US oil production growth set to cease in the second half, signaling end to crude price plunge

The IHS Unconventional Energy Blog will provide a brief weekly extract from the client program, Oil: The Great Deflation, a comprehensive view on the impacts of lower oil prices.

The plunge in crude oil prices will spur a cut in U.S. capital investment in drilling during the second half of this year, which will signal the beginning of a bottoming for the market.

In the latest of a series of presentations entitled "Oil: The Great Deflation," Raoul LeBlanc, managing director for IHS Energy, outlined the factors that will lead to a cut in U.S. capital spending on oil production. As described in the previous presentation, the current price plunge began in the United States and also will end here, triggered by the North American shale oil revolution and reaching its conclusion with a slowdown in U.S. oil-related capital spending.

Spot oil prices now in the $50 range will trigger a 30 percent reduction in U.S. capital spending for oil drilling and completion in 2015 compared to 2014. This will cause the long-term expansion of U.S. oil production to begin to flatten out in the second half of 2015, perhaps starting in the fourth quarter.

Even so, the U.S. production rate will end the year at 9.61 million barrels per day, up from 9.15 at the end of 2014, because of continued growth during the first half of the year.

As soon as U.S. production shows signs of flattening out, worldwide oil prices will begin to recover, even if supply still exceeds demand.

Despite the rock-bottom spot prices for oil-which are below breakeven production costs for parts of existing plays by some estimates-U.S. output is expected to continue to rise for a few months for a number of reasons.

For one, independent U.S. oil companies are primarily focused on growth, and will strive to maintain their momentum as long as possible.

Some observers point to spot prices in the $45 range and conclude that it is not economical to drill new oil wells at this sub-breakeven level, LeBlanc noted. While oil prices are the lowest noted in some six years, those within the oil industry use a more complex approach to determine the economics of drilling, accounting for future pricing. With oil futures higher than current spot prices, at $60 to $70, it remains economical to continue to drill more wells.

Despite some concerns over the survival of U.S. oil drilling amid sector current market conditions-particularly the shale sector-LeBlanc noted that the American crude business is relatively resilient.

For example, 40 percent of capital spending for U.S. oil production is devoted to a large number of low-output wells. U.S. oil producers can easily eliminate a large percentage of capital spending without making a major reduction in production simply by cutting off these underperforming wells.

Furthermore, technological developments such as the "superfrack"-using high volumes of fluid and proppant--may allow increases in U.S. oil production efficiency. This is significant, because during the past three to four years, productivity for U.S. shale oil production has stagnated-even as oil output has boomed. If the superfrack continues to boost productivity as already noted in the best parts of the plays, the breakeven cost could be reduced, possibly keeping the U.S. shale boom rolling for a little while longer.

Raoul LeBlanc is the Research Director for IHS North America Performance Evaluator.

In the next presentation in The Great Deflation Framework Series, entitled "The Global Response to Lower Prices," IHS details expected developments in the worldwide market this year.

By an IHS Staff Writer.

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.