EC Oil And Thunder

Oil prices are on the rise; driven by a strong U.S. economy, OPEC production cuts, plunging output from Venezuela but also as the fact that there are signs that the U.S. shale revolution may not quite deliver on the Energy Information Administration’s (EIA) more optimistic forecast.

The latest warning comes from Energy Analyst legend Philip Verleger, who sees a quick decline in U.S. oil production. He says that despite the fact that the U.S. Energy Information Administration (EIA) sees production output from U.S. wells rising from 11.9 million barrels per day at the end of 2018 to 13.5 million barrels per day by the end of 2020, that it may come as a surprise to learn that production at the end of 2020 may have actually decreased from December’s 11.9 million barrels per day level to between 11.3 and 11.5 million barrels per day. This lower figure represents the production level that should be expected given the financial activity of the independent firms behind the shale output surge.

He warns that the coming decline will occur mostly in the areas that have produced the most growth over the last five years: the Bakken, Eagle Ford, Haynesville, Julesburg, and Permian basins. The production drop will occur because the firms operating there have been forced by monetary constraints to cut back on drilling. The recent reduction in debt and equity issuance by these firms assures the output decline. He said that stressed shale firms will enter hedges as soon as the size of their new discoveries is delineated. The futures sales will likely occur when wells are completed and before they are fracked to ensure the company can cover costs and perhaps profit, even if prices fall. He points out that data on the issuance of debt and equity by shale firms and their positions in futures markets thus provide an indicator of their future production. This data points to a possible large decline in output.

He says that a February 24 Wall Street Journal article, by Bradley Olson and Rebecca Elliott, should warn every one of the impending slowdowns. A key graph presented there shows that debt and equity issued by U.S. shale producers declined to $22 billion in 2018, which is less than half the amount raised in 2016 and one-third the amount raised in 2012. When one compares the total debt and equity issuance to Lower-48 onshore production lagged two years, one finds a close relationship. Lower-48 onshore output rose from three million barrels per day to 8.5 million barrels per day in 2018. However, the drop in the issuance of equity and borrowing suggests this production could fall by a third to six million barrels per day by the end of 2020 if this relationship holds.

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Moon Kil Woong 7 months ago Contributor's comment

Shale is increasing production, but from here on out the more they pump with higher expenditures to tap more the faster they deplete their existing wells. Actual oil demand is growing at a decent clip globally and soon the US and Saudi Arabia will not be able to keep up with the demand growth unless we get a recession which may be caused yet again due to rising energy costs.

This is the biggest long term recession concern more than anything else. Even monetary policy can't counter it adequately.