U.S. Oil Production Growth Hinges on Key Price Level

September 25, 2020
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Crude oil production growth in the U.S. should take a breather for the next 12-18 months as the sharp price collapse this spring reduced rig and completion activity. WTI at $50/Bbl seems to be a key level in triggering oil production growth in the U.S.

We tested the effects of five price scenarios on future oil production. Even with WTI in the mid-to-upper $40s through 2021 (a $5/Bbl increase versus recent values) , U.S. oil production would stay relatively flat through next year. The chart below shows production outcomes based on several price scenarios. A second chart, of our price assumptions, follows.

First, note these production scenarios are only based on well economics based on past wells’ production. We gave no consideration to changes in efficiencies, costs, cash-flow management, hold-by-production tactics, or hedges.

The “base” case is represented the production profile using the current CME curve (light blue line) as of 9/17/2020, which was about $1/Bbl higher than the 9/25/2020 curve. Under this base case, production continues to slide slowly, staying steady at just under 11 MMBbl/d for the next four years.

Source: AEGIS, Enverus

However, oil prices are near a critical level that would encourage growth past the next 12 months. Cal ’22 currently stands at about $43.60, a level very close to the break-evens of a few prolific plays. Under the scenario of “Oil +$5” (green and dark blue lines in the chart above), the Cal ’22 strip nears $50/Bbl. Based on well economics demanding a 20% IRR, $50/Bbl triggers more activity and production output starting in late 2021.

Source: AEGIS, Enverus

A recent survey by the Dallas Fed showed many industry leaders agreed that production could resume growth at modestly higher prices. Oil and gas executives were asked “at what price would you expect a substantial increase in completions of drilled but uncompleted wells (DUCS).” Thirty-six percent answered with WTI between $46-50/Bbl; twenty-eight percent said $51-$55/Bbl.

At what West Texas Intermediate crude oil price would you expect a substantial increase in completions of drilled but uncompleted wells (DUCs)?

Both the survey and the chart above highlight the importance of price levels for WTI and the resulting production profile. There is a substantial difference in production from where prices are today and $50/Bbl. If the market needs to call on more supply and OPEC+ can’t meet the demand, prices in the U.S. will need to rise to incentivize more supply, and that price level is over $50/Bbl.

We continue to monitor oil, gas, NGLs, regional markets, jet fuel, and interest rates for hedging opportunities. To learn more and see AEGIS opinion and recommendations, go to AEGIS View publications, or contact info@aegis-energy.com. Like what you see? Share this article with the button on the bottom right of your desktop. Market questions or comments? Contact us at view@aegis-energy.com.

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