OKLAHOMA CITY ̶ “Our in-laws AT OPEC gave us … a self-improvement gift” on Thanksgiving Day, Newfield Exploration Co. general manager, Midcontinent, Pat McCelvey told attendees at Hart Energy’s DUG Midcontinent conference. “They decided we got too used to $100 oil, too … reckless with our investments. I’m not sure they want us to get better, but that’s what we’re going to do.”

John Rutherford, executive vice president, Plains All American Pipeline LP, said U.S. producers have done with oil what they did with natural gas. “We have. We practiced too hard and we’ve gotten too productive.”

Rusty Braziel, president of market-analysis firm RBN Energy LLC, said, “It’s already happened. I don’t think we’ve accepted the fact.”

Cushing To Be Full In Four Weeks

U.S. crude oil in storage grew by 8.4 million barrels—twice as much as commodity analysts expected—to 1.125 billion barrels for the week ending Feb. 20, according to the EIA’s weekly report Wednesday. Of that, 434 million was in non-SPR storage, up from 363 million a year ago.

Storage at Cushing, in particular, grew by 2.4 million barrels to 48.7 million, up from 34.8 million a year ago; Gulf Coast inventory, by 4.3 million to 214.5, up from 177.7 a year ago. The day after Thanksgiving, when OPEC announced no cut to its production amid an estimated 1.6-million-barrel, daily, global over-supply, U.S. storage sans SPR was 379 million barrels; Cushing, 23.9; Gulf Coast, 193.1.

Cushing inventory has more than doubled in three months.

Tudor, Pickering, Holt & Co. Inc. analysts reported Thursday, “Yuck … With Cushing stocks near 50 million barrels, we start to get nervous about operation capacity above 60 million, (which would be reached in) four more weeks at this week’s build rate ...”

Simmons & Co. International Inc. analyst Arinjoy Ganguly added that the Gulf Coast number is near the all-time high of 216 million that was set last year and will likely be exceeded in the EIA’s March 4 report. In addition, “Cushing is also closing in on an all-time high (of 52 million in early 2013), which we expect will be attained in the coming weeks.”

Meanwhile, “(there is) no impact of rig-count reductions yet on crude production…,” he wrote. Ganguly estimates Cushing working-storage capacity is between 65- and 70 million barrels; Gulf Coast, between 250- and 260-million barrels.

North America, The Swing Producer

Plains All American owns 20 million barrels—or roughly a third—of Cushing storage capacity and a total of 73 million barrels of capacity across the U.S., according to its 2014 annual report filed in February.

Rutherford told DUG Midcontinent attendees, “We, the United States and Canada, are the de facto (world) swing producer. There has been no incremental production added by the rest of the world. We’ve added 5.6 million barrels of (daily) Canadian and U.S. supply and nothing in the rest of the world … You used to see ‘the call on OPEC.’ We just flipped it.”

The call will be on the U.S. in the future, he said. Opec spare capacity is 4% of global demand today vs. 26% in the 1980s. “It will take time to resolve the current imbalance, but the world needs sustainable North American production growth.”

That’s in the midst of a Lower 48 decline rate of about 30% a year. And overall U.S. production won’t grow at $50 WTI. “We don’t have enough supply in the U.S. at $50 oil to feed the rest of the world ... Into 2016, there is a call on U.S. and Canadian supply, (but) production is declining (at $50). In 2017, it gets worse.”

At $50, U.S. production will peak this summer as a backlog of wells waiting on completion are put online, while U.S. drilling does continue, albeit at a between a quarter and a half of the October 2014 rig count. If with $80 oil, daily Lower 48 production could have grown to nearly 11.5 million barrels, Rutherford said. Currently, it is at about 9 million a day.

Dave Hager, chief operating officer, Devon Energy Corp., told attendees that, while some E&P companies are forecasting increased production—despite paring capex an industry average to date of 34%—overall U.S. oil production will decline as the year unfolds.

“It is important to remember that there is a delay in when you cut capital and when you see a production impact. For Devon, on average, the dollar we spend today won’t have a production impact for as much as six months. That’s why you will see a delayed impact on production, but … we will probably start to see that impact later this year.”

Too Good At Growing Supply

New U.S. production supply is easier to come by today. Braziel noted that, in 2011, it took EOG Resources Inc. 22 days to drill an Eagle Ford well, for example; now, it can do this in about nine. That’s 41 wells in one year with one rig, producing 30-day IPs of nearly 800 barrels a day on average. So drill days are down 60%; the number of wells per year, up 151%; and IPs, up 44%. It equals to IP additions per rig per year having grown 239% from 9,000 barrels a day to more than 30,000.

Who’s to blame for world oil oversupply? “It was you,” he told producers. “You’ve been too good for your own good.”

Devon is focusing its 2015 capex on development wells in high-IRR acreage, Hager said. Braziel said, “Producers are going to their sweet spots…Their average IPs are going to increase this year versus last year.”

Many producers are hedged at least for 2015; some for as many as five years, Braziel said. “You put all of these factors together, what’s going to happen to production?”

He forecasts that WTI will find a bandwidth just as U.S. natural gas did as a result of shale-gas development. “If prices do get back to the $80 range, that crude oil that was sitting there didn’t go away. It’s going to be produced ... We’ve seen this story before.”

Oil-In-Storage Basins

The Haynesville gas play was developed in early 2008, producing consecutive 20-million-cubic-foot wells from virtually Day 1. As that play came online and joined new gas production from the Barnett, Fayetteville, Arkoma Basin-Woodford and the Marcellus, supply surged, gas futures settled into a roughly $3 to $5 window and the Haynesville rig count dived from about 120 to 16.

“But all of that gas is still in the Haynesville, waiting to be produced …,” Braziel noted. “That is what we have created for ourselves in the crude-oil basins.”

He forecasts a “base-oil theory” that is similar to modern dynamics in U.S. natural gas. “Prices rise, production rises, prices fall.”

WTI for April delivery closed Friday at $49.52; for April 2016 delivery, $61.94. Meanwhile, Brent closed Friday at $62.58; for April 2016 delivery, $69.87.

Devon’s Hager said the company’s weighting to both oil and gas is a result of a sentiment that things—i.e., commodity futures—are never as bad as they seem and never as good as they seem. “History has shown it is challenged to accurately predict the prices (of either),” he told attendees. Devon’s analyses have shown that futures are “probably one of the worst predictors of future oil and gas prices out there.”

Nissa Darbonne is the author of The American Shales. Contact her at ndarbonne@hartenergy.com.