(John Kemp is a Reuters market analyst. The views expressed are his own)
* Chartbook: tmsnrt.rs/2WjeKfd
By John Kemp
LONDON, May 1 (Reuters) - The second U.S. shale oil drilling boom has started to cool as a decline in oil prices since the end of the third quarter of 2018 filters through to lower well boring and completion rates.
The first boom ended when prices plunged in the second half of 2014; something similar is happening now, albeit on a milder scale corresponding to the smaller fall in prices.
The number of rigs drilling for oil in the United States has fallen by more than 9 percent from its cyclical peak in November, according to oilfield services company Baker Hughes (“North America rotary rig count”, April 26).
And crude output is down by almost 300,000 barrels per day (bpd) from its cyclical peak in December, the U.S. Energy Information Administration says (“Petroleum Supply Monthly”, April 30).
Much of the recent output decline is attributable to the Gulf of Mexico, where offshore production is often volatile, so it needs to be interpreted with care (tmsnrt.rs/2WjeKfd).
But onshore output from the Lower 48 states is also now growing more slowly, a sign the drilling boom is beginning to cool.
Lower 48 output was up by 1.6 million barrels per day in the three months from December to February compared with a year earlier.
Growth is down from more than 1.8 million bpd in August-September and is slowing significantly for the first time since 2016.
Experience suggests changes in wellhead prices filter through to drilling with a delay of around three-four months and to production with a lag of nine to 12 months, which is consistent with the recent slowdown.
Declines in drilling and output are probably the lagged result of the fall in oil prices since September 2018 as well as pipeline constraints that depressed wellhead prices in the Permian Basin last year.
Reports also suggest output growth has been hurt by increasing interference between wells as a result of denser spacing in some of the most promising drilling areas.
Shale producers may be reaching the limits of their strategy to accelerate output and minimise costs by increasingly dense infill drilling and massive pressure pumping.
Before prices fell in the fourth quarter of 2018, U.S. crude production was growing at annual rates of more than 2 million bpd, the fastest increase anywhere in history.
Some sort of slowdown was inevitable, otherwise surging production from the United States would have overwhelmed global oil consumption, increasing inventories and depressing prices.
The EIA is now predicting U.S. crude production will rise by around 1.4 million bpd in 2019 and 0.7 million bpd in 2020 (“Short-Term Energy Outlook”, April 9).
But the outturn will depend critically on the performance of the global economy, the impact of U.S. sanctions on Iran and Venezuela, how Saudi Arabia responds, and the behaviour of oil prices.
Wellhead prices in the Permian Basin have already risen by almost $18 per barrel since the start of the year, which should eventually arrest and maybe even reverse the drilling slowdown.
If the combined impact of global economic growth, U.S. sanctions and Saudi Arabia’s output cuts pushes benchmark prices up by another $5 to $10, drilling and production rates are likely to start accelerating again.
But if the global economy stalls, sanctions prove less effective, or Saudi Arabia raises output significantly in response to pressure from the White House, and prices stabilise or fall, the drilling slowdown is likely to persist.
- U.S. shale boom set to cool in 2019 (Reuters, Jan. 22)
- U.S. oil output surges but growth likely to moderate in 2019 (Reuters, Nov. 1)
- U.S. oil boom starts to cool, tightening global market (Reuters, Sept. 12) (Editing by Dale Hudson)