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Column: U.S. oil producers race to cut output as prices fall, storage fills

LONDON (Reuters) - U.S. oil producers and refiners are starting to adapt to the massive shock caused by lockdowns imposed to contain the coronavirus, according to the latest weekly government data.

General view of oil tanks and the Bayway Refinery of Phillips 66 in Linden, New Jersey, U.S., March 30, 2020. REUTERS/Mike Segar REFILE - CORRECTING REFINERY NAME

Producers are racing to cut output before the remaining storage space at tank farms and offshore becomes full, with tumbling wellhead prices forcing a brutal pace of adjustment.


Total stocks of crude oil and petroleum products, excluding the strategic petroleum reserve, climbed by another 10 million barrels last week and have now risen by a total of 120 million barrels over the last six weeks.

But last week’s inventory increase was much smaller than in any of the four previous weeks (26 million, 27 million, 33 million and 21 million barrels respectively) which suggests the margin of oversupply is shrinking.

Crude stocks rose by 9 million barrels last week, but again the increase was much smaller than in the four previous weeks (15 million, 19 million, 15 million and 14 million barrels respectively).

Crude storage around the country is now 61% full, but with capacity to store up to another 255 million barrels, according to estimates from the U.S. Energy Information Administration.


On the consumption side, the sudden slump in fuel use has bottomed out, and demand seems to have risen slightly last week, from very depressed levels earlier in April.

The total volume of petroleum products supplied to the domestic market averaged 15.8 million barrels per day (bpd) last week, the highest for four weeks, though still far below the 21.5 million bpd in mid-March.

Gasoline supplied to the domestic market averaged 5.9 million bpd last week, the highest for four weeks, but still far below the 9.7 million bpd in mid-March when U.S. lockdowns started to taking a sledgehammer to consumption.

Gasoline stocks fell by 4 million barrels last week, the first decline for five weeks, but distillate stocks continued to swell for the fourth week in a row, rising by another 5 million barrels.


Perhaps the most important change is on the production side, where there are preliminary indications domestic crude producers have already cut output by as much as 1 million bpd.

Domestic crude output averaged 12.1 million bpd last week, down from 13.1 million bpd in the middle of March, according to the U.S. Energy Information Administration (“Weekly Petroleum Status Report”, EIA, April 29).

Domestic production numbers contained in the Weekly Petroleum Status Report are estimates and will eventually be superseded by authoritative data from industry surveys in the Petroleum Supply Monthly.

But the EIA’s weekly estimates have proved to be a useful advance indicator for both the direction and magnitude of changes in domestic crude production.

Domestic production is likely falling as a result of reduced drilling and completions for new wells, natural decline rates from old wells and discontinued production from thousands of high-cost and/or low-output wells.


Oil wells producing less than 100 bpd accounted for 2.9 million bpd in 2018, more than a quarter of U.S. output. Wells producing less than 15 bpd accounted for 0.8 million bpd, or almost 8% of U.S. output.

There were more than 400,000 wells producing less than 100 bpd and 275,000 producing less than 15 bpd (“The Distribution of U.S. Oil and Natural Gas Wells by Production Rate”, EIA, Dec. 20, 2019).

Many of these “stripper” wells, so called because they strip the last barrels of oil from a field, are at the end of their life-cycle and vulnerable to a downturn in prices.

They require expensive electric pumps to lift the oil because there is little or no natural reservoir pressure left to bring crude to the surface. And they produce a lot of contaminated water which must be disposed of safely.

With benchmark futures prices below $20 per barrel, and the prices actually paid to producers by pipeline companies and merchants at the wellhead even lower, many of these low-output high-cost wells are no longer economic.

In combination with fewer rigs and competition crews working on new wells, alongside natural decline rates from existing wells, the temporary or permanent closure of stripper wells should start to cut production significantly.

The EIA weekly estimates will be revised in the weeks ahead as more complete data become available. But they are the first sign the adaptation may have started.

John Kemp is a Reuters market analyst. The views expressed are his own.

Related columns:

- U.S. oil consumption stabilises but inventories continue to swell (Reuters, April 23)

- U.S. crude oil storage is filling rapidly (Reuters, April 17)

- U.S. oil output set to plunge as storage fills (Reuters, April 1)

Editing by Edmund Blair