Strategy Blog


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Existing and potential U.S. crude oil supply will continue to exert downward pressure on WTI

Highlights

  • Weekly production at highest levels in 30 years.

  • Inventories continue to be elevated

  • Refining capacity is at 90%

  • Demand remains flat

  • Estimated large number of high initial production wells have been drilled and are waiting to be fracked (aka, the fracklog)

Research & Analysis

U.S. production remains at elevated levels in spite of a precipitous decline in WTI since June 2014. Only in recent weeks has production stopped increasing. Though it is important to note production has only flattened, not decreased. Even with a decrease in production and a likely corresponding increase in WTI, we expect the decrease to be short-lived given the North American fracklog. In addition, inventories are at their highest levels in years. Refining away excess supply is unlikely given capacity usage is at 90%.

At its core, the fracklog is basically a meaningful number of wells that have been drilled but yet to be fracked. These wells can quickly be tapped and generally have a very high initial production. Estimates are as high as 3,000 wells, scattered throughout North American shale fields, with as much as 3MM bbl/day of production could be waiting behind the scenes. Analysis suggests that $65 WTI could see as much as 500,000 bbl/day come on line.

Futures contracts will also impact how WTI moves. If the fracklog is sold for later delivery instead of current delivery prices would likely stay higher and have less volatility. The Commitment of Traders Report is what we watch to understand changing dynamics in the Futures universe.

Current Strategy

Long-term Investment Strategy

  • HOLD companies with sustainable dividends, low debt/equity ratio and an appetite for hedging.

Triggers for Strategy Change

  • OPEC collectively meaningfully reduces production

  • Lower existing production rates and a reduction in the fracklog

Categories

  • Type: Investment Strategy Thesis

  • Geography: Canada, US

  • Sector: Energy

  • Sub-sector: Oil Producers

  • Area of Analysis: WTI