue to bounce around current levels until we see data in early Feb on the compliance to the cuts.
The strength of US shale/tight oil was seen in yesterday afternoon’s EIA (US Energy Information Administration) monthly Drilling Productivity Report Jan 2017 (DPR), which is the EIA’s estimate of the current and next month (in this case Jan and Feb) production for the major shale/tight basins, and its estimate of DUCs (Drilled UnCompleted Wells) as at the end of the just completed month (in this case Dec).
1. Jan 2017 oil production is higher than estimated last month. The EIA revised up its Jan 2017 estimate for the shale/tight oil basins so that Jan is +165,000 b/d vs the estimate for Jan 2017 that the EIA made one month ago in its Dec 2016 DPR. This means that Jan 2017 oil production isn’t flat to Dec, but higher. And that means that the Dec oil growth wasn’t a one month aberration.
2. Feb 2017 oil production is expected up from Jan 2017. The key to the EIA’s DPR is that, with the revised Jan estimate, the EIA is now forecasting that the major shale/tight oil basins are returning to growth. These basins had bottomed in Sept-Nov with Dec being the first monthly increase. That has now been supported by Jan and Feb also up so we are seeing three solid months of oil production growth. The EIA’s introduces its estimate for shale/tight oil major basin production for Feb 2017 of 4.748 million b/d, or +41,000 b/d from the revised higher Jan 2017 estimate. The expectation of increasing US oil production at $50/b oil was the subject of our Nov 15, 2016 blog “Countdown To OPEC’s Nov 30 Meeting. Part 4: Oil Growth Returning To US At $50 Oil, But Not To Most Non-OPEC Producers” [LINK]
3. The inventory of DUCs is up at Dec 31. The other negative is that there is an increasing inventory of wells that have been drilled but not yet completed. These are wells that have a shorter time to add production because they are already drilled. The EIA estimates DUCs were up to 5,379 at Dec 31, vs 5,212 at Nov 30. In particular, Permian (an oil basin) DUCs increased by 137 DUCs to 1,706 at Dec 31.
It looks like the major US shale/tight oil basins are now returning to growth. The EIA is now forecasting three consecutive months of increasing oil production from the major shale/tight oil basins. This should not surprise anyone as the expectations are that the US is one of the few non-OPEC producers that can grow at $50/b oil. It is a slight negative to oil prices today, but the reality is that oil prices in 2017 and 2018 are going to be driven by the level of compliance to OPEC/non-OPEC cuts of 1.731 million b/d. Their comments have been indicating compliance to the Jan 1 production cuts, but we will start to see data in early Feb on the level of compliance. We continue to expect reasonable (not perfect) compliance, which would be supportive of oil prices going higher from current levels in 2017 and 2018.