CIBC: The Crude Glut Might Be Cured Faster Than You Think
OPEC has sent oil prices back to the mat, but North America might be able to pick them back up before too long.
CIBC World Markets Economist Nick Exarhos notes that the decline in U.S. oil production hasn't come about with the speed or magnitude most experts expected. But in the details of production data, he finds a dynamic that could support crude prices next year.
"The EIA’s data on the changes in 'legacy' production—a measure on the decline rate of existing wells—suggests that if no new rigs were drilled, production would drop by a million barrels per day every quarter," writes Exarhos. "U.S. production is now forecast to decline by 500,000 barrels per day over the next six months, a reason to expect at least some price recovery in 2016."
Increasingly productive new rigs are behind the resilience of U.S. production, but this comes at a cost. Higher initial production also implies upward pressure on decline rates for these new wells. All else equal, the ability to take more oil out of the ground more expediently reduces the life span of a single well.
Tight oil projects like shale have much swifter decline rates than conventional plays.
The price of 12-month West Texas Intermediate futures contracts and shale drillers' access to capital remain integral variables that will inform when the supply-demand imbalance in the oil market is resolved.
But if drillers don't tap into the fracklog too much, Exarhos has mapped out an avenue through which the oil market's rebalancing process could meaningfully accelerate in the near future. To be sure, there are a number of countervailing forces that could derail this forecast. For instance, the elimination of OPEC's production target threatens to see more production unleashed onto the market, and the economist readily admits that the extent to which shale production has been curtailed has continuously been overestimated.
The front-month West Texas Intermediate futures contract has broken below $40 per barrel in trading on Monday morning to linger less than a dollar away from its lows of the year.