Wednesday, February 10, 2016

EIA Overestimates US Production, Huge Production Drop in the Works #4

psw01 2016-2-10
It seems that EIA is doubling down on their faulty model for weekly US oil production estimates.  EIA continues to drive monthly production estimates up, at least through February, and in turn this is supporting weekly overestimates of US production.  In fact their latest monthly report estimates production in the major US shale basins will exceed their previous January production estimate by 68k bbl/day.  This is in direct conflict with dropping rig counts and more importantly falling well completion rates reported by the states of Texas and North Dakota.

More telling is the huge negative error in the EIA production estimate that is showing up consistently in the Unaccounted for Oil category in the weekly reports since Dec. 4, 2015.  For all of 2015 Unaccounted for Oil averaged 192k bbl/day each week, in 2014 the average error was 150k bbl/day, but since Dec. 4 the error has averaged -126k bbl/day and in the last six weeks it has averaged -166k bbl/day.  Not only is it alarming that Unaccounted for Oil is suddenly averaging a large negative value, which is a major deviation from the norm of averaging positive, the magnitude of some of the recent values has been extreme.  This week Unaccounted for Oil was -509k bbl/day or 3.56MM bbl/week which goes along with the week of Dec. 4 which printed -598k bbl/day and Jan 8 which printed -459k bbl/day.

What is possibly more alarming is when the 10 week averages of Production + Unaccounted for Oil are looked at.  This exposes a trend in US production that is clearly masked by the official weekly estimates.  The 10 week average was 9.672MM bbl/day for the week of Aug 28, 2015,  For the week of Feb, 5, 2016 the average is 9.077MM bbl/day which implies at least a 595k bbl/day or 119k bbl/day/month decline over that period, which is a significant rate of decline.  However, the official weekly production estimate shows a decline from 9.22MM bbl/day to 9.19MM bbl/day which amounts to a measly decline of 32k bbl/day over that period or a 6.4k bbl/day/month rate.  Hence the erroneous belief that US production is holding up well.  But the recent decline since December is far greater than the 5 month data implies.  Since Dec. 4, 2015 to Feb 5, 2015 the 10 week average has fallen from 9.585MM bbl/day to 9.077MM bbl/day or a 508k bbl/day decline.  This indicates US production has been falling about 225k bbl/day/month over the last two months.  Which is double the rate implied by a 5 month view.

This week's weekly report showed a 30k bbl/day drop in US production which isn't terribly far off from the 50k bbl/day/week decline rate implied when Unaccounted for Oil is factored in.  However the weekly production estimate is at least 100k-120k bbl/day higher than what is indicated when Unaccounted for Oil is included.  This weeks' drop is not an anomaly.  Is it the beginning of EIA showing a 30k-50k bbl/day drop every week is unclear given past history?  What is clear is EIA will catch up at some point, and the longer this goes on the more dramatic it will be.

The conclusion is US shale production is far less robust than the world of oil traders currently believes.  If we have now moved into a mode where Unaccounted for Oil tends to be negative, say -150k bbl/day every week, opposed to the normal +150k bbl/day every week, and this is just week 2 of a much longer streak of back to back negative values for Unaccounted for Oil, US production could already be well under 9MM bbl/day and very rapidly falling toward 8MM bbl/day.

Below I'm including my updated 2016 US production + Unaccounted for Oil projection.  I've included a couple of my own linear projections as well as a couple polynomial trend lines.  My belief is US production is declining at a rate best described by Projection 2.  This means the decline is trending in the lower channel and possibly the lower half of the upper channel.  The less steep poly trend line also likely describes the situation well.

1 comment:

  1. I think you are correct. When I look at how some of the upstream mlps have now entered panic mode even with good hedging this yr is telling