Following the strong production performance in the U.S. onshore during the second quarter, analysts are less enthusiastic about oil and gas prices strengthening in the near term.
Even with fewer rigs in operation, efficiency gains have proven to be the primary driver of more output, which should keep prices stagnant possibly for years, according to analyst firms and credit ratings agencies.
U.S. rig counts remained relatively flat in July after falling 55% in the first half of the year, suggesting some stabilization and possibly a trough, said Fitch Ratings analysts led by Dino Kritikos. Production was resilient in part during July not only because of increased output per rig, but because drilled but uncompleted wells began coming online.
That could signal a slowdown in U.S. production.
"Fitch estimates the production rate in tight oil and shale gas regions -- about 50% of total U.S. oil and gas production -- will exit 2015 roughly 7% below the 13.1 million boe/d rate from June 2015," said Kritikos. "The forecast exit production rate would be around 3% lower than year-end 2014. This assumes a flat tight oil and shale gas rig count of 578 and constant EIA-estimated new well production efficiencies and legacy well decline rates" from June levels.
"The Eagle Ford (down 16%), Niobrara (down 14%) and Bakken (down 11%) are forecast to see the steepest declines to production exit rates" because of their higher than average legacy well output decline rates and huge drop in rig counts. "The Utica (up 5%), Marcellus (down 1%) and Permian (down 1%) are anticipated to exhibit higher to flat second-half 2015 production profiles, benefiting from above average/improving new well productivity and below average legacy well decline rates despite rig count declines, albeit less severe in the Marcellus."
Fitch's team still views a "longer, slower rig recovery profile" based on the firm's West Texas Intermediate (WTI) price assumption of $60/bbl for 2016 and $70/bbl long term. "Historical downcycles suggest trough-to-previous peak rig response -- though tight oil and shale gas has likely created a new normal run-rate -- depends on the speed and intensity of the price recovery. The 2001 U-shaped bear market recovery required about 35 months to return to peak levels, while the 2009 V-shaped bear market needed roughly 28 months."
Goldman Sachs analysts said Monday the current U.S. rig count implies production growth of 130,000 b/d year/year (y/y) by the fourth quarter and 145,000 b/d in 2016.
"The growth in the horizontal oil rig count continues to be driven by the ramp up in drilling activity in the Permian Basin with an unchanged horizontal rig count in the Bakken, Niobrara, Mississippian and Granite Wash plays," wrote Goldman analysts Damien Courvalin and Raquel Ohana. "The recent recovery in the oil rig count supports our expectation that U.S. producers can and will ramp up activity with WTI prices near $60/bbl, given improved returns with costs down 30%."
The current rig count points to U.S. output declining sequentially in 3Q2015 by 245,000 b/d following rig retirements in the Permian, Eagle Ford, Bakken and Niobrara plays. However, the decline would be only around 85,000 b/d "if we account for the 10% delay in well completion," said the Goldman duo.
Production should however resume its growth in 2016 by 145,000 b/d at the current rig count under Goldman's well deferral scenario, which analysts consider likely given the rise in well backlog. Analysts took into the account the impact of increased productivity per well, noting that in the first six months of this year, it was double the 2013-2014 trend.
"We see risk to our production modeling as skewed to the upside later this year given producer comments and results during the 2Q2015 earning season. Finally, a rapid draw down of the observed backlog of uncompleted wells could lead to higher production later this year and in 2016."
Barclays Capital analysts said as the U.S. exploration and production (E&P) earnings rolled in, the resilience in tight oil production became increasingly apparent.
"Most E&Ps boosted production levels in excess of expectations and emphasized cost reductions that make their assets more economic in the current price environment," said Barclays analysts Warren Russell, Michael Cohen and Miswin Mahesh. "The resilience of U.S. production thus far and the decisions producers make regarding second half 2015 drilling and completion activity have the potential to keep output above expectations."
Surging oil supply not only from the United States but Saudi Arabia, Iran and Iraq led Raymond James & Associates on Monday to lower its 2015/2016 oil deck.
"Even if we exclude the potential (and premature) negative impact of rising Iraqi supply and uncertain Chinese demand, our 2016 oil model is substantially more bearish today than a few months ago," said J. Marshall Adkins and Pavel Molchanov. "That means we no longer believe that oil prices should rebound to $65/bbl in 2016.
"Our new WTI forecast is $50 for 2015, rising slightly to $55 in 2016. For Brent, we are at $56 for 2015 and $62 for 2016. Our new 2016 forecast is $10 lower than our previous $65 estimate. This means the industry is set for a second straight year of painful austerity, with 2016 capital spending likely to average flat to down versus 2015."
The only "silver lining," said the Raymond James team, may be the number of large project cancellations and delays already announced or expected (see Daily GPI, Aug. 3).