US oil production continues in defiance of soft oil prices-but for how long?

Despite the decline in global oil prices, U.S. production of oil has continued to grow unabated, and is now out of step with prevailing conditions in a market already struggling with significant inventory overhangs.

In a webinar called "North America: The Shale Adjustment Three Months In," IHS analysts also noted that domestic companies were overspending their cash flows, even if capital expenditures for new and emerging plays have been cut because of soft oil prices. This webinar is the 11th of a series offered as part of the program about "Oil: The Great Deflation."

The oil supply from U.S. unconventional reservoirs has grown without any signs of letup. U.S. shale oil forms part of North America's store of unconventional energy that also includes Canadian oil sands. The surge in unconventional production of North American oil has reshaped the global oil market overall and how the commodity is marketed, stored and transported.

"Despite the WTI [West Texas Intermediate] price of oil falling in July and August of last year and then accelerating into a strong decline through January, what's interesting is that U.S. oil production has continued on as if nothing has happened," said Raoul LeBlanc, managing director for IHS Energy.

The pattern, however, will not go on indefinitely, LeBlanc warned. The growth of production will start to sharply decelerate in the second quarter and then completely stop by summer. Prices, finally, will have an effect on U.S. shale oil production.

Even now, the industry is contending with a global surplus in crude, a good portion of this surplus will be consumed during the course of the year, but not all of it will be used by 2016. As a result, the market will have to continue to work its way through the glut as the market strives to regain balance.

Many large E&P (exploration and production) companies in North America continue to spend at the median of 130% of projected cash flows for the year. This is a growing concern, noted Andrew Byrne, as freely spending companies will have to find a way to fund their overspending at a time when the oil market is already in distress.

For some of these companies, one way to secure fresh funding has been to sell stock. Such a strategy is understandable, Byrne noted, because the stock value of oil is relatively high compared to oil and gas prices. All told, approximately $11.5 billion in new equity has flooded the market in the last two months alone as U.S. oil companies sought new financial resources. "It makes perfect sense for companies to prepare for the worst at this point and hope for the best," Byrne said. "And they can do this by issuing equity, reducing debt and trying to survive until prices recover."

Aside from the very high levels of global crude storage, the oil market is also struggling with a surplus of drilled uncompleted (DUC) wells and large volumes of capital. IHS believes the industry has roughly 2,500 to 3,000 DUCs available for completion. If prices rise and costs fall, operators will complete these wells to drive more profitable growth and utilize idle capital in the market by investing in completions of DUCs.

Overall, growth of U.S. oil production will come to a halt after a period of strong production growth, but expansion is expected to resume as the market comes into balance according to IHS experts. The return of growth in production, anticipated in 2016, means the United States will continue to put downward pressure on global oil prices moving forward.

IHS Staff Writer March 30, 2015

Research presented in this webinar comes from these services, IHS North America Performance Evaluator, and IHS Energy Company and Transaction Research and was highlighted in the program, Oil: The Great Deflation.

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.