Half a Bakken Added to Production

Jim Brown
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Saudi Arabia increased production in March by 658,800 bpd. That is the equivalent to half the daily output of the entire Bakken shale. Saudi Arabia is clearly trying to grab market share at the expense of other OPEC members. Their output does not really impact the U.S. except that it can lower the price for Brent crude.

OPEC countries like Iraq, Iran, Venezuela, Libya and Nigeria are the ones that will be hurt by Saudi Arabia's increase in production. Saudi is attempting to force prices lower and by doing so sell more oil to buyers of water borne crude. People say Saudi is trying to force shale production lower but what they are really doing is declaring war on the other OPEC nations, especially Iran. They are also at war with Russia, which supplies military equipment to Iran.

By driving the prices lower Iran will receive less for the amount of oil they do sell. This weakens their economy and gives them less free cash flow to support terrorism on the borders of Saudi Arabia.

If the sanctions were removed Iran could increase production quickly by about 600,000 bpd to 3.4 mbpd. If the sanctions were lifted and foreign companies could work in Iran's energy industry they could probably raise production to 4.0 mbpd in a year or two. This flow of cash into Iran supports their nuclear activities and their spread of terrorism.

Saudi Arabia is Iran's enemy. If they believe Iran is headed towards nuclear weapons Saudi will buy nuclear weapons from Pakistan in order to maintain the balance of power.

In an attempt to delay this Saudi is trying to starve Iran by depressing crude prices. Saudi produced 10.294 mbpd in March. They claim they can ramp up production to 12.5 mbpd if there are buyers for their oil. If they sell it cheap enough there will be buyers.

Russia produces about 9.0 mbpd. This represents more than 50% of their government revenue. Russian revenues have declined to 2005 levels as a result of the oil crash. Russia's standard of living has increased significantly since 2005. The lower the oil price the more pressure on Putin. Since prices fell Russian companies have accelerated drilling by enormous amounts. According to Bloomberg Russian producers boosted their drilling by 23%. Bashneft increased drilling by 160%. The only way a country can make up for lost revenue from declining oil prices is to produce more. Putin is ramping up drilling to compensate for Saudi Arabia pushing prices lower. The eventual winner here will be Saudi Arabia. They have billions in reserve and their cost of production is in the $20 range. The side benefit goes to the global consumers of oil because of lower fuel prices.

President Obama made Saudi Arabia's job a little harder this weekend by talking about some "creative negotiations" to enable the sanctions to be dropped with the signing of a deal in June rather than over time as he previously stated. This means Saudi needs to apply even more pressure while they can so I expect them to produce even more in April and May.

OPEC production rose +890,000 bpd in March to 31.02 mbpd and the biggest monthly gain since June 2011 according to the IEA.

In the USA the price decline is working in reverse. Production declined in the U.S. by -20,000 bpd last week to 9.38 mbpd. That is the second decline in the last three weeks. The EIA said production in the Bakken will decline -57,000 bpd in May.

The IEA is predicting U.S. production will decline by -160,000 bpd in the second half of 2015.

In Q4 the U.S. drilled 9,544 onshore wells with the active rig count ending the year right at 1,931. That is roughly 5 wells per quarter per rig. As of last week the active rig count was 954. Multiply that by 5 wells each and you get 4,770 wells drilled in Q2. With the rig count still dropping I am sure it will be even less than 4,770. Unfortunately Baker Hughes terminated the quarterly well counts last week so we will not know how many wells were drilled.

I have done this forecast math before in these pages but now we have the benefit of real time numbers. Now, take into account the news from IHS Cera that there are as many as 3,000 wells that have been drilled and not completed. If that number is right we are only going to see new completion from a minimum number of wells, maybe something in the 2,000 range per quarter. Since shale wells deplete about 75% in the first 12 months we could see a dramatic decline in production 12 months from now. Enjoy your cheap gasoline this summer because prices will be going back up.

Active Rigs

Active drilling rigs declined -34 to 954 for the week ended on Friday. Oil rigs declined -26 for the week to 734. Active gas rigs fell -8 to 217 and another 18 year low. Active rigs have now declined -977 since the high of 1,931 in September. That is a -50.6% drop. Active offshore rigs were flat at 33 and well off their January high of 60.

Oil Inventories

Crude inventories rose another 1.3 million barrels to 483.7 million and the highest level for April since 1931. Crude inventories have risen +101.2 million barrels over just the last 14 weeks. Inventories are 23% over year ago levels.

Refinery utilization rose to 92.3% last week from 90.1%. Imports fell from 8.22 mbpd to 7.15 mbpd. U.S. production declined -22,000 barrels to 9.384 mbpd.

Cushing inventories rose +1.3 million barrels to 61.5 million and a new high. Cushing is now over 86.6% of capacity and well over the level where inflows are curtailed in order to maintain operational capability. Cushing has about 71 million barrels of capacity according to the EIA. The highest utilization on record was 91% set in March 2011.

EIA Crude Inventory Chart

Gasoline inventories fell -2.1 million barrels to 227.9 million. Gasoline demand rose +304,000 bpd and imports rose -19,000 bpd.

Distillate inventories rose +2.0 million barrels to 128.9 million. Demand fell -408,000 bpd. Imports rose +19,000 bpd.

In the graphic below green represents a recent high and yellow a recent low.


The market choked on a bunch of headlines on Friday and the Dow declined -357 points intraday only to rebound slightly to close down -279. Futures are up +8.50 late Sunday so it looks like we will see a rebound on Monday. China cut their reserve ratio for banks and that could overcome the change in stork trading rules enacted after the close on Friday.

Jim Brown

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