It seems that production has peaked in three of the two of
the three major basins. It is showing some signs of leveling out in the Permian as well.
Now that the decline has started, I would expect an acceleration in
declines as we go forward, especially in the Bakken. The market may still be oversupplied for some while, even as production declines and maintenance season ends at refineries,
but certainly this is a significant moment.
Part of this decline in production may be due to the well
documented current tendency of deferring well completions. Essentially this is oil in storage. There are a number of reasons to do
this. “Completing” a horizontal
tight-oil well can cost substantially more than drilling it. By waiting as service costs come down, the
E&P company can improve the financial return on the well. They can also sell the oil forward for when
they know it will be completed, and since future prices are higher than spot
prices (contango) they will lock in a higher price than if they were to sell
that oil today into the spot market. I
am aware of this effect, but I don’t think that it should be over-emphasized.
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