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- 14 Mar
Planned spending on oil drilling drops, production continues to increase
According to an article in the Wall Street Journal today, the International Energy Agency announced Friday that US oil output was “surprisingly strong” in February, rapidly filling all available storage tanks. The agency said that US supply continues to “defy expectations”.
The reason is this: while independent shale-oil producers have slashed their planned 2015 spending on drilling by $50 billion year over year, they are increasing production on their best oil fields. Total US crude oil production again hit a high for the week ending March 6, reaching 9.4 million barrels a day.
And now many of these oil producers are adopting a new strategy that allows them to store oil in the ground, wait for the market price to rise again, and then quickly flood the market again. They simply drill the wells, which accounts for roughly 40% of the cost of the well’s total price, and then cap it until the right time when they can justify the remaining 60% investment to bring the oil to market. Plus many of these companies are betting that when it is time to produce from these capped wells, the services cost will be lower. This US oil under ground provides that much more storage beyond what is in the tanks above ground.
Add all this together and we see a scenario where it’s unlikely to have dramatically increasing oil prices anytime in the near future.
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