- U.S. onshore oil production set to decline in August, signaling first monthly drop in 2023.
- Companies opt to delay operations despite abundant shale wells, waiting for better market conditions.
- Decline in drilled but uncompleted wells (DUCs) poses challenges for future production growth.
The latest Drilling Productivity Report from the EIA indicates that onshore oil production in the United States from shale oil regions will likely decline in August. If this prediction follows through, this will be the first monthly drop in U.S. onshore production this year.
Here are five important takeaways for traders:
1. August Decline
U.S. oil production from shale oil regions hit a high in July of 9.42 million bpd, so even with a decline in August, U.S. oil production from shale oil regions is still predicted to hit 9.4 million bpd.
2. Companies' Cautious Stance
U.S. shale oil production is not expected to slow because wells are running dry. According to Bloomberg, there are plenty of wells to be drilled in highly prolific shale oil regions.
The issue is that the companies that hold leases to drill in these areas are choosing not to expand operations at this time. They say that these companies do not want to spend money to drill new wells at current prices and prefer to wait until “the most opportune time to ramp up.” Presumably, this means when oil prices are higher and/or costs are lower.
3. DUCs on the Decline
The number of DUCs (drilled but uncompleted wells) has continued to drop. Producers access these wells because they are relatively easy and quick to bring online. As this number drops, the amount of time, money, and manpower producers will need to increase production grows.
4. Different from Saudi Arabia
Traders should not consider this oil “spare capacity.” U.S. shale oil production is not and can never be as nimble as Saudi Arabia’s spare capacity. Even if shale oil producers know they have productive leases but are content to sit on oil rather than bring it into production, traders should not view this as similar to Saudi Arabia’s spare capacity.
Yes, the time it takes to bring a shale oil well online is much shorter than the time it takes to bring an offshore oil well online, but it still takes longer than it would take for Saudi Arabia to increase production.
Aramco (TADAWUL:2222) can bring Saudi Arabia’s spare capacity online within one month. U.S. production is not centrally managed like Saudi Arabia’s oil production and cannot be “ramped up” nearly as quickly or efficiently.
5. Uncertain Outlook
The small decline in production does not necessarily indicate that we will see a supply deficit this year. Much depends on oil production from other areas.
Saudi Arabia could easily ramp up production, as could other producers, like the UAE. Oil demand might also not be as robust as forecast, especially with China’s shaky economy.
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Disclaimer: The author does not own any of the instruments mentioned in this report.