Quick supply change a vital factor in oil market recovery

Large among questions hanging over an oil market groping for balance is the behavior of short-fuse supply.

With demand growth unlikely to eliminate surplus, price recovery awaits lower supply. The earliest cuts likely will occur in tight-oil plays of the US and Canada, where sustaining production requires continuous drilling. With rig counts plummeting, output from the biggest tight-oil plays has flattened or, in several cases, begun to fall. And because decline rates are characteristically steep in tight-oil wells, the overall production drop could be as dramatic as the surge that preceded it.

Yet reasons exist to expect the tight-oil decline to be moderate.

Operators have drilled but not completed several thousand horizontal holes in the Bakken, Eagle Ford, and other tight-oil plays. Some observers fear that, at the first sign of durable price strength, they’ll fracture and bring the wells on stream promptly, creating a new supply wave and price slump.

But reasons also exist to think production won’t rebound that swiftly.

Many leases will have new owners before this difficult cycle ends. Transfers take time.

Also, operators and service companies have laid off tens of thousands of workers and idled rigs and other equipment. Capacities to drill and complete wells thus have fallen.

And the oil field supply chain, measured in time, is longer than it used to be. For some of the cost concessions operators are demanding of service firms, which service firms are trying to pass along to their suppliers, the compensation has been extension of delivery times.

Operators therefore should be able to secure services at less cost than they could a few months ago, but they probably will wait longer for them. Many of them, too, newly cautious with price risk, won’t rush investment.

The balance of these forces will influence drilling, production, and ultimately oil and gas prices but is impossible to predict.

What’s certain is that the potential for prompt supply change is yet another way unconventional resources have changed the oil business.

(From the subscription area of www.ogj.com, posted May 8, 2015; author’s e-mail: [email protected])