U.S. Shale Production at the Lowest Level Since 2018

May 19, 2020 09:42 AM
Covid-19 forced the most significant shale production setback ever
roduction in the 7 most active shale basins will fall to 7.822 million BPD
Diesel prices are lower, least expensive in Gulf Coast region
Energy Report



The Phil Flynn Energy Report 

The Other Shale Drop

Just when everyone was getting prepared for oil to go back to zero, the other shale dropped. The EIA has confirmed that the Covid-19 drop in demand forced what now is the most significant shale production setback ever. Production in the 7 most active shale basins will fall to 7.822 million barrels per day (BPD), the EIA said, down from 8.019 million BPD this month. That 87,00 barrel drop is a record monthly loss. The most significant part of that decrease will be in the shale sweet spot, the Permian basin, which is expected to fall by 87,000 BPD to 4.290 million BPD. The Eagle Ford basin in Texas is also going to fall by 36,000 BPD in June, to 1.174 million BPD. This puts U.S. shale production at the lowest level since 2018. Given that last week's U.S. rig count fell to a record low, it doesn’t look to get better anytime soon.

Early reports of OPEC compliance to the agreed-upon record 9.7 million barrels a day production cut are impressive. Reports show that Russia, usually a laggard, has already achieved  93% compliance with reductions. Mexico, who had to be dragged, kicking and screaming into a cut agreement is at a 98% compliance rate. Azerbaijan is at 60%. Oman at 58% and Kazakhstan has some work to do at  39% compliance to cuts. It’s not just oil that is seeing sharp production declines; it is natural gas as well. The EIA is predicting that natural gas production will fall by 779 million cubic feet per day.

This record pullback in production comes as oil demand is coming back faster than anticipated. China is reportedly at pre-virus demand levels, and Europe and the U.S. are seeing sharp increases in oil demand. Low oil prices may be greasing the wheels for fast economic recovery, but we had better enjoy it because we most likely will have a big price spike because we have seen some long-lasting damage to some oil producers.

Today the oil market will look to more soothing words from Fed Chairman Jerome Powell, who remotely testifying before  to the Senate Banking Committee.  In prepared remarks Powell wrote, "We are committed to using our full range of tools to support the economy in this challenging time even as we recognize that these actions are only a part of a broader public-sector response, we expect to maintain interest rates at this level until we are confident that the economy has weathered recent events and is on track to achieve our maximum-employment and price-stability goals.”

This kind of talk is also supportive to oil. Low-interest rates and low oil prices mean that oil prices will not stay low for long. While we may see some setbacks along the way, don't fight the Fed and don't fight the Trump Administration that is openly rooting for higher oil prices. 

Gas prices are on the go as Americans again start to hit the road. Diesel prices are lower. Dan Ronan at Transport Topics wrote that the average price of diesel fuel nationally dropped 8/10s of a cent last week to $2.386 a gallon from $2.394, according to the EIA’s May 18 report. The price of trucking’s main fuel is now 77.7 cents a gallon less than it was a year ago. Meanwhile, national average price of gasoline continued going in the other direction, rising 2.7 cents per gallon to hit $1.878. That's still 97.4 cents per gallon cheaper than a year ago. Diesel dropped in all 10 regions the EIA surveys in its report.

The least expensive diesel is in the Gulf Coast region, where prices declined to $2.175 a gallon, which is 73.2 cents less expensive than it was a year ago. The most expensive diesel continues to be found in California, which is also the only region in the survey where diesel is more than $3 a gallon. Still, diesel in California fell 1.1 cents a gallon and is now $3.171 a gallon, putting it 97.4 cents less expensive than it was a year ago. The West Coast, not including California, saw the steepest decline in diesel prices, falling 1.4 cents to $2.543 a gallon. In that region, the cost of diesel is 80.9 cents a gallon less expensive than it was a year ago.

Meanwhile, the price of oil jumped 10.4% on May 18 to $32.74 a barrel for the benchmark WTI crude oil. Still, the cost of crude is less than half of its 52-week high of $65.65 a barrel.

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About the Author

Phil Flynn is a senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. Phil is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets.