Why A U.S Shale Slowdown Will Hardly Effect Oil Prices
Just last week I wrote on the possibility of a renewed downturn in oil prices, owing to the fact that huge volumes of supplies could potentially come online in places like Iraq, Libya, and Iran. That is still the case.
But let’s look at the other side of the coin. Despite the surprising resilience of U.S. shale, production could be now entering an extended period of decline. The EIApredicts that output in the major shale regions could decline by 91,000 barrels per day in July.
An ongoing and deeper contraction is likely. The EIA also reports a dramatic decline in well completions since October of last year. When prices starting falling, especially after the November 2014 OPEC meeting, rig counts started vanishing from the field and drilling companies began completing fewer wells.
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That is important because shale wells suffer from rapid decline rates in their production profiles. After about the first year, the initial burst of oil largely peters out, and the decline rate is precipitous. As a result, a large number of fresh wells need to constantly be completed just to keep output flat.
Related: Global Oil Production Substantially Lower Than Believed
With the number of well completions down, falling production from wells that were drilled in the past start to become more obvious. This “legacy decline” is now overtaking new production, most likely forcing overall net production to have dipped into negative territory in May.
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The volume of legacy declines will only increase as it will increasingly reflect the huge volume of production that came online in 2013 and 2014. All of that recent production won’t be replaced as drillers sit on the sidelines. That means the decline in total production will only accelerate in the months ahead.
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