This week was the start of the first big week for Q1/19 reporting for US producers, whereas the US service companies are just finishing their Q1/19 reporting. Post the Q1 earnings season, we expect that one of the common takeaways will be a lowering of US oil production growth forecasts for 2019. Today’s EIA Form 914 actuals for Feb of 11.683 mmb/d and Jan of 11.870 mmb/d were the first two consecutive MoM declines in US oil production since June and July 2016. We are seeing a slow start to 2019 US oil growth and that shouldn’t surprise as WTI oil prices were off $27.84 in Q4/18. The service company Q1 calls are pointing to a bottoming of industry activity in Q2/19 as industry activity hasn’t yet responded to the higher oil prices in 2019. The big increase in US oil production in 2019 will continue to be from the increasing Permian egress. But the combination of the low Jan/Feb start and industry activity not yet responding to higher oil prices make the EIA’s current forecast of 12.39 mmb/d for 2019 (+1.43 mmb/d YoY) look high. We won’t be surprised to see forecasts for US 2019 oil production growth lowered by ~0.3 mmb/d putting growth closer ~1.1 mmb/d YoY. This will be viewed as positive to oil prices. However, even with a lowering of the US oil growth, it still speaks to the strength of US shale because this is not indicative of the growth under $60 oil, rather more reflective of industry activity in H1/19 starting 2019 assuming oil was likely in the low $50s. The strong US oil growth story is far from over, it will just be a little lower in 2019.
The $27.84 decline in WTI oil prices over Q4 is now being seen in a slower start to 2019 spending and oil production growth. The US oil growth story continues to be very strong and far stronger than probably everyone expected a year ago. And what we are talking about is that the very strong growth may be a little less but still very strong. It has been an excellent 2019 for oil prices and oil companies. But this follows a terrible Q4 that saw WTI oil prices decline from $73.25 on Sep 28, 2018 to close Dec 31, 2018 at $45.41. Oil companies had mostly just refreshed capex budgets for 2019 and then were faced with a big decline in oil prices. No surprise, the companies pulled back a little bit in activity to start 2019 to avoid over spending too early in 2019 in case oil prices didn’t prices didn’t’ recover. This pull back is now being seen by lower oil production to start 2019.
WTI Oil Price – May 1, 2018 to May 1, 2019
EIA Form 914 actuals – Jan and Feb were first two consecutive MoM declines since June and July 2016. Today, the EIA posted its Form 914 “Monthly Crude Oil and Natural Gas Production” data for Feb 2019 actuals [LINK]. We call this the actuals as the Form 914 data is considered to be the most accurate actual production data and comes out two months after the actuals period. Today’s Form 914 are the actuals for Feb. The EIA estimates Feb 2019 US oil production to be 11.683 mmb/d, which was +14.0% YoY from 10.248 mmb/d in Feb 2018. This was another month of strong YoY growth being up 1.435 mmb/d YoY. But Feb 2019 was down 1.6% MoM. from 11.870 mmb/d in Jan 2019, which in turn was down 0.8% MoM from 11.963 mmb/d in Dec 2018. These are the first two consecutive MoM declines in US oil production since June and July 2016.
EIA Form 914 – US Crude Oil and Lease Condensate Production
US service company Q1 calls are pointing to slower/lower US oil growth as US oil drilling hasn’t yet responded to stronger oil prices. Our SAF Energy Tidbits April 28, 2019 memo highlighted “Are the service companies pointing to lower or slower US oil growth in 2019?”. One of our two key oil outlook questions from the US service company Q1 calls (Halliburton, Helmerich & Payne, National Oilwell, and Patterson UTI) last week was wondering if they are pointing to lower than expected and/or slower than expected growth in US shale oil in 2019. The service company comments were similar. (i) Not seeing operators increase capex budgets despite the stronger oil prices of late and looking forward. Remember WTI oil prices dropped by $27.84 in Q4/18 to close Dec 31 at $45.41. And at the end of 2019, WTI strips were closer to $45 than $50 for 2019 and 2020, and now they are over $60. (ii) See industry activity going lower in Q2, but Q2 should be the bottom for the year. Helmerich & Payne has a fiscal yr end Sept 30 and said “Considering the trends we are seeing in rig releases, the higher levels of churn across certain basins and the current demand, we believe the Company’s rig count will bottom out early during the third fiscal quarter”. Patterson UTI said “In the near-term, we expect our rig count will decline further, bottoming this quarter in the mid-150s.” (iii) The stronger YoY oil prices are not expected to lead to a YoY increase in activity, rather less of a YoY decrease. (iv) There was one other linked point from the Halliburton call, where Halliburton seemed to infer that some operators have to crank it up to hit their production targets. Mgmt said “More specifically around the second half of the year, a couple of ways we think about that, but I think importantly is the production targets that are out there today, all of that requires some level of completion activity to meet that.” (v) National Oilwell’s Q1 call on Fri specifically warned on this risk. On Sat April 27, we tweeted [LINK] “Drillers say drilling to bottom in Q2, increase in Q3. National Oilwell Q1 call – customer drill pipe inventory @ 10 yr low, deliveries pushed to Q2 or Q3, “consuming drill pipe daily and they won’t be able to drill when they run out”. Oil growth ramp up slower than expected?”
The EIA’s current 2019 oil production forecast is likely too high by ~0.3 mmb/d. The EIA Form 914 actuals for Jan and Feb mean that the Q1/19 starting point for the EIA”s current forecast (Short Term Energy Outlook April 2019 [LINK]) is too high. If we assume March is flat to Feb, then Q1/19 will be 11.75 mmb/d, or 0.16 mmb/d below the STEO forecast assumption that has Q1/19 at 11.91 mmb/d. The STEO forecast assumption for Q2/19 is 12.36mmb/d, compared to the Form 914 Feb actual of 11.683 mmb/d. A key part of the increasing quarterly assumption is increasing Permian production with increasing Permian takeaway. This is happening, which is why we expect the a lowering of Q2/19 forecasts by ~0.3 mmb/d. And there is no question that production will ramp up strongly in H2/19 with the new Permian egress. But with Jan/Feb being well below forecast assumption and if we link the service company Q1 call comments that industry activity has not yet responded to higher oil pries and industry activity going lower and bottoming in Q2/19, we won’t be surprised to see forecasts for US 2019 oil production growth lowered by ~0.3 mmb/d putting 2019 growth closer to ~1.1 mmb/d YoY.
EIA Estimated US Crude Oil Production by Forecast Month
The lower US oil growth is still strong and not reflective of $60 oil, rather more like a low $50’s growth. If US oil growth forecasts for 2019 are lowered to ~1.1 mmb/d YoY, this will be viewed as a positive to oil prices. It will also help the tone because the US oil YoY growth will be less than YoY growth in global oil demand. The current forecasts for global oil demand growth YoY in 2019 are +1.4 mmb/d YoY by the IEA, +1.4 mmb/d YoY by the EIA and +1.21 mmb/d by OPEC. Even if we see a lowering of US oil growth rate in 2019, it still speaks to the strength of US shale because this is not indicative of the growth under $60 oil, rather more reflective of industry activity in H1/19 starting 2019 assuming oil was likely in the low $50s. We believe we would not be seeing this reduction in growth expectations if industry has kept activity levels in Q1/19 assuming WTI would be $60. The US oil growth story is far from over, it will just be a little lower in 2019.