Weekly Oil Markets Recap – Rude Awakening For The Consensus As US Oil Production Disappoints To The Downside

Welcome to the weekly oil markets recap edition of Oil Markets Daily!

WTI finished the week up 2%.

Coming into the last week of Q3, energy stocks started the week massively outperforming the broader market and technology stocks. Despite notching another week of gains, energy stocks’ relative performance pulled back a bit versus its technology counterparts.

There are two things that happened this week that we think are worth recapping.

Brent – WTI spread narrowed…

Brent – WTI spread narrowed from $6/bbl last Friday to $4.87/bbl.

EIA reported that US crude exports rose to 1.491 million b/d for the week ending 9/22.

With the spread still far apart, we expect US crude exports to remain elevated for the time being.

As a result of higher US crude exports, delayed refinery maintenance, and subpar refined product storage, we expect US crude storage to draw over 40 million bbls from now to the end of 2017.

US oil production disappoints again…

On Friday, we released an OMD titled, “As Should’ve Been Expected – EIA 914 Shows Monthly Production Lower Than The Weekly Estimates.”

EIA released its monthly oil production figures for July and it was 9.238 million b/d. This was 178k b/d below the EIA weekly estimate of 9.417 million b/d.

In EIA’s September STEO, EIA said that August oil production is on track for 9.2 million b/d, or 40k b/d lower than July’s figures.

US oil production has not been growing as fast as sell side expected. The main culprit has been the lackluster growth in Texas and New Mexico, where Eagle Ford and Permian reside.

Over the course of 2017, we have heard rumblings from servicing firms, E&Ps and consultants that there’s an inadequate amount of completion capacity in the Permian. Well completions have risen from January 2017 of 242 per month to 355 per month in July 2017, but bottlenecks still remain.

For most of August and September, we repeatedly argued that the consensus’s shale growth estimates were being overstated. We pointed to Eagle Ford being the reason why this is happening, and EIA’s recent DPR validated our thesis.

The next delusion that will need to be overthrown in the coming months is the idea that as oil prices increase, US shale production will increase “faster”. At the current pace of growth, US shale is growing at about 600k b/d exit-to-exit. The issue with using oil price as a “flexible” assumption assumes that E&P companies flex capex as oil prices rise or falls. That has not been the case in 2017 given we track all publicly traded E&Ps. Guidance fluctuation at the end of Q2 were minimal, and production impacted were less than 10k b/d.

In fact, here’s a gift from us to you. Below is the production growth in liquids of 52 publicly traded E&P names. As you can see, total crude production growth y-o-y is 349k b/d.

To make the sample worse, here’s a list of producers that are increasing capex by 45%, but only growing production by 1% H2 2016 vs H2 2017.

We used these data points to write an exclusive OMD to HFI Research subs titled, “Delusions Aplenty – Where’s The Shale Growth?”

Next time someone says that oil prices falling during the middle of the year was the cause for the lower US oil production in the monthly versus the weekly, just link our article and slap them with the producer guidance.

Reality is slowly coming through…

The hysterical thing about the argument we have been making over the last 60 days had nothing to do with where oil prices went through 2017. In fact, these guidance numbers were given at the beginning of 2017, and if only people had paid attention, the shale growth story of 1 million b/d exit-to-exit would have never even been a thesis floating around to begin with.

That’s the problem with the oil markets today. It’s not the shale growth story that has the market fooled; it’s complacency. People are simply extrapolating erroneous data points like “production per rig”, when we have been arguing its production per well is what counts.

While everyone keeps looking at rig count data, we are watching well completion levels.

Are these really outstanding insights? No. But all we did was ask basic questions and follow the logic along the way. Even after we write these articles, you will still have sell side touting production per rig and productivity gains. These arcane assumptions in forecasting US shale growth are precisely why these analysts were wrong to begin with.

But we digress. Over the last several weeks, there have been mea culpa pieces by the consensus. As EIA 914 data at the end of October shows for August oil production, the divergence between the weekly and monthly data will be close to ~300k b/d. Combine that with the adjustment factor still lingering in negative territory and we know US oil production won’t be anywhere close to 9.5 million b/d for October.

We expect most of the analyst community to wake up to reality soon. The shale growth dream is coming to an end. Unless we hear that well completion bottlenecks are gone in the Permian, we expect muted shale growth to continue.

Get your popcorn ready, because this rude awakening is going to be fun to watch.

For readers who have found our forecast on U.S. shale illuminating, we think you will enjoy our exclusive oil market reports even more. We publish detailed discussions of energy companies along with our expectations on global oil rebalancing. If you are interested, you should sign up here today!

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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