US oil production is falling more steeply than expected, forcing analysts to scale back output projections even before a deep plunge in planned upstream spending further cuts supply later this year.
Genscape, a unit of consultancy Wood Mackenzie, said production by May 20 had dropped almost 20 per cent, or 2.3m barrels a day, from a peak of 13.24m in March.
The volume lost already is almost as much as Russia and Saudi Arabia last month pledged to cut in a historic supply deal that begins in June. It will alarm US politicians, including President Donald Trump, who pressured Opec to shoulder production cuts in a bid to push up oil prices so that American producers could profitably keep pumping oil.
Genscape’s latest numbers, based on satellite monitoring and heat sensors at facilities across the US, suggested the biggest reductions were in Texas’s Permian shale — down 1.15m barrels a day — and North Dakota’s Bakken — 480,000 b/d.
Paul Horsnell, head of commodities research at Standard Chartered, said producers had already cut about 1.5m b/d more than official estimates. He predicted output could drop below 10m b/d in the coming weeks, down more than 3m b/d since March.
US shale output responds faster to price changes than other sources of oil, but analysts have disagreed over how much supply it will shed during the worst oil-price crash in decades.
Goldman Sachs had estimated the losses would reach a maximum of 1.3m b/d in the second quarter before “mostly reversing” as the oil market began to recover in the second half of 2020.
Privately held producers, which account for almost half of US output, are not obliged to disclose production cuts, unlike public companies. This might help explain the divergent numbers, said Randall Collum, managing director at Genscape.
Oil market traders fixate on US supply information, given the huge volumes at stake in the world’s largest oil-producing country.
But data often remain obscure or opaque.
“It’s rather like observing a black hole,” said Mr Horsnell of US production estimates. “We’re trying to work out what it is by observing the movements of the things around it.”
Shutting wells in reaction to a sudden market collapse like that of the past two months is a radical step for oil producers, but it is reversible. If prices hold above $30 a barrel, production would spurt higher briefly as operators restore some wells.
The impact of capital spending cuts, though slower to affect supply, will be harder to recover from.
Shale’s defining characteristic is the need for constant spending to keep drilling new wells to replace fast-declining older ones. In recent weeks, operators have outlined capex cuts totalling 45 per cent of their previously announced plans, which will begin to affect supply in the coming months.
The capex cuts would bite later in the year, with output dropping 300,000 b/d per month due to the lack of well completions, said Mr Horsnell. Genscape said US output could end the year at just 10.6m b/d.