Tuesday, March 22, 2016

Oil: Dreaded 'stealth' supply becomes reality as U.S. drillers turn on 'ducks'

WTI new front month May $41.38 down 14 cents.
Brent $41.58 up four cents.

From Reuters:
A dreaded scenario for U.S. oil bulls might just be becoming a reality.
Some U.S. shale oil producers, including Oasis Petroleum (OAS.N) and Pioneer Natural Resources Co (PXD.N), are activating drilled but uncompleted wells (DUCs) in a reversal in strategy that threatens to bring more crude to a saturated market and dampen any sustained rebound in prices.
When oil prices started their long slide in mid-2014, many producers kept drilling wells, but halted expensive fracking work that brings them online, waiting for prices to bounce back.

But now, with crude futures hovering near multi-year lows and many doubting recent modest gains that brought oil prices near $40 a barrel CLc1 can hold, the backlog of DUCs is already shrinking in some areas. In key shale areas such as Eagle Ford or Wolfcamp and Bone Spring in Texas such backlog has fallen by as much as a third over the past six months, according to data compiled by Alex Beeker, a researcher at Wood Mackenzie.

"If the number of DUCs brought online is surprising to the upside, that means U.S. production won't decline as quickly as people expect," said Michael Wittner, global head of oil research at Societe Generale. "More output is bearish.”

In the Wolfcamp, Bone Spring and Eagle Ford, the combined backlog of excessive wells remains around 600, Beeker estimates.

About 660 wells could be the equivalent of between 100,000 and 300,000 barrels per day of potential new supply, according to Ed Longanecker, president of Texas Independent Producers and Royalty Owners Association (TIPRO).

For now, most of the wells are activated in Texas, where proximity to refiners allows producers to sell their crude closer to benchmark prices, and by well-hedged companies that have locked in higher prices.

Still, the pace of fracking of the uncompleted wells may quicken if cash-strapped producers facing debt repayments can no longer afford to store their oil in the ground.

While the potential additional supply is a fraction of total U.S. production of around 9 million bpd, the fresh flow would reinforce concerns about a growing global glut just as Iran ramps up output and inventories in domestic storage tanks from the Gulf to Cushing, Oklahoma, test new highs on a weekly basis.

Wood Mackenzie reckons that the backlog of excess DUCs will decline over the next two years, and return to normal levels by the end of 2017. It is expected to fall 35 percent from current levels in the Bakken and 85 percent in the Eagle Ford by the end of 2016....MORE