NEW YORK (Apr 28): The drop in U.S. crude production is set to accelerate as investment cutbacks are felt, reducing the chance of a V-shaped recovery in output.
Reports of falling output and plummeting rig counts in the four main shale-producing areas has left “no doubt” that production is falling and likely to fall faster in the months ahead, Paul Horsnell, global head of commodities research at Standard Chartered Plc in London, said in a report. The reduction in U.S. activity and a rebound in prices have probably pleased Saudi Arabian policy makers, Horsnell said.
The shale oil boom sent U.S. crude output to 9.422 million barrels a day in the week ended March 20, the highest level in more than four decades, Energy Information Administration data show. Production slipped in three of the following four weeks to 9.121 million. U.S. drillers have idled 56 percent of oil rigs since October, leaving the total at 703 on April 24, according to Baker Hughes Inc.
“A common assumption is that once prices are high enough, the U.S. oil industry can recover very quickly in a V-shaped pattern,” Horsnell said in the report. “We think this is unlikely.”
The backlog of uncompleted wells, or fracklog, in North Dakota swelled to 900 in late February. When drillers decide to complete work they have to wait for hydraulic fracturing fluids and completion rigs to arrive. The largest challenge may be bringing back staff, Horsnell said.
Oil services provider Schlumberger Ltd. said it will cut 11,000 more jobs this month, signaling that the industry may undergo another round of cuts. The world’s largest provider of oilfield services announced plans in January to trim its workforce by 9,000 in what was then the single biggest reduction in the sector.
Additional Rigs
The industry will need to add 200 rigs to stabilize oil output, something that’s unlikely to take place this year, Horsnell said.
West Texas Intermediate for May delivery fell 16 cents to settle at $56.99 a barrel on the New York Mercantile Exchange Monday. Futures touched $58.41 on April 23, the highest level since Dec. 22. Prices are down 43 percent from a year earlier.
Prices tumbled 19 percent in December, the biggest monthly drop since 2008, after the Organization of Petroleum Exporting Countries left its production quotas unchanged at a Nov. 27 meeting. The 12-member group’s move prompted speculation that they would let crude slide low enough to slow U.S. production. OPEC ministers are scheduled to convene June 5 in Vienna.
Saudi Arabia would be open over the next six weeks to discussing a multilateral deal to cut production, particularly if Russia takes part, Horsnell said. The desert kingdom appears ready to allow present market conditions to continue if they don’t get a suitable agreement, leading to steady prices and an over-tight market, he said.
‘Excellent’ Condition
The oil market is in “excellent” condition, Saudi Arabia’s Prince Abdulaziz bin Salman, the deputy oil minister, told reporters Monday in the eastern city of Khobar, without elaborating.
Saudi Arabia raised output to 10.1 million barrels a day in March, near an all-time peak, the International Energy Agency reported on April 15. Saudi Oil Minister Ali al-Naimi has stressed that his country won’t cede market share to higher-cost producers and said in the capital Riyadh on April 7 that output was at 10.3 million barrels and would remain close to that.
“Statements from oil industry and government figures in Saudi Arabia have been accentuating the positive over the past two weeks,” Horsnell said. “It now appears Saudi Arabia did not have any difficulty in passing on extra oil to its customers when its output increased last month.”