Last Christmas, you said shale would jumpstart, but very soon after, it all fell apart, this year you say no more tears, you say that shale will be special. Last Christmas you said production would rise it did but fell far short of your prize. This year, you say have no fear, we will hit a new high threshold.
The Energy Information Administration (EIA) is back at it and traders are wondering if they are overestimating shale oil production once again. The ever-optimistic EIA says that crude oil production from seven major shale regions will surge by 94,000 barrels a day in January, putting production at 6.4 million barrels a day next month. That means that production of U.S. shale is up 1.2 million barrels a day over where they were a year ago.
Yet, while we believe shale oil will rise, many in the industry is convinced that the EIA is overestimating the numbers. According to a recent MIT study, the EIA continues to assume that oil production in individual shale oil wells will continue to see increases in production because of technology gains. In reality, as shale producers move from their best production sweet spots those gains in output will not happen,. At the same time, shale oil wells will also suffer faster decline rates as they move to less productive areas. That will mean that they will have to drill and complete even more wells. On top of that drilled but uncompleted wells will have a lower flush rate than the EIA will predict, lowering the output versus the EIA forecasts. That the more wells that they drill the more the EIA will be off- of the mark.
The MIT study says that shale oil majors have drilled the easy-to-access areas, in the Eagle Ford and Permian basins in Texas, and the Bakken formation in North Dakota. This has led to an exaggerated increase in the number of active wells, and an exaggerated growth estimate in production by the EIA.
In Northeast’s Marcellus basin and in the Permian wells have lost between 10 to 20% of their output since last fall, so it will take more wells to keep production on an upward trajectory. Oil prices did breathe a sigh of relief after Nigeria’s oil unions said they would delay a workers strike. That is good as Nigeria is key to take away some of the pain from the oil being lost from the downed Forties oil pipeline.
Natural gas back from the dead? Winter may return! Great news for Frosty the snowman and good news for natural gas bulls.
Today look for another big drop in U.S. crude oil supply. You can argue price points on grades of crude that no one wants but you can’t argue about the biggest crude oil supply drain in history!