US oil production continues at breakneck speed. According to Reuters, US output rose by 450 000 bpd over the first five months of 2017, putting the country on course for an annual production increase of 1 million bpd – levels last seen during the boom years of 2012 - 2014.1 Interestingly enough, most of the increased production thus far has actually come from non-shale producers, such as those in the Gulf of Mexico and Alaska (228 000 bpd and 61 000 bpd respectively). There’s more to come, however. The US onshore rig count has risen by around 120% since hitting lows of 380 in May 2016, and is continuing to rise at roughly 10 per week – with a typical delay of 6 months before impacting production figures, the full weight of US unconventional operations has likely yet to be felt on the market.2
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With a breakeven of US$40/bbl, the Permian Basin has been the driving force behind much of the increased drilling activity with companies rushing to acquire acreage and make the most of the opportunity. Centennial Resource Development, Exxon Mobil, Diamondback Energy, and Pioneer Natural Resources are just some of the companies that have increased their stake in the basin – indeed, according to data provided by Baker Hughes, 349 of all US land rigs are now operating in the Permian.3
As one might expect, all of this production is applying downward pressure on prices – Brent crude is sitting at US$49/bbl as I write this. In response, Saudi Arabia’s OPEC governor, Adeeb Al-Aama, has suggested that the group’s supply cuts should be extended beyond their original cut-off date of June. Al-Aama was quoted as saying that “There’s an emerging consensus among participating countries on the need to extend the production agreement reached last year […] Based on today’s data, there’s a growing conviction that a six-month extension may be needed to rebalance the market”. Another ray of hope comes from the fact that inventories outside of the US are being gradually drawn down and global demand continues to rise. As I mentioned last month, data provided by Vortexa, shows that volumes of crude for seaborne transit and crude being held in floating storage decreased by 139.8 million bbls and 26.4 million bbls respectively.4
There have even been predictions of the oil price rising as high as US$90/bbl in the next few years. Bill Strazzullo of Bell Curve Trading was quoted by CNBC as saying that “I think over the next [few years] it’s not out of the question that you push US$80 - 90” He went on to state that “The whole pricing structure has shifted lower. But when you look at the new structure, the bottom is still around US30/bbl. We think fair value is up around US$60, and probably the upper end of the range is US$80 - 90”.5 Given the challenges facing today’s market, this prediction might seem a little far fetched, but Strazzullo cites the recovering European and US economies and global demand growth as key factors behind his forecast.
Despite the price pressure, the upstream industry isn’t standing still. New technologies and companies enter the market on an almost daily basis, and exploration activity continues to forge ahead in areas ranging from onshore Oman to offshore Ireland. As always, we at Oilfield Technology want to hear your thoughts on the new technologies and innovations that are driving the industry forward – let us know how your company is fighting the downturn!
- ‘Rising U.S. oil production knocks OPEC off course: Kemp’ – http://www.reuters.com/article/us-usa-oil-kemp-idUSKBN17Y262
- ‘Baker Hughes U.S. Rig Count Climbs by 7’ – https://www.thestreet.com/story/14121512/1/baker-hughes-u-s-rig-count-climbs-by-7.html
- ‘Oil’s seaborne picture suggests Opec cuts taking effect’ – https://www.ft.com/content/26ae1866-1888-11e7-a53d-df09f373be87
- ‘Technician makes shocking call: Expect crude to hit $90’ – http://www.cnbc.com/2017/05/05/technician-makes-shocking-call-expect-crude-to-hit-90.html