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US Crude Production and Stocks Summary

Core Content

The document outlines the outlook for US crude oil production and inventory levels through 2015 and 2016. Key findings include:

• Crude Production is Peaking: Based on rig-based modeling, US crude oil production is expected to peak in April 2015. The peak is anticipated to occur despite a rapid decline in the rig count, which has led to a slower-than-expected production growth. The peak production level is estimated at 7,485 kb/d, with a sequential decline of 60 kb/d in the second quarter.

• Inventory Drawdown Expected: US crude oil inventories are projected to peak in April 2015 and then begin to decline, with an average monthly draw of 380 kb/d between May and August. The shift from crude surplus to product surplus is expected as refinery runs increase.

• Refinery Runs Set to Rise: Refinery operations are expected to ramp up strongly in the coming weeks, driven by the end of scheduled turnarounds and elevated refining margins. This is expected to lead to a drawdown in crude inventories starting in May.

• Storage Capacity Uncertain but Sufficient: Despite the rapid build in crude inventories, there remains significant spare storage capacity in PADD2 and PADD3, ranging from 7 to 21 mb. However, uncertainty exists around the exact levels and accessibility of this capacity.

• Production Growth to Continue: Even with the rig count decline, US production is expected to grow by 700 kb/d year-on-year in 2015 and 550 kb/d in 2016. This growth is attributed to factors such as uncompleted wells, highgrading, and productivity gains.

• Prices Need to Remain Low: The report emphasizes that current rig count declines are insufficient to balance the market in 2016. Prices are expected to remain low in 2015, with only a gradual recovery by year-end. A premature price recovery could risk continued oversupply and hinder the rebalancing process.

• Export Ban Constraints: The export ban plays a key role in limiting the ability of US producers to offload excess supply, thus contributing to the inventory build and the need for lower prices to achieve a sustainable slowdown in production.

Key Views

• Peak Production in April: US production is forecast to peak in April 2015, with the potential for a slight increase if well deferral and productivity gains are more significant than anticipated.

• Inventory Drawdown in Summer: After peaking in April, US crude oil inventories are expected to decline from May through August, with a draw of 380 kb/d per month. This is due to the increase in refinery runs and the shift to product surplus.

• Uncertainty in Production Path: Factors such as highgrading, productivity gains, and uncompleted wells introduce uncertainty into the production path. These variables could either delay the peak or increase production levels, depending on their impact.

• Spare Storage Capacity: The report calculates spare storage capacity using different methods, suggesting that while it is not certain, the US has enough capacity to accommodate higher production levels, especially if crude is shifted to PADD3 or floating storage.

• Price Forecast: The report maintains a forecast of low prices in 2015, with a modest upside of $40/bbl over the next three months. However, the 2016 forecast of $65/bbl is at risk of being skewed downward due to continued production growth.

Key Uncertainties

• Timing of Production Peak: The peak could occur in April or May, depending on the assumed lag between rig activity and production, which is currently set at 2 months.

• Impact of Well Deferrals: Uncertainty remains about the extent of well deferrals and how they will affect production growth in the short and medium term.

• Storage Capacity and Utilization: While spare capacity is estimated, the actual utilization and accessibility of this capacity are uncertain, which could affect the ability to absorb inventory builds.

• Refinery Downtime: Unplanned refinery outages remain a key risk to the forecasted increase in refinery runs and subsequent drawdown in crude stocks.

Key Figures

• April 2015 Production Peak: 7,485 kb/d
• Inventory Drawdown (May–August 2015): 380 kb/d per month
• 2015 Production Growth: 700 kb/d year-on-year
• 2016 Production Growth: 550 kb/d year-on-year
• 1Q15 WTI Price: $49/bbl (vs. forecast of $46/bbl)
• 2016 Price Forecast: $65/bbl (skewed to downside)
• Spare Storage Capacity (PADD2 & PADD3): 7–21 mb (EIA) or 49 mb (implied)

Appendix References

• Appendix 1: Details on well deferral strategies and their economic implications.
• Appendix 2: Provides the updated US crude balance projection for 2015–2016.
• Appendix 3: Explains the methods used to calculate spare storage capacity.

Contact Information

• Damien Courvalin: (212) 902-3307 | damien.courvalin@gs.com | Goldman, Sachs & Co.
• Raquel Ohana: +44(20)7552-4055 | raquel.ohana@gs.com | Goldman Sachs International
• Abhisek Banerjee: +44(20)7552-9350 | abhisek.banerjee@gs.com | Goldman Sachs International
• Anamaria Pieschacon: (917) 343-9076 | anamaria.pieschacon@gs.com | Goldman, Sachs & Co.

Disclaimer

This report is intended as a single factor in making investment decisions. Full disclosures and regulatory certifications are available in the Disclosure Appendix or at www.gs.com/research/hedge.html.