It’s only August, but the folks involved in Permian markets must feel like they’ve already packed in a full year’s worth of action. The events are well known by now, but they’re still remarkable. A crash in refining utilization, followed by massive field shut-ins, all precipitated by a novel virus and exacerbated by some unusual moves by global oil producers. The year’s not over, and the coronavirus hasn’t gone away like a miracle, but a calm has emerged in oil prices that has helped producers get their sea legs. While $40/bbl West Texas Intermediate (WTI) is a far cry from where we started 2020, it’s been just enough to get most of the shut-in crude production back online in West Texas. Today, we provide an update on the status of curtailments in the Permian Basin.
When we wrote our 2020 Outlook For Permian Oil and Gas Markets the first week of January, Permian crude oil prices were hovering around $65/bbl and basin oil production was expected to grow by about 500 Mb/d this year. Compare that outlook with our most recent blog on Permian oil a few weeks ago, when we explained how almost 500 Mb/d of Permian crude oil had been voluntarily removed from the market in May. In the interim, various peculiar events combined to transform the early 2020 Permian state of affairs into today’s situation, including the most unexpected event of all: April’s crash of crude oil prices into negative territory. There have been many twists and turns along the way, and we’ve written enough oil blogs this year to fill a book. A lot of hardship has come with all these events as well, and we’d have much preferred things turned out this year more like our January outlook.
However, it’s not all bad news for crude oil prices lately. Despite the pricing challenges that stressed Permian oil producers and marketers earlier this year, a topic we just covered in What Difference Does It Make, prices for WTI began rising this summer. We’ll get to the recent price improvement next, but first a quick recap on where we’ve been so far in 2020. The green line in Figure 1 shows the price for WTI at Midland, the Permian’s primary crude oil trading hub, since the beginning of the year. For reference, the Midland hub has been trading at or near parity with Cushing over the last few weeks, oscillating between a slight premium and a slight discount to its Midcontinent peer. It seems like forever ago, but as we noted earlier, WTI started this year hovering between $60/bbl and $70/bbl before the global pandemic began eroding demand around the world. Just as the virus’s impacts were beginning to ramp up in February and March, a period highlighted by the dashed purple oval, oil markets were also broadsided by Saudi Arabia’s decision to engage in a short-lived price war, which we detailed in Wipe Out. The confluence of these events then helped send Midland WTI prices down to around $10/bbl by early April and laid the groundwork for the plunge to negative prices in late April (dashed red circle) — an event driven in large part by the expiration of the May futures contract, as we outlined in Futures Games.
Figure 1. Midland WTI Price. Source: Bloomberg
However, a steady rally has been underway since late April and prices have settled into a fairly tight range around $40/bbl over the last few weeks (dashed blue oval in Figure 1). Various factors have driven that improvement, including the decision in May by many Permian producers to curtail field production until prices improved. The late-April wipeout was also followed by a global oil supply drop that started in May and was largely the result of an agreement by Saudi Arabia and other OPEC+ parties to remove about 10 MMb/d of oil production from the world market in an effort to stabilize prices. As the international cartel action combined with a more economics-based U.S. response, the supply reduction worked to dramatically improve WTI prices from under $20/bbl in early May to near $40/bbl by the first week of June. Since then, prices have been remarkably stable by this year’s standards and WTI prices have held steady near $40/bbl, even finding their footing and approaching $42/bbl in recent trading.
It may not be $65/bbl, but the recent price levels have been just what Permian producers needed to get almost all of that curtailed oil back on the market. Figure 2 below shows how the reduction impacted production in May and June: estimated curtailments (striped light-blue bar segments) those two months averaged 550 Mb/d and 350 Mb/d, respectively. The dark-blue bar segments represent actual production. Note that the sum of the two stacked bar segments equals our estimated Permian oil production in a given month, a forecast we provide on a weekly basis in our Crude Oil Permian report.
Figure 2 clearly shows that the weak prices of April had a quick impact on Permian production. As we detailed in What Difference Does It Make, absolute price levels in the Permian were very near zero for many producers in May, as various other deducts combined to reduce realizations to levels even worse than the depressed levels shown in Figure 1. It came as little surprise then that companies across the Permian spectrum — from majors like ExxonMobil to independents like Pioneer Natural Resources and Parsley Energy — announced plans for cutting back production beginning in May.
Figure 2. Estimated Permian Oil Production and Curtailments. Source: RBN
However, things change quickly and, as we already saw in Figure 1, crude oil prices at Midland responded bullishly to the supply curtailments in West Texas and elsewhere. The situation improved so much that almost every producer announced during second-quarter earnings calls the past few weeks that the vast majority of the curtailed volumes had been restored to the market. Our estimates suggest that has been the case. Based on natural gas pipeline data we collect in our NATGAS Permian report, it appears that the hefty shut-ins from May and June have largely dissipated in July and August. In fact, our estimates show that curtailed crude oil volumes now sit at just over 50 Mb/d, an amount barely equal to 1% of Permian field volumes. Producer comments seem to verify this as well, with Pioneer noting that all but about 6 Mb/d of its vertical oil production had been restarted. This behavior is consistent with the price rise, as higher netbacks mean that half-cycle production economics for most of the larger producers’ core acreage is no longer negative.
Despite the reduced curtailments, however, we don’t expect Permian oil production to set new highs any time soon. Base production is trending lower due to the dramatic decline in Permian rig counts, which currently stand about 70% below where they started the year. As we mentioned earlier, base production is shown in Figure 2 by looking at the sum of both bar segments (dark blue plus striped light blue), with the top of the striped bar segments indicating where total Permian production would be without any curtailments. In our view, production in August was already set to average about 4.25 MMb/d, with the few remaining curtailed wells lowering that to around 4.2 MMb/d. That’s a pretty steep decline from where we were earlier this year, when we estimate Permian oil production hit a monthly record in March over 4.8 MMb/d. What’s more, the declines aren’t over yet, and we see Permian production trending lower before bottoming around 4.05 MMb/d by December. This outlook is similar to that of Plains All American, a leading Permian midstream operator, which recently outlined its view that basin oil production was headed to below 4 MMb/d in 2020. While our oil production forecast may be conservative, as there is always the potential that producers find ways to cut costs and drill a few more wells without spending incremental capital, we doubt it’s conservative by much. So, while it’s happy news that prices have improved and the once-unthinkable curtailments can be mostly left in the rearview mirror, Permian market participants find themselves staring at a production outlook that pales in comparison to where the year started. Where things go from here depends mostly on price, as usual. Let’s just hope that the final stretch of 2020 doesn’t feel like another year in itself!
"Just What I Needed" was written by Ric Ocasek and appears as the third cut on side one of The Cars' debut album, The Cars. Released as a single in May 1978, it went to #27 on the Billboard Hot 100 Singles chart. Personnel on the record were: Benjamin Orr (lead vocal, bass), Ric Ocasek (backing vocals, rhythm guitar), Elliot Easton (lead guitar, backing vocals), Greg Hawkes (keyboards, backing vocals), and David Robinson (drums, backing vocals).
The Cars was recorded at AIR Studios in London, with Roy Thomas Baker producing. Released in June 1978, the album went to #18 on the Billboard Top 200 Albums chart. The striking album cover art featured Nataliya Medvedeva, a Russian-born model, singer, poet, and writer. The Cars yielded three charting singles, proving that the new wave/rock sound of The Cars was radio-friendly. It has been certified 6x Platinum by the Recording Industry Association of America.
The Cars were an American rock band formed in Boston in 1976. Ric Ocasek, Benjamin Orr, Elliot Easton, Greg Hawkes, and David Robinson successfully blended guitar-driven rock with synthesizer pop music. The band's demos were garnering a lot of radio airplay in the Boston area before they signed a record deal with Elektra Records in 1977. The band released seven studio albums, eight compilation albums, and 26 singles. They have sold over 23 million records in the U.S. alone. The Cars are members of the Rock and Roll Hall of Fame. They officially broke up for the first time in 1988, with four of the original members reuniting in 2010 to record the album Move Like This, which was followed with a brief tour. All of the band members have done solo projects. Benjamin Orr died in 2000 and Ric Ocasek in 2019.
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