No one expected US shale oil output cuts to happen so fast

NEW YORK: In brokering the end to the global oil-price war last month, the Trump administration assured leaders that America’s shale patch would throttle back production.

But few expected that the cuts would run this deep -- and happen so quickly.

Drillers are laying down rigs and shutting in wells at a frantic pace in response to the plunge in oil prices caused by the coronavirus pandemic. A week after West Texas Intermediate crude settled below zero for the first time ever, analysts at Jpmorgan projected that the US would cut output by 1.5 million barrels a day by June. Two weeks into May, production is already down by at least that much and continues to decline.

As a result, oil storage tanks that were in danger of brimming over got a break last week when inventories shrank for the first time since January. The market has noticed:

WTI for June delivery rallied to near US$30 a barrel on Friday, up from US$10.01 when it became the prompt contract on April 21.

“We were already in the midst of a transition away from high growth into slower growth,” Raoul Leblanc, a Houston-based oil expert at IHS Markit said by phone. “We just got cut off at the knees.”

The declines include 758,000 barrels a day of announced reductions in the US by some of the country’s biggest producers including Conocophillips, Continental Resources Inc and Chevron Corp, according to data compiled by Bloombergnef.

More than 500,000 barrels a day of production in the Bakken region of North Dakota and Montana has been shut in. Daily output from Alaska’s North Slope is down by about 100,000 barrels from early March.

In April, US Energy Secretary Dan

Brouillette told world leaders that the US will cut production by about two million barrels a day this year.

Rystad Energy said that US production shut-ins will reach at least two million barrels a day in June, including natural gas liquids, with Permian-focused producers in West Texas and New Mexico driving 42% of the curtailments expected.

Some producers expect that currently projected June cuts may eventually increase depending on the prevailing oil price, but curtailed oil volumes should mostly return to pre-cut levels in the third quarter of 2020, Rystad said in a research note.

Plains All American Pipeline LP said in its first quarter earnings call that shut-ins in the US and Canada combined are somewhere between 3.5 million and 4.5 million barrels per day.

“We assumed June, July time period for trough and then some activity resumption in the August time period,” Plains executive vice president Jeremy Goebel said in the May 5 call.

Things in the shale patch began to change quickly this spring when Saudi Arabia and Russia launched a price war to gain control of the market just as the global coronavirus pandemic began to smash demand, forcing oil prices into a downward spiral.

To be sure, even after last week’s decline, US crude stockpiles are still close to record highs and a fleet of 30 Saudi oil tankers with more than 50 million barrels of crude are just now starting to arrive on the US Gulf and Pacific coasts.

Oil prices aren’t expected to rise fast and when they do start to climb, expect shale producers to open production as soon as they can.