Delayed US Oil Market Adjustment

John Robertson


Bloomberg Intelligence has counted 4,731 uncompleted oil wells in the USA being held back because of weaker oil market conditions.  Based on the latest US Energy Information Agency estimate of the average productivity of a new well, the delayed wells would have a 1.8 Mbpd start-up capacity.  This would not be sustainable. Productivity falls away rapidly during the first 12-18 months of production.  That implies a four step adjustment process in the US industry.  First, low productivity wells are shut (hence the rapid decline in the number of operating rigs since October 2014).  Second, new wells are brought on to maximise cash flows to meet debt obligations.  Thirdly, unnecessary expenditures are minimised which includes slowing down new well development.  Fourthly, delayed wells are tapped progressively as productivity falls among existing wells creating a need to top up short term cash flows.  This process implies a lengthy adjustment time.  Equally, it says that, at some time in the future, production growth will slow and then fall, possibly quite sharply, as these interactions play out.

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John Robertson is Chief Investment Strategist for PortfolioDirect a provider of resource sector investment stock ratings and portfolio strategies for mining and oil and gas investors. He has worked as a policy economist, corporate business...


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