Is U.S. Oil Production Finally About to Fall?

Could a decline in U.S. oil production finally be here?

After months of substantial declines in the number of active rig counts in the oil patch, U.S. oil production figures have yet to take a hit. There are good reasons for that. There is a lag effect between the falling oil price and corporate decision-making – it takes time to ratchet down drilling plans.

More importantly, the average oil rig has become much more efficient, enabling drillers to produce more with less. That meant that the most inefficient rigs were taken off the market first. Also, exploration companies, especially ones with cash flow problems, kept up drilling to keep the money rolling in, even if they were selling oil for half of what they were last year.

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Still, the rig count decline has been too prodigious to leave output unaffected. An estimated 684 fewer rigs are in operation as of March 13 compared to a year ago. According to the latest government data, three of the most critical shale regions are expected to see production drops in April for the first time since October 2013. The Eagle Ford in South Texas, the Niobrara in Colorado, and the Bakken in North Dakota are expected to see their combined production fall by 24,000 barrels per day.

Despite the declines, other shale producing regions are expected to pick up the slack. The Permian basin in West Texas is projected to see more than a 21,000 barrel-per-day increase in April, offsetting the declines elsewhere. This means that overall U.S. output probably won’t drop off quite yet.

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Nevertheless, the news that several of the most prolific shale basins are starting to see falls in output suggests that the U.S. may finally be approaching that inflection point. This development is crucial for oil markets, which have been waiting for a sign that U.S. shale would begin to cut back. Aside from falling rig counts, the Energy Information Administration also noted on March 17 that the decline rate for shale wells is increasing. Compared to conventional oil wells, shale drilling sees an initial burst of production only to quickly drop off after the first or second year. If the shale patch is starting to see decline rates tick up, production should soon decline much quicker, as there are fewer new wells being drilled to offset decline.

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Meanwhile, oil prices are in freefall once again, falling to fresh lows. WTI is flirting with the possibility of dipping below the $40-per-barrel level, which will bring worse panic to the sector. In a sign that the pain is mounting, Quicksilver Resources, a Texas-based oil and gas company, announced on March 17 that it has declared bankruptcy.

This article originally appeared on Oilprice.com.

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