Lower 48 Production Nears Cycle Highs As Rig Count Rises For 18th Straight Week

Tyler Durden's picture

While much was made of this week's drop in US crude production, it was driven by an Alaskan supply drop, not the Lower 48 whose production is at Aug 2015 highs. WTI back above $50 on the back of more OPEC jawboning appears to have everyone convinced this time is different, but for the 18th week in a row US oil rig counts rose (by 8 to 720).


The 18th weekly oil rig count rise...


Production from the Lower 48 continues to soar...


And WTI dipped a little on the print...


And while prices hover above $50, OilPrice.com's Brian Noble warns that as breakeven prices converge an oil price crash nears...

No one should underestimate the impact of AI (artificial intelligence) on the future of the entire capital markets complex. The LinkedIn group, Algorithmic Traders Association, has recently been running a series of articles warning of the seismic shift that is and will continue to be felt in the global hedge fund industry as machines take over from people on trading desks.

But what intelligent human being would ever suddenly have turned bullish on the morning of Monday 15 May 2017 just because of renewed jawboning from Saudi Arabia and Russia, indulging in the same old two-step as they did at Doha in April 2016 and Vienna in November of last year. That is however precisely what the machines did. Hallelujah.

In the past couple of weeks, crude oil futures really did a round trip. First, they took a beating. WTI futures fell on May 4th to $45.52 per barrel, coming down from an April peak of $53.40, hitting the lowest point since the deal between OPEC and non-OPEC oil producers was signed last November. Since then, WTI has rallied up above $49 on as confidence grows over an OPEC cut. So is this more noise or a portent of things to come?

Despite the occasional rally, it’s hard to see that the outlook for oil is encouraging on both fundamental and technical levels. The charts look to be screaming double top for WTI, while the fundamentals seem to be saying Economics 101: too much supply, too little demand. The parallel with 2014 is there if you want to see it.

At the heart of the matter is the same old cast of characters that recur again and again. What’s different this time is the rise in cheap U.S. production, primarily shale. While it’s perfectly true that there isn’t enough U.S. shale to flood the world with oil, a lot of what there is is historically cheap to produce so as to give crude from the Middle East a real run for its money; and a solid proportion of that production has been sold forward at attractive levels in the futures market ensuring financial stability for U.S. producers. This growing price competiveness is nothing new. In the Bakken, for example, the average breakeven cost per barrel was $59.03 in 2014, which fell to $29.44 in 2016, a reduction of 50 percent in just two years. Meanwhile, U.S. oil production has risen to approximately 9.3 million barrels a day and is estimated by the EIA to reach 10 million barrels a day by 2018. In the meantime, crude oil inventories remain stubbornly high. Most recent EIA data puts crude oil inventories at 527.

8 million barrels, stuck at the higher end of the 5-year range.

In a recent and highly informative article in Business Insider originally published in The Motley Fool and using energy industry consultant Rystad Energy research, author Matthew DiLallo shows that it costs Saudi Arabia around $9 per barrel to breakeven, Russia $19 and U.S. shale a little over $23. That said, the simple average of Saudi/Russian breakeven would be about $14, a number which can only go higher, while U.S. shale breakeven is declining significantly, with production also growing significantly. So who’s going to win this one?

DiLallo sums it up nicely:Saudi Arabia has the lowest oil production costs in the world thanks to two strategic advantages: Abundant pools of oil close to the surface and no taxes on production. Because of that, it can make money in almost any oil price environment. That said, Saudi Arabia made a mistake by trying to use its low costs to kill the shale revolution; it only made shale stronger.”

Let the Saudis and their close allies the Russians do whatever it takes. Because they’re going to have to do a lot more than that.

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Pasadena Phil's picture

Were this about how GM inventories are peaking while they were retaking control of the domestic auto market and poised to take the lead globally, we wouldn't be having this talk about "over-production" and "inventory glut". When sales keep pushing to new record highs, production and inventory levels keep pace to meet demand. But not in the libertarian world I guess.

Hohum's picture

Year over year: rig counts up 130%, production up about 10%  Winning!

NoWayJose's picture

Nothing like some OPEC jawboning to raise the price of oil and start more drilling in the US!

SpeakerFTD's picture

That analysis at the end is mistaking structurally lower costs with oversupply from frac suppliers.   That oversupply depressed the prices that were being paid by frackers to secure sand, water, machines, etc.   There certainly have been massive improvements in frack pad productivity, but these have been magnified by depressed prices.

Those prices are now roaring back.  There is a huge labor shortage right now - you can show up today in the Permian or OK as a barely literate HS dropout and someone will pay you $60K plus overtime to get out there and work.  And still they can't hire enough people.  You are going to see production delays because of labor shortages.  You are going to see material price increases emerging from suppliers. These effects are changing the dynamic.   Extrapolating the last 12 months of frack behavior into the future is a huge mistake.

A. Boaty's picture

"Estimated inventories in industrialized nations totaled 3.025 billion barrels at the end of March - about 300 million barrels above the five-year average, according to the International Energy Agency’s latest monthly report."


And, yet the article says 527 million bbl in storage? Have I missed something here?

DoctorFix's picture

I've worked in the oilfield and what's not mentioned are the thousands of wells that have been drilled but left uncompleted.  Much of the above activity seen in the article comes from lease obligations.  They have to drill or lose out.  How much of it a result of fresh leasing activity is a big question.  With all of the fields recently "announced" (likely known for decades) there is so much oil available that the only problem they have now is in keeping prices up enough.  Peak oil?... Don't make me laugh.