US Oil Production Fall Will be Worse than Markets Expect

25-Sep-2015
With the U.S. now the de facto swing producer for the global oil industry, a key factor in understanding when oil markets might rebalance is how much U.S. production could ultimately fall from recent record highs.
Positively, U.S. supply resilience in the face of falling investment is turning out to be a temporary phenomenon. Production has in fact already started to fall, and since the March peak of 9.7mmb/d, crude oil output is down 5%. Consensus points toward U.S. oil production falling further in the coming months, but also appears to indicate that there will be resilience in 2016.

As discussed below, (at morningstar.co.uk) we disagree with the latter notion and believe next year's declines are likely to be substantial. This is the case even after considering production tailwinds such as continued efficiency gains and inventory high-grading, as well the assumption that a sizable portion of the uncompleted well inventory is brought online next year.

Based on our projections of a horizontal rig count of 500-500 in the tight oil plays (the industry has been running between 540-560 during the past three months), we expect U.S. oil production to fall by 600-800mb/d during 2016, with monthly volumes bottoming around 8.2mmb/d later next year. This is a bearish outlook relative to consensus, with the variance explained by the fact many forecasters continue to hedge their bets on what 2016 activity levels will be. (by Stephen Simko, Morning Star)

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