Everyone knows it by now but the growth in domestic US oil production has been truly astonishing. Spurred on by high oil prices and easy credit, oil companies in Texas and North Dakota have been drilling like crazy and the result has been an inexorable rise in US domestic production.
What is remarkable is that almost all of the growth in production has been recorded in just six states, Texas, North Dakota, Oklahoma, New Mexico, Utah and Colorado.
This chart shows US domestic production from 1981 to 2014 and the upturn in production is striking. Even more dramatic when you focus in on just those six states.
In 2008, just before the crash, there were almost as many rigs working in these six states as have been working there over the past three years, but back then the growth in supply was positively anaemic. Now, it seems as if the folk running these crews have really got their eye in, and lately, with around 1500 rigs drilling, annual growth has averaged about 30%. That's astonishing. There is obviously a correlation between rigs working and supply growth, but lately that correlation has changed.
Back when shale wasn't even a gleam in Harold Hamm's eye, when about 600 rigs were working all the decent drilling locations were being snapped up. Adding more rigs in the pre-shale era didn't do anything for production growth. Nowadays though, growth and rig count are very strongly correlated. I would guess that when the rig count falls to somewhere between 600 and 1,000 rigs growth will grind to halt. So how long will that take.
Well I would say that the reduction in rig count is already baked in.
It turns out that the rig count in these states is very strongly correlated with the oil price. That should be no surprise to anyone. The correlation works best with a one hundred day delay between the rig count and the oil price. It is a very simplistic model but I can use that equation to predict where the rig count in these six states is going to go in the coming months. Based on January's average price, I reckon by April we will be down to around about 700 operating rigs.
It also turns out that the correlation between rig count and production growth works best with a three month delay between the two curves. That means that by July production growth in domestic US oil supply should quietly drop to zero.
What happens in August and beyond will be very dependent on what happens to oil prices between now and then, but the shale miracle will be over in the summer. For how long, who knows, but for sure it will come back in time.