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U.S. Crude Oil Production Decline

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Oct 13, 2015

Background

NYMEX Light Sweet Crude Oil began a precipitous decline in July 2014 from more than $100 to less than $50 per barrel. When oil began dropping exploration and production as measured by the Baker Hughes North America Rig Count continued to increase until late October/early November 2014 when oil dropped below $80 and operators started stacking drilling rigs.

Reduced exploration and production activity ultimately impacts production, but the lag between reduced drilling activity, production decline, and petroleum storage continues to challenge oil prices.

Exploration and Production

The Baker Hughes Rotary Rig Count of total land rigs in North America set its 2014 peak at 1,864 in November dropping to 760 in the latest report, a 59% decrease in almost a year detailed in Figure 1.

Figure 1 North American Land Rigs, Source: Baker Hughes, Updata Analytics

Land rigs exploring for oil peaked at 1,609 in October 2014 and declined to 605 in the most recent report, a 62.4% decline in Figure 2.

Figure 2 North American Land Rigs – Oil, Source: Baker Hughes, Updata Analytics

The decline in rig count was expected and prudent with falling oil prices. The sharp reduction in exploration and production activity should curtail hydrocarbon production, reduce storage, and ultimately bring supply and demand back to equilibrium and stabilizing prices.

U.S. Production

Exploration and production activity began declining in the fall of 2014 detailed in Figures 1 and 2. U.S. oil production continued to to set weekly records months after rigs were stacked out on a weekly basis.

U.S. continental field production, the lower 48 states, was 8.6MM barrels per day in late October 2014. Lower 48 production continued to rise to 9.2MM barrels per day in June 2015 detailed in Figure 3.

Figure 3 U.S. Continental Field Production, Source: Energy Information Administration, Updata Analytics

One year after rig count began declining U.S. field production is still above fall 2014 levels at 8.7MM barrels per day.

U.S. production including Alaska consistent with the lower 48 states peaked at 9.6MM barrels per day and has declined to 9.17MM barrels per day, above the 9MM barrels per day production from the fall of 2014 detailed in Figure 4.

Figure 4 U.S. Total Field Production, Source: Energy Information Administration, Updata Analytics

The drop in production is intuitive and consistent with a more than 50% decrease in exploration and production activity. The lag in production response to rig count decline continues to impact petroleum storage and ultimately prices.

Petroleum Storage

Commercial Crude Oil Storage (non Strategic Petroleum Reserve SPR) continued to climb while production rose until storage peaked at its all time high of 490MM barrels in April 2015 displayed in Figure 5.

Figure 5 Commercial Crude Oil Storage, Source: Energy Information Administration, Updata Analytics

Commercial crude oil peaked and then began its seasonal decline associated with spring and summer driving season, but total petroleum continues to rise as the lag in exploration and production activity filters through the industry.

The Energy Information Administration tracks 12 refined products and commercial crude oil storage and calculates Total Petroleum Storage. Total Petroleum Storage continues to set new records almost every week in Figure 6.

Figure 6 Total Petroleum Storage, Source: Energy Information Administration, Updata Analytics

Summary – Timeline

The significant lag in supply responding to a more than 50% price drop in crude oil continues to pressure prices.

July 2014 – NYMEX Light Sweet Crude Oil trades above $100 for the last time in recent history.

October 2014 – Operators begin stacking out rigs.

April 2015 – Commercial Crude Oil Storage peaks prior to summer driving season.

June 2015 – U.S. Field Production peaks.

??? – Total Petroleum Storage peaks.

The continued rise in refined products turns attention to weakness in demand while reduced exploration and production works its way through the upstream supply chain.

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