May/June Industry Affairs

Producers May Tap Uncompleted Crude Wells on $50-$60/bbl WTI Price

Genscape by Bridget Hunsucker, Publications Director

June 6, 2016

U.S. crude producers could soon activate drilled but uncompleted wells if West Texas Intermediate prices hover in the $50/bbl to $60/bbl range, according to Genscape.

There are a total of between 3,000 to 3,500 DUCs in the United States, according to Genscape. About 650 of those uncompleted wells are in North Dakota, which “currently has one of the higher levels of DUCs of the shale plays,” said Jodi Quinnell, an oil product manager for Genscape.

North Dakota state reported DUCs. Click to enlarge

But, even if some of those DUCs move into the production phase, it would take at least three months before new output comes online, Quinnell said. There is generally a lag of about four to six months between a price signal, such as the $50/bbl-mark, and production impact, according to Genscape.

The NYMEX July Light Sweet Crude futures contract price briefly breached the $50-bbl mark early last week but traded near $49/bbl on Friday. The NYMEX crude contract has a locational basis of Cushing, OK, where U.S. benchmark crude WTI is stored. Storage utilization reached above 80 percent last month for the first time since Genscape began monitoring the hub in 2009. Crude has moved into storage due to a global glut and a contango price environment. Cushing stocks hit a record high for the week ending May 13, of near 71mn bbls. Since, stocks fell due in part to supply disruptions in Western Canada, where a wildfire has caused production outages. Inventories at Cushing were near 69mn bbls during the week ending May 27, according to Genscape.

Market sentiment swayed toward supply rebalance

The WTI price has strengthened since hitting a low near $26/bbl in the first quarter of 2016, and the sentiment that the global oil supply and demand complex has moved into a rebalancing pattern is growing among market participants, according to Dominick Chirichella, senior partner at New York's Energy Management Institute. 

Prices “are likely at a level where economics make sense to move into a production stage” for DUCs, he said, noting that new output from DUCs could affect U.S. production rates as early as the second half of 2016.

But, expected well completions are variable between producers and are likely “to be spread out and will not have the effect of starting to grow production again this year,” Quinnell said. U.S. production should fall through 2016 even if some uncompleted wells are activated. Total U.S. crude production is expected to average 8.752mn bpd in 2016 and 8.491mn bpd in 2017, according to data released last week by Genscape.

‘Abnormal’ wells untapped possibility

About 1,000 of the existing U.S. DUCs are considered “normal,” meaning the wells are part of untapped inventory generally due to pad drilling and will always be there at this level of rig activity. The remaining 2,000 to 2,500 wells are considered “abnormal” inventory, or wells that were uncompleted due to economics.

In recent years, some producers invested in drilling oil wells to take advantage of relatively cheap drilling costs, which have declined 50 percent since mid-2014 along with crude prices. Completion costs generally consist of up to 60 to 70 percent of total well costs.

It’s likely that about 500 of the abnormal DUCs are lower quality wells that would be completed at a higher price range of $80-$90/bbl, Quinnell said.

“Some of the uncompleted inventory could be from end of 2014 or beginning of 2015 from wells that were drilled outside the core areas” and would yield lower output, Quinnell said. “Producers could also be intentionally holding these wells because the anticipated return will not cover completion costs in the current price environment.”

In addition, skilled labor resource constraints could slow the pace of bringing uncompleted wells online should the WTI price stay within the $50/bbl to $60/bbl range. The well completion industry “has been hit hardest in this lower price environment…getting the completion crew back to work may be the biggest constraint,” Quinnell said.

US Rig Count Rises For Only Second Week This Year


U.S. energy firms added rigs drilling for oil for the second time this year during the week ended June 3, energy services company Baker Hughes Inc. said, after crude prices briefly tested a seven-month high over $50 a barrel over the past two weeks.

That was a key price level that analysts and producers had said would likely trigger a return to the well pad. Drillers added 9 oil rigs during the week, bringing the total rig count up to 325, compared with 642 a year ago, Baker Hughes said in its closely followed report.

The new rigs were scattered across many basins and states with the Permian in West Texas and New Mexico gaining five, while Alaska and Texas gained three each. Prior to this week, energy companies added only one rig so far this year, during the week of March 18. They had cut on average 10 oil rigs per week for a total of 220 so far this year. They cut on average 18 oil rigs per week for a total of 963 in 2015, the most since at least 1988 amid the biggest rout in crude prices in a generation.

The rig count has dropped since hitting a peak of 1,609 in October 2014 as U.S. crude futures fell from over $107 a barrel in mid-2014 to a near 13-year low around $26 in February. Since then, U.S. oil futures have jumped by about 90%, breaking through the $50 mark earlier last week.

Oil prices, however, were headed for a near 2% loss this week due in part to the rig count increase and on earlier signs the market was moving back to more balanced supply and demand after a series of supply disruptions, ending three consecutive weeks of price gains.

Looking ahead, crude futures were fetching nearly $50 for the balance of 2016 and over $51 for calendar 2017 . U.S. oil executives and analysts have said any price rise above $50 could fuel a resurgence in new drilling projects.

Analysts at U.S. financial services firm Raymond James said they believe the U.S. total natural gas and oil rig count is at or near the bottom and a modest recovery is in store for the back half of 2016. This week's increase in total gas and oil rigs to 408 was the first gain since August, according to Baker Hughes.

Why Did Natural Gas Prices Just Rise 25% In Two Weeks? by Rakesh Upadhyay June 7, 2016

Natural gas prices have run up phenomenally since the June contract expired on 26 May at $1.963/mmBtu. The natural gas prices touched an intraday high of $2.48/mmBtu on 6 June before closing flat for the day.

Since October 2015, prices have not been able to cross the strong resistance area of $2.5/mmBtu, as seen in the chart below. Do the fundamentals support a breakout and higher prices in the coming weeks, or will we see a move back into the range?

We have to consider supply and demand, along with inventory data to understand whether prices justify their sharp rise, within such a short span of time.

Though natural gas storage levels remain elevated, the supply glut is slowing compared to analysts’ expectations. As of 27 May, the Energy Information Administration reported natural gas inventories of 2,907 Billion cubic feet, an increase of 82 Bcf, which was below the consensus expectations of 86-Bcf, according to The Wall Street Journal.

In the previous week, inventories were 37 percent above five-year average levels compared to the same week in 2015; however, this week the surplus shrank to 35 percent above five-year average levels. This is an indication of a diminishing surplus.

"The 82 Bcf net injection into storage for last week was slightly less than the consensus view and below the 98 Bcf five-year average for the date, and so at least somewhat supportive for prices," said Tim Evans of Citi Futures Perspective.

"The build was also well below our model's 96 Bcf forecast, and so will translate into a more bullish baseline for the reports to follow," reports Natural Gas Intel.

In the long-term, the demand for natural gas is on the rise, as outlined in the EIA’s Annual Energy Outlook. However, in the short-term, the immediate demand for natural gas influences prices. Mild winter conditions were partly to blame for the record low prices in March of this year, along with the excess supply.