Hsueh On Oil:US production jumps

US production jumps +332kb/d in a week

    US data are starting to look much less constructive this week. As US crudeoil production crosses the 10mmb/d mark, the most recent monthly survey(EIA-914) data has thrown another curveball, this time to the upside of Novemberweekly and model estimates. In some sense, this is an 'overcorrection' from thedownward deviation seen between April and August 2017, Figure 1. Stripping outAlaska and GoM gives a similar result, Figure 2. Although the pace of monthlysurvey supply growth could slow before accelerating again in September, thispoints to the role of production in the generally positive inventory error term,averaging +283kb/d since November. This, along with an unexpectedly (andunsustainably) large +332kb/d increase in crude oil production (w/e 2Feb), ishelping to counter bullish sentiment.

    But growth likely to moderate

    In November, US monthly crude oil production rose by 384kb/d, of which 209kb/d was a Gulf of Mexico recovery from Tropical Storm Nate evacuations, and172kb/d attributed to onshore Lower 48production growth. This pace of growthkeeps the monthly survey data on a surprisingly rapid growth path.

    Contrast current growth with the Mar-Sep 2017period, when onshore supplygrew at an average of 45kb/d/mon. Then between Sep-Nov 2017, growthaveraged 262kb/d per month, Figure 3. Because the Drilling Productivity Reportmodel doesn't indicate any such shift from low gear into high gear, we expect thepace of supply growth will moderate towards some middle ground. The +1,174kb/d pace of growth implied by the January DPR works out to a monthly pace of+98kb/d, which we think is more sustainable.

    Supply boost from high prices to come later

    The weekly supply bump comes much too early for us to characterise it as a resultof WTI oil prices reaching the USD 61-65/bbl range cited as a key level whichwould accelerate drilling activity, according to a Federal Reserve Bank of Dallassurvey of 125oil and gas executives. This is because we would typically expect a3-4month lag between oil prices and drilling activity, and a further 6month periodbetween drilling and production reaching the market. With WTI prices havingcrossed USD 61/bbl on 3January, this puts the activity boost in April, Figure 4,and the resulting supply surge around October. Nonetheless, our extrapolation ofcurrent data points into the end of the year suggests US inventory will remainbroadly supportive of price, Figure 5, as it maintains a yoy decline.