Shut-in, even new wells may be attractive at $30s/b WTI: analysts - S&P Global

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Highlights

Some shut-ins could start to return in July

As recovery begins, DUCs likely source of output

Market rebalancing eyed for Q3-Q4 2020

Houston — NYMEX crude futures have risen above the $30/b level that represents breakeven for many US upstream operators, which could result in some restoration of shut-in wells soon as the economic scourge of the global coronavirus pandemic begins to subside.

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Front-month crude futures have only been trading above $30/b for the past six trading days, since May 18. However, NYMEX crude contracts out along the curve have been holding there for longer. The December contract, for instance, briefly dipped below $30/b in late April, but has since risen to trade above $36/b Tuesday.

If crude stabilizes in the $30s/b, producers should be able to not only bring back selected wells they deem economic but even drill and complete new ones for future production, analysts said.

"I think starting in July we could see a lot of the shut-ins [wells] start to come back," said Bernadette Johnson, vice president of market intelligence for data provider Enverus. "The order in which this works is that demand [for oil] has to come back, which allows refiners to buy more crude, start ramping refinery runs and sell more gasoline and diesel. Then shut-ins come back on line."

Now, "we're seeing demand pop up," with more buyer interest for NYMEX July crude, she added.

NOT ALL SHUT-IN WELLS ARE PROFITABLE

However, the percentage of wells that will be profitable in a $30/b environment is not large. And analysts say that some operators that are not best-in-class or still have high costs may till have breakevens in the $40s/b or even $50/b.

But on the low-cost end of the producer spectrum, S&P Global Platts Analytics estimates that in the Delaware portion of the Permian Basin, 33% of new wells would be profitable at $30/b WTI. In the Bakken, just 4% of new wells would be profitable.

Upstream companies ar e seeing initial well production rates and decline curves continue to improve, which bodes well for new drilling at low prices.

"Operators are proving they can achieve strong well results even in this tough environment," Platts Analytics analyst Andrew Cooper said. "While hedged volumes are still strong for the remainder of the year, 2021 wells will likely be exposed and need to find profitability in this lower commodity-price environment."

Since operators have continued to shave down well costs in recent years and especially want to avoid unnecessary spending right now, they may find it economic to drill wells now and complete and place them online next year as oil prices improve.

With rig activity nearing all-time lows, operators during the recovery will likely target their drilled-but-uncompleted, or DUC, well inventory, as 25% of the drilling and completion cost has already been spent, Platts Analytics said.

US producers have voluntarily shut in roughly 1.7 million b/d of their oil output in the last three months due to low demand and a supply glut. That is on top of recent pledges by OPEC+ for global cuts of nearly 10 million b/d, an additional 1 million by Saudi Arabia alone for June, and 100,000 b/d by the UAEand 80,000 b/d by Kuwait for the same period.

EXCESS SUPPLY STARTS TO DIMINISH

The cuts have removed some supply overhang in excess of a low demand level that had abated owing to the viral pandemic, and therefore had coax up crude prices that had been in the teens and $20s/b just weeks ago.

US production was 11.5 million b/d in the latest US Energy Information Administration weekly petroleum status report, down 100,000 b/d from the week before and down from 13 million b/d during the first week in March.

At the same time as oil supply has been reduced, demand appears to be ticking up. Governments around the world, including the US, have eased mobility and commercial restrictions, which have tapped down crude inventories down a bit.

"The market generally anticipates demand some recovery in July ... [it] looks better than in the second quarter," Johnson said. "As soon as the market comes back into a decent equilibrium, then you can bring back shut-ins. It starts to rebalance in the third quarter and into the fourth quarter."

Generally, consumption will take about 18 months to return to normal, Rob Thummel, managing director of Tortoise, said. But with inventory levels still high, new supply is not needed right away, he said.

"There's time here" for that to occur, Thummel said.

In the second half, lingering oversupply "probably keeps WTI in the $30s/b," he said. "As we get closer to the end of the year and things are moving [in a favorable direction as] recovery continues, then you get back into the $40s/b next year."

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