American Oil and Gas Reporter - March 2016 - 39

SpecialReport: Market Analysis

U.S. Oil Supply Slips Into Steep Decline
By Jodi Quinnell
BOULDER, CO.-A glut of crude oil
supply has persisted and pushed crude
prices down to their lowest levels since
May 2003. After five straight years of increasing production, the market is eagerly
awaiting signals of slowing and decreasing
crude output. The fact is the decline is
occurring already.
Genscape believes U.S. production
hit a peak of slightly more than 9.6
million barrels a day in April 2015 and is
now declining as a result of the significant
reduction in drilling across all producing
basins. U.S. oil production ended 2015
at 9.2 MMbbl/d, down 400,000 bbl/d
from the April peak, and we expect it to
continue declining through the remainder
of 2016 and into 2017, bottoming at 7.8
MMbbl/d by the end of third quarter
2017.
Figure 1 shows oil production from
the U.S. Energy Information Administration
and Genscape forecasting models since
January 2009, with Genscape projections
through October 2017. We anticipate production will begin climbing again near

the end of 2017, but growth will depend
on oil price levels. Assuming similar
pricing to the current market environment,
it would reach only 8.8 MMbbl/d by the
latter half of 2020.
From the middle of December to the
middle of February, the total U.S. rig
count fell by 163, according to RigData.
Genscape expects a continued slide in
rigs counts through August, with the 607
active rigs tallied in RigData's mid-February count losing another 263 over the
next six months to reach a low of 344
rigs in late summer. Once the rig cutting
is complete, the lower-48 drilling market
will have lost 84 percent of its active
fleet compared with October 2014.
In the latest round of earnings calls,
producers have suggested varying operational plans to weather the low-price environment. Some operators are relying
on continued efficiency gains, cost reductions and high grading to their best
acreage to keep drilling activity constant,
while others are decreasing or ceasing
drilling altogether to wait for higher
prices. Others are deferring completions.
In a news release detailing its 2016

FIGURE 1

plans, Continental Resources confirmed
its "intense focus on cash flow neutrality."
To meet this objective in the horizontal
Bakken/Three Forks play, Continental
said it planned to increase its drilled, but
uncompleted (DUC) inventory of wells
from 135 gross at year's end 2015 to 195
gross DUCs at year's end 2016. Further
highlighting that strategy, the Continental
release stated, "This high-quality DUC
inventory represents a significant asset
for the company as prices recover."
Similar to Continental, an Anadarko
Petroleum news release reported that the
company had 120 DUC wells in the Wattenberg Field in the heart of the horizontal
Niobrara play in the Denver-Julesburg
Basin, and said, "It doesn't appear we
will utilize them all this year."
Depending on the timeline of when
this inventory of DUCs will be worked
off, there is some risk to Genscape's forecast, but we do not feel the DUCs will
come into play until 2017 or even 2018.
Our view is that with lower prices and
less cash available to initiate new drilling,
producers have charted distinctive courses
to navigate 2016 successfully, which in
aggregate, will not likely lead to a flurry
of additional crude production anytime
soon.
❒

U.S. Oil Production
(Genscape Forecasts and Historical EIA Data)
10,000

9,000

Mb/d

8,000

JODI
QUINNELL

7,000

6,000

5,000

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4,000

Genscape

EIA

Jodi Quinnell is manager of crude
oil analytics at Genscape Inc. Before
joining the company in 2012, she
served as manager of oil analysis at
BENTEK Energy, Rocky Mountain
district hydraulic fracturing engineer
at FTS International, and an associate
technical professional of hydraulic
fracturing at Halliburton. Quinnell
holds a B.S. in applied mathematics
from the University of Rhode Island
and an M.S. in mineral economics
from the Colorado School of Mines.

Source: Genscape and EIA

MARCH 2016 39

American Oil and Gas Reporter - March 2016

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