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Can The Permian Push Oil Prices Down To $40?

Courtesy of ZeroHedge. View original post here.

Authored by Irina Slav via OilPrice.com,

Two analyst firms have revised upwards their production growth forecasts for the Permian, expecting oil output there to be 300,000 bpd higher by the end of this year. The firms are none other than Wood Mackenzie, whose analysts expect 300,000 bpd more in Permian output by end-2017—a 200,000-bpd increase to its year-end forecast—and Rystad, which sees the cumulative increase for June-December at 300,000 bpd.

That’s the kind of consensus market players like to see, especially when it comes a couple of days after reports that investors are pulling out from the Permian after Pioneer Resources reported the share of natural gas and gas liquids in its overall output has been rising at the expense of oil. Investors love their crude, after all, and are much less excited about gas.

Amid the worry, which some say is not as widespread as it may seem, the upbeat forecasts of these analysts were certainly welcome. Indeed, EIA data shows that the Permian continues to be the leader among the shale plays in terms of production growth. This month, output there is seen to rise by 64,000 bpd from July, to 2.535 million bpd. To compare, the second-fastest output growth is forecast for Eagle Ford, at a distant 27,000 bpd this month. In fact, the Permian should account for over half of the total U.S. shale oil output increase in August from July. The figure stands at 113,000 bpd. Related: Oil Rises, But Saudis Face Daunting Dilemma

Going back three months in EIA’s drilling productivity reports reveals that the rate of production growth in the Permian was within the range of 65,000 bpd (in June) to 76,000 bpd (in April). In the first quarter, production growth rose from 53,000 bpd in January to 79,000 bpd in March. One thing seems very obvious: the monthly growth rates so far this year are lower than 100,000 bpd, let alone the 300,000 bpd Rystad and Wood Mac forecast.

That’s because so far this year drillers have rushed to add rigs, but the output from these new rigs takes a few months to show up on production reports. This means that over the next four to five months, if the analysts are right, we’re likely to see a pretty sharp increase in Permian oil output. This, in turn, could spell US$40 for West Texas Intermediate.

An analysis by Oil & Gas Financial Journal’s Mikaila Adams quotes some energy independents’ spending plans, which suggest this year’s push will continue as initially planned in the happy days following OPEC’s decision to start cutting, but next year many independents are likely to take it down a notch, anticipating a potential price fall to US$40-45. In other words, these companies are preparing for the consequences of their output boost. Some, and no small fish, have already announced capex cuts for this year, including Anadarko and Continental. The total capex cut for shale producers for the year has come in at US$1.2 billion.

Continental’s Harold Hamm warned his peers that too aggressive an output increase would drive prices into the ground. The temptation, however, must have been irresistible, what with all the debt to pay, so shale operators continue to ramp up production. The latest news suggests they are being more careful than last time, however. These plans to cut spending and reduce rigs counts in case prices start falling below the minimum comfortable level indicate that shale producers are wary of being caught by surprise again, as they were in 2014. Perhaps, if the Permian production growth estimates prove true, we might get to see exactly how nimble shale operators can be when push comes to shove.


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