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The Americas Reducing The World Glut in Oil

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MajorClay:
Americas, Asia do what OPEC wouldn't: cut oil production
HOUSTON/SINGAPORE | By Terry Wade and Henning Gloystein

An oil well is seen near Denver, Colorado February 2, 2015. REUTERS/Rick Wilking
An oil well is seen near Denver, Colorado February 2, 2015.
Reuters/Rick Wilking

Wildfires in Canada. Instability in Venezuela. Stalling U.S. frackers. Drops in oil output are happening so fast that it looks as if the Americas alone could resolve global oversupply.

The 70 percent oil price slide LCOc1 CLc1 between 2014 and early 2016 has been pegged to one problem: production exceeding demand by as much as 2 million barrels per day (bpd).

But oversupply is evaporating quickly due to output cuts in the Americas - including the United States, Canada and Latin America - and also increasingly in Asia.

"Unplanned oil supply disruptions have been a key element so far this year that have contributed to a tighter oil market than was otherwise expected," said analyst Guy Baber of Simmons & Co.

If the disruptions last, there will be limited spare capacity to meet demand, Baber cautioned.

Output from the Americas dropped over 1.5 million bpd last quarter, while producers in Asia and Australia cut some 250,000 bpd, eating away large chunks of the world's oversupply, government, industry and consultancy data shows.

This comes at a time when members of the Organization of the Petroleum Exporting Countries (OPEC), led by Saudi Arabia, have refused to curb output in order to retain market share and squeeze out higher-cost competitors.

"The Saudis have achieved what they want in that the market is re-balancing through price," said senior oil analyst Neil Beveridge of Sanford C. Bernstein.

"Over the past 12 months Saudi has raised production, putting downward pressure on price to bring back discipline among the producers. This is now playing out."

In fact, with so much non-OPEC output now off the market, producers like Saudi Arabia and Qatar have been able to raise supplies and prices for shipments to Asia, the world's top oil consuming region.

Outages in Canada are also helping speed up the re-balancing, Beveridge added.

CUTS GALORE

A raging wildfire in Fort McMurray, at the heart of Canada's oil sands region, has forced more than 690,000 bpd out of production, according to Reuters estimates, with more disruptions possible.

"In the last two years, outages have not been the focus because of the imbalance in the market, but that changes now that the market is tightening," said Richard Gorry, director of JBC Energy Asia.

U.S. output, down by 410,000 bpd this year and 800,000 bpd since mid-2015, is expected to slide another 800,000 bpd in the next five months, according to the Energy Information Administration.

Latin America's crude oil production, suffering from under-investment, fell 4.6 percent in the first quarter to 9.13 million bpd, a loss of 441,000 bpd from the same period a year ago, according to data from individual countries and OPEC.

The largest decline was in Venezuela, which lost 188,000 bpd in the first quarter as President Nicolas Maduro's government wrestles a deep economic crisis.

Production is also on the wane across Asia Pacific.

China, the region's biggest producer and consumer of oil, is expected to see a 6 percent drop in crude output in 2016 due to ageing fields and poor economics, Standard Chartered bank said.

Signs of tighter supply helped lift oil prices to more than five-month highs last week. U.S. WTI crude hit an intraday high above $46 a barrel on Thursday, within striking distance of recent peaks. [O/R]

Nonetheless, with rising Middle Eastern output, near-record Russian production and brimming storage tanks, the global glut is set to stay for some time.

Brent futures for delivery five years out are only at a small $10-per-barrel premium to one-month contracts, an indication the "lower for longer" price scenario may linger.

(Additional reporting by Amanda Cooper in LONDON, Marianna Parraga in HOUSTON, and Liz Hampton in EDMONTON; Editing by Andrew Hay and Himani Sarkar)

Smokin Joe:
Good post.

Here is where I think the DUC (Drilled but UnCompleted) wells will come in to flatten the decline curve.

(Comments in parentheses are provided for those unfamiliar with common industry acronyms)

By completing those wells, new production can be brought on line for the price of the completion, and the price will likely climb as the surplus declines, making those more attractive.

In the meantime, however, the price of frac services is unlikely to wane much, because those will remain in demand as long as the 'fraclog' (the backlog of uncompleted wells) remains the reason for wells being in DUC status to begin with.

I think there might be some intentional slowdown in completions, partly for working capital reasons, and partly because frac costs equal or exceed drilling costs, and there will be an attempt to see those drop to mirror the slowdown in drilling. With a year worth of backlog, that demand/price drop may not be as pronounced as the drop in drilling and drilling service company prices.

Keep in mind, that although production decline curves on completed wells vary by region, they generally are at 25% of IP (Initial Production) at the end of the first two years.

That means there will have to be new drilling in the next couple of years to replace depleted well capacities in order to maintain current levels, and there will be whatever lag in that to allow for supply/demand equalization to bring prices to attractive levels.

Global economic and geopolitical factors, as always, could affect that either way.

IsailedawayfromFR:

--- Quote from: Smokin Joe on May 06, 2016, 11:33:26 pm ---

Keep in mind, that although production decline curves on completed wells vary by region, they generally are at 25% of IP (Initial Production) at the end of the first two years.

That means there will have to be new drilling in the next couple of years to replace depleted well capacities in order to maintain current levels, and there will be whatever lag in that to allow for supply/demand equalization to bring prices to attractive levels.

Global economic and geopolitical factors, as always, could affect that either way.

--- End quote ---

all those thousands of wells currently producing that were drilled 4 to 10 years ago are actually declining very little. less than 10% per year from all the many reserves analysis I have performed.

What you are quoting is for new wells only, which will make up a small percentage of total wells count for some time.  To put it another way: since few wells are getting drilled, the decline of current production is rather small.

Bigun:
What I find most interesting is tha all those production cuts the article mentions have yet to affect market prices all that much. Would be very interested in hearing what others think about why that is.

Smokin Joe:

--- Quote from: Bigun on May 07, 2016, 03:16:19 am ---What I find most interesting is tha all those production cuts the article mentions have yet to affect market prices all that much. Would be very interested in hearing what others think about why that is.

--- End quote ---
Surplus capacity is the single biggest controlling factor, followed by location of that with geopolitical considerations (Is that capacity threatened in a war zone, for instance). A good, if somewhat dated article can be found here: http://instituteforenergyresearch.org/analysis/the-significance-of-spare-oil-capacity/ "The Significance of Spare Oil Capacity"

At present, between increased production in the US in the past decade, OPEC producing at full tilt, ISIS selling oil on the sly through Turkey, and Iran coming back on line (Thanks Obama), there is enough surplus capacity to handle the load. The theoretical increase in that from the Iran deal alone went from 1 million BOPD to 5 million BOPD

The other factor is the downstream/upstream factor. For those majors with distribution networks for refined products to get the books to work out, the price of products has to increase to significantly increase the upstream (crude oil) bids. If gas is cheap, that doesn't justify paying more for their own produced oil, but if gas prices creep up, so will the price of oil at the wellhead, because it can. For the majors this means both sectors will look better at the stock market, which is the part that keeps investors around.  (Increased demand for motor fuels will drive up fuel prices, which in turn will bolster the crude prices.)

Independents and mid-sized companies will benefit as well by increases in prices, at the wellhead and/or the pump.

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