Commodities Corner: Sinking oil demand, drop in prices put U.S. fracking activity on track for a record monthly decline: report
An early version of this story included an incorrect figure for year-ago total U.S. rig count. The story has been corrected.
Signs of a further drop in U.S. crude oil production are everywhere, from a slowdown in fracking activity and sharp weekly declines in the active oil-rig count, to expectations of a May decline for all seven major shale oil output regions.
In a report issued Thursday, Rystad Energy said it expects global oil demand to decline by 10.4% this year, or 10.3 million barrels per day year-over-year, from 2019 daily demand of about 99.5 million barrels.
Significant declines in oil demand pulled prices into negative territory on Monday, with the May West Texas Intermediate crude oil contract, which expired Tuesday, settling at a negative $37.63 a barrel, down 306% for the session. The front-month June WTI contract US:CLM20
has manage to climb for two straight sessions, settling at $16.50 Thursday, but trades over 35% lower week to date.
The oil industry had already been reacting to severe demand slowdowns amid expectations that global storage will soon reach full capacity. Energy companies have announced production cuts, including Continental Resources Inc. US:CLR
and Parsley Energy Inc. US:PE
earlier this month. Offshore oil drillers have started to shut off wells in the U.S. Gulf of Mexico.
U.S. fracking activity, meanwhile, is poised to suffer its largest-ever monthly drop in April, according to a recent report from Rystad Energy.
Hydraulic fracturing, or fracking, involves using a mix of water, sand, and other additives to coax oil and gas from dense rock formations. It unlocks huge oil and gas deposits previously trapped in shale rock.
Rystad Energy estimates that the total number of “started frac operations” will be below 300 wells this month, which translates into a 60% decline between the peak level seen in January to February 2020 and April 2020.
The number of frac jobs started in March saw an estimated monthly decline of 30% to 550 in the three major oil basins–the Permian, Bakken and Eagle Ford, Rystad Energy said.
“With such a rapid decline in fracking already visible, very little activity will be happening in the oil basins during the remainder of the second quarter of 2020,” said Artem Abramov, head of shale research at Rystad Energy.
Hydraulically fractured horizontal wells account for most new oil and natural-gas wells. Assuming that no new horizontal wells are put on production from this month onwards, total light oil production will fall by one million barrels per day by May 2, two million barrels a day by July, and three million barrels a day by October to November, according to Rystad Energy. The Permian Basin would account for over half the nationwide base decline, it said.
Oil production from seven major U.S. shale plays is forecast to decline by 183,000 barrels a day in May to 8.526 million barrels a day, according to monthly figures from the Energy Information Administration released on April 13. The data show expectations for a decline in production from all seven of those U.S. shale plays, with the biggest fall expected to come from the Permian.
Data from Baker Hughes US:BKR,
meanwhile, show a drop of 66 in the number of active U.S. rigs drilling for oil to 438 as of the week ended April 17. That marked a fifth straight weekly decline.
The total active U.S. rig count was down 73 at 529. A year ago, the total count was at 1,012 rigs, according to Baker Hughes.
Despite the drop in active rigs, the EIA on Wednesday showed domestic oil production “perfectly unchanged” at 12.2 million barrels per day, “relative to the corresponding week in 2019,” said Tyler Richey, co-editor at Sevens Report Research.
“This suggest most of the wells that came offline were exploratory and not the established wells that likely have oil pre-sold several quarters or even years in advance which, in theory, will allow a good portion of output to continue into the foreseeable future,” he told MarketWatch.
Rig-count figures from Baker Hughes will be updated on Friday.
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