Spending cuts by domestic producers and the swift decline in the onshore rig count could signal a drop in U.S. oil production by the end of the year, the Organization of Petroleum Exporting Countries (OPEC), said Monday. Meanwhile, analysts with Raymond James & Associates also see a substantial risk for even lower U.S. oil prices in the months ahead.
In its monthly oil market report, OPEC's experts offered a dim view of U.S. producers' ability to overcome the already historic global collapse in crude oil prices, citing capital expenditure cuts. The U.S. rig count fell faster in February than in January, falling by 335 from January to 1,348 and down 421 year/year as of March 6, Baker Hughes Inc. said earlier this month (see Daily GPI, March 6). The active U.S. rig count as of March 13 was 1,125, down 684, or 37.8% from a year ago.
OPEC's view that domestic oil growth could end by December contrasts with a monthly report issued last week by the International Energy Agency (IEA), which is forecasting U.S. oil production to continue to rise through 2020, in spite of low prices, because of better efficiencies and new technology. Total U.S. crude production hit a record high of 9.4 million b/d earlier this month.
However, OPEC forecasters said U.S. oil is more expensive to produce and therefore more vulnerable to falling prices. Overall U.S. tight oil production should only increase by 820,000 b/d this year, versus 1.61 million b/d in 2014, according to OPEC.
"Tight crude producers are aware that typical oil wells in shale plays decline 60% annually, and that losses can only be recouped by drilling new wells," OPEC noted. "As drilling subsides due to high costs and a potentially sustained low oil price, a drop in production can be expected to follow, possibly by late 2015." OPEC's prognosticators previously had said U.S. oil production would not begin to flatten until 2018.
The latest report would support OPEC's decision last November to maintain production levels even though oil prices were beginning to collapse. OPEC in the past had cut production to keep prices steady.
Meanwhile, analysts with Raymond James said that over the the next few months, "there is substantial risk for lower oil prices due to several potential negative catalysts."
Cory Garcia, J. Marshall Adkins and Justin Jenkins in their Energy Stat to clients noted that one of the most talked about items of late is the record-high level of U.S. oil storage "and the possibility that the market might run out of storage capacity later this year (possibly as early as May here in the U.S.)."
The broader global landscape "indicates that we should have plenty of places to store the surging oil supplies," but the analysts’ concern is the "continued upward march of already record-high U.S. oil inventories," which may lead to a "psychological trading-related selloff in the coming months."
The pace of global oil inventory builds should accelerate even more in the second quarter, the analysts noted. "This means we would suggest that short-term energy investors stay on the sidelines until this risk is behind us."