Welcome to the US oil production edition of Oil Markets Daily!

August monthly US oil production came out today and it was well below our estimate. EIA reported 10.579 mb/d vs. our estimate of ~11.05 mb/d. But there’s a caveat to this number which is that if you include the infamous adjustment factor, US oil production came in at 11.247 mb/d. In August, we saw GOM lose about ~450k b/d of production due to storm-related shut-ins, so if we add that back, we will be at full capacity of ~11.7 mb/d.

Source: EIA, HFI Research

Now it’s important to remind everyone here again that we came to the conclusion several months ago that EIA 914 was not fully capturing the US oil production landscape.

Source: EIA, HFI Research

The simple reason is that other than production, you can’t really fit the adjustment that’s being added to US crude storage anywhere.

Source: EIA PSM

Now for those of you that are new to this whole adjustment ordeal, we are probably one of the few energy investing mutants to have investigated the EIA adjustment in detail. We’ve finally just concluded that it’s just unaccounted for oil production. As US oil production grows and EIA’s data collection method lags, there will be unreported production, and the EIA 914 methodology even states that it may only capture up to ~95% of the data.

So with all that being said, US oil production back in March 2020 was actually closer to ~13.4 mb/d vs. the reported ~12.737 mb/d from EIA 914. You can then get a sense of the implied production decline from March to August.

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From March to August, we saw a decline of ~1.4 mb/d for Lower 48 ex-GOM. This is an implied decline of ~281k b/d, which by the way was our original implied decline estimate.

August also was the month where we saw all US oil production return from shut-in, so this is expected to be peak capacity. Now using this implied decline assumption, we can arrive at the following figures all the way into Q1 2021:

  • September ~11.4 mb/d
  • October ~11.1 mb/d
  • November ~10.86 mb/d
  • December ~10.58 mb/d
  • January 2021 ~10.295 mb/d
  • February 2021 ~10.014 mb/d
  • March 2021 ~9.733 mb/d

Source: EIA, HFI Research

Now if you put it into a chart format, we are going to go below the lows we observed in May. Anecdotally speaking, we are hearing that producers will show ~7% lower production in Q1 vs. Q4 2020. This estimate also lines up with that.

And with WTI still below $40/bbl, there’s almost no line of sight where US oil producers will be able to increase production. This will be the case until WTI at least goes to $50 to $55/bbl. And even then, producers will be constrained as spending only ~60% to ~70% of OCF on capex means flat at best to ~2-3% production growth.

This is a gloomy outlook for US oil production, but it’s a very bullish outlook for the global oil supply and demand balance going into 2021.

By the end of 2020, we will have effectively lost ~2.82 mb/d and by March 2021, we will have lost ~3.667 mb/d. These supply loss figures will eventually shock the world and be reflected via much higher oil prices. It really is only a matter of time now.

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