Single-digit oil prices and unprecedented demand destruction are leading to production shut-ins all over the planet, but US shale and Canadian crude are the most affected.
As the oil war and coronavirus demand destruction rage on, WTI crude prices briefly dipped below $20 per barrel, but many prices aren’t even fetching $20 per barrel as they are struggling to find buyers for their crude.
Prices in Oklahoma, Colorado, Kansas, and Louisiana, for instance, have dropped significantly over the last week, with benchmark prices such as Louisiana Light falling to $5.85 and Oklahoma Sweet falling to $16.50 on Monday, while prices in the cowboy state, Wyoming, have fallen to $1.25.
The deepest discounts in crude are often found in more remote areas with little access to pipeline and export infrastructure, and these are also often the areas where, once shut-in, production isn’t likely to be restarted anytime soon.
So-called stripper wells made up about 10 percent of total US crude output back in 2015, and after a round of serious cost-cutting, there’s not much left to cut for these tiny producers, most of whom are now losing money on every barrel they produce.
Larger shale producers such as Pioneer, Exxon, and Chevron can bring back production relatively easy as we’ve seen in the past, but smaller producers are more likely to either shut-in production or face bankruptcy. The Houston Chronicle cites energy data provider Enverus as saying that stripper wells now make up about 6 percent of total US oil production, or about 850,000 bpd, and that about 500,000 bpd or even more could be at stake with oil prices in the teens or even lower.
The question is then, how much production will bigger oil producers shut-in, and where will most well shut-ins occur?
Even before oil prices crashed into the $20-range, Canadian, Bakken, and SCOOP/STACK producers were struggling to churn out a profit, and as prices of some blends fall below $10 per barrel, these areas are most likely to see the first major well shut-ins. Canadian oil giant Suncor has already shut-in production at its Fort Hills heavy crude operation, and other producers are set to follow suit. Matt Murphy of Tudor Pickering Holt & Co. thinks that some 20 percent of Canada’s thermal bitumen production could be shut-in within the next couple of months, equating to some 340,000 bpd. In the meantime, Canada’s rig count has fallen by 44 rigs in just one week as producers are starting to focus on the lowest cost wells in their portfolio.
In the heart of the US shale industry, producers such as Pioneer Natural Resources and Parsley Energy have asked the Texas Railroad Commission to consider formal output cuts. Pioneer CEO Sheffield and Parsley CEO Gallagher sent a letter to the Commission on Monday to officially ask for pro-rationing orders for the entire state of Texas, something that has not been done since the 1970s.
Pioneer CEO Sheffield states that his company received requests from pipeline operators to stop the flow of crude and shut-in production, saying that he fears a “total decimation” of the industry if action is not taken immediately.
Total global production then is set to decline this year as a result of the coronavirus crisis. In a note on Tuesday, IHS Markit said that the total number of shut-in barrels could reach 10 million bpd between April and June as storage is filling up at an unprecedented pace.
The declines, however, are not equally distributed, with OPEC producers such as Saudi Arabia, the UAE and possibly Iraq set to boost output by 4 million bpd this year according to Energy Aspects, highlighting the significant production crash in non-OPEC production countries.
Is it all bad news then? For now, it seems like the industry is set for a huge round of consolidation, spending cuts and well shut-ins, but the producers that will survive this brutal supply/demand crisis will likely see higher prices as a result of a possible oil shortage later this decade according to investment bank Goldman Sachs.