The EIA recently revised its reporting for crude storage volumes. The new storage report, while only published twice a year (at the moment), provides more transparency regarding how much of the storage number is “line-fill” and crude in transit. As it turns out, this comprised roughly 20% or almost 100 MMbbls of the storage number that was reported in March. Taking this into account, the storage situation for the fall, when refineries go into maintenance, is less bearish than previously thought (Can Producers Survive Another Refinery Maintenance Season?).
In PADD 2 and PADD 3, where the bulk of US crude oil storage facilities exist, utilization of refineries and tank farms was only 74% and 54%, respectively, for March. Due to robust production, storage continued to build through April and into early May. In March, the EIA reported a 260 Mb/d jump in crude oil production and the weekly numbers are continuing to trend up on a monthly basis. However, the US refining complex has countered by running at extremely high utilization rates to capitalize on favorable crude pricing. In fact, major refineries, like Motiva’s Port Arthur refinery, with a capacity of 600 Mb/d have postponed planned maintenance until next spring to take advantage of highly discounted feed slates.
However, despite a less severe situation and refineries running at record-breaking throughput levels, a significant wild card in the equation are DUCs (drilled but uncompleted wells). In June, BTU Analytics wrote a piece showing our calculation of wells that are awaiting completion in Texas (Texas DUC Season). To reiterate, DUCs are wells whose completion was intentionally delayed beyond the normal drilling cycle. BTU Analytics estimates that there are over 1,500 wells that fall into the DUC category in Texas. While this is a large number (especially considering that this is only in TX and does not include the Bakken or other areas), to help quantify the potential impact of these wells, I took the 1,500 DUCs, and assumed they would all come online between now and July 2016 in our major producing areas in the Permian and the Eagle Ford. BTU Analytics’ DUC analysis for Texas shows that while there are DUCs in other areas in Texas, the largest inventory is in Eagle Ford followed by the Permian Basin. For this analysis, I evenly weighted the distribution of DUCs between these areas (we will take a deep dive on this topic in July’s Upstream Outlook). The results were significant. Completing all these DUCs increases oil production in Texas alone, by 300 Mb/d and gross gas production by 1.2 Bcf/d above our June 2015 forecast. This would put Texas production volumes much closer to the trajectory that would be expected in a $90 crude price environment.
Unfortunately, the US crude oil market is already oversupplied and without a new, significant demand source, prices will likely weaken to push marginal producers out of the market. DUCs provide a lifeline for some producers for the next few months, but long term, the battle to grow oil production will be a fierce one, primarily between the three oil titans: the Permian, the Eagle Ford, and the Bakken.