Review of US onshore – Inventories, rig productivity and production rates
The slow down in the growth of US crude inventories has continued this week, with stocks starting to flatten out. At some point the sharp cut in rig count was going to have an effect, and this is now actually starting to be felt.
The crude stocks are still at record highs though.
Crude stocks levels are not paralleled by inventories of gasoline, distillate or other products. Gasoline and distillate are very close to 5-year average ranges for this time of year.
Rig productivity and outlook for oil production
While the rig count has fallen, rig productivity has increased markedly. Notably, the Permian region has seen a spike in the rates in April and May, with rates increasing from 200bopd in January to 265bopd in May. We will watch the next few data points in coming months to see how this develops. The Permian currently accounts for 2.0mmbd or about 36% of US onshore production so this is not an immaterial data point.
Elsewhere, the rate of increase in rig productivity is now normalising with average increases of c.5% (per month) across the regions. It is not hard to appreciate that growth rates of 5% per month have had a significant offsetting effect despite the drastic reduction in rig count since late 2014.
How much of this growth rate is due to better completion techniques, or increased concentration on sweet spot areas need to be better understood, but at some point these growth rates will slow and eventually flatten out. How long this takes makes a significant difference to the overall production story.
Effect on US production
Our current model assumes a fade of rig productivity over time (applying the most recent rig counts). The three scenarios laid out below assume that the growth rate in production per rig fade to 0% by the dates given (from current growth rates). We can see how different fades will affect headline production.
The results imply that US crude production is likely to at least flatline unless rig count continues to decline or rig productivity growth rates lessen quickly.