My 2016 US Oil Production Projections

psw01 2016-1-13

I believe EIA just projected that US production would drop about 500k bbl/day in 2016 and average about 8.7MM bbl/day.  In my opinion that estimate is very high unless of course EIA expects a huge upturn in price soon.

I use Production + Unaccounted to get a truer picture of US production on a weekly basis.  The above chart plots US Production + Unaccounted for Oil over the last several years.  I added a couple of channels indicating where production is likely to actually go in 2016.  The bottom/steeper channel has a bottom trendline that assumes no well completions and therefore a 65% decline for shale.  I expect this to be nearly the case should price remain below $40 and certainly near $30.  The upper trendline in the steeper channel may be a more accurate representation of what will happen should WTI stay under $40  The upper less steep channel represents what is likely to occur should WTI only recover into the low $40s in a few months and stay there.

My expectation is that WTI will stay trapped below $40 into the March/April time frame with a recovery into the $60s or even $70s this summer.  However, production likely will not recover in any significant way till well into summer.  So we are likely to see US production fall well below 8 MM bbl/day in 2016 possibly as low as 7.5MM bbl/day.  We could see that much drop by May.  Without a major recovery in price to about $60, US production is likely to move sideways from there.

The above chart pretty clearly shows the start of a major US production cut.  To go along with just how severe it is I include this bit of data.  Over the last couple of years US combined inventory of crude+refined products grew by about 2.8MM bbl/week or 387k bbl/day.  Unaccounted for Oil on the weekly EIA report has been negative 4 of the last 6 weeks since the week of Dec 4.  The last 2 weeks have both been negative averaging -398k bbl/day which exceeds the average daily inventory increase for the last 2 years.  The 4 and 6 week averages for unaccounted for oil have been about -176k bbl/day.  For me it is pretty clear US production has rolled into a mode where it is not contributing to inventory growth, it is yet to be seen if imports will continue to overwhelm these cuts.

I do not believe that imports will overwhelm US production cuts leading to a continued inventory build.  There are two reasons, 1) I believe when these cuts and the rate of these cuts become apparent to the market in the coming 3-8 weeks, futures spreads will be cut either eliminating contango or shrinking it to the point where buying and storing oil is not very attractive.  2)  When these cuts become apparent the Saudis and the rest of OPEC will be  inclined to slow down production or at least maintain rather than grow once they see the US is no longer growing its market share.  After all of OPEC needs far more revenue and one of the easiest ways to get it is to allow price to rise.  3)  After the beating US producers just took with low prices, few will want to or even have the financial and/or manpower resources left to get in the way of rising prices by rapidly increasing production again.  Where US producers were once willing to maintain production around $48/bbl they will now wait for $55-$60.  In 2015 US producers were willing to increase production around $60, going forward they may wait for WTI to hold above $65 or $70.