Oil production to reach peak in April, according to report

Oil production from the nation's shale formations is approaching its peak -- at least in the short term.

The amount of oil pulled from the dense rock formations will decline in May for the first time in years as energy companies, including Murphy Oil Corp., scale back on domestic drilling operations in response to weak crude prices, a government report showed this week.

"It has happened faster than we anticipated," said Carlos Newall, equity research associate for Raymond James and Associates. "The rig count dropped at a much faster pace [than expected]."

Oil output from seven U.S. shale plays will decline by 57,000 barrels per day in May compared with April, according to a report released Monday by the U.S. Energy Information Administration, the statistical arm of the Energy Department.

But the drop in production appears to be temporary as domestic oil production is set to grow through 2020, according to an annual forecast released by the same agency Tuesday.

Production will reach 10.6 million barrels per day in 2020, before declining to 9.9 million in 2040, the administration said.

"Shale is going to be here to stay forever," said Phil Flynn, an energy analyst with Price Futures Group. "In the short term, we are going to see production peak."

Energy companies are cutting back operations in response to crude prices that have fallen 50 percent since mid-2014. The price of oil has dropped as a result of a supply glut -- largely driven by the shale boom -- and low global demand.

West Texas Intermediate crude for May delivery climbed $1.38 to $53.29 a barrel on the New York Mercantile Exchange, the highest settlement since April 7.

The industry has rapidly cut capital spending. Nationwide, the number of active oil rigs has fallen by 42 to 760, according to Baker Hughes, an oil-field service company.

"The slowdown in U.S. shale production is not a surprise," Newall said. "As soon as production starts to flatten, prices start to stabilize and firm up from where they are right now, and when the cost curve comes down you're going to see production ramp up again."

There is a delay between drilling rig activity and well production, so oil flowing from the nation's shale plays has yet to mirror the rig count. But a recent report by analysts from Goldman Sachs said oil output likely will peak this month and fall until August.

El Dorado-based Murphy Oil has cut its capital spending plans this year by 33 percent, including a 46 percent reduction in the Eagle Ford Shale in Texas, where it has reduced its drilling rigs from seven to four.

Newall said Murphy Oil's spending cuts are low compared with some other energy producers, but the projected 20 percent decline in Eagle Ford oil production is high. The drop "is going to hurt quite a little bit," he said.

Analysts are divided on what price will bring more drilling rigs back on line.

Refineries are expected to process a record amount of crude this year, potentially relieving the industry of its surplus of oil.

"You might see a temporary production decrease in the next few months, but we feel we will see that come back ... later on into the year," said Tariq Zahir, a managing member of Tyche Capital Advisors LLC, in an email. "Since shale can be started rather quickly, we will see rigs come back on line if prices go higher in the next few months."

Business on 04/15/2015

Upcoming Events