IEA: If oil keeps rising, some marginal U.S. production could be “switched back on”

HOUSTON – The International Energy Agency believes U.S. oil production will come down by 600,000 barrels a day this year, but if crude prices keep rising, some of the marginal production baked into that forecast could be “switched back on.”

But it’s almost impossible to know how much an uninterrupted oil-market bounce could affect the IEA’s production forecast, said Neil Atkinson, head of the oil market division at the IEA in Paris, in an interview Friday, shortly after Baker Hughes reported the U.S. oil rig count increased by one unit last week, after declining for 12 consecutive weeks.

“If prices keep rising, we could find that because of the cost cutting and the technology improvements that some of this marginal production is switched back on,” said Neil Atkinson, head of the oil market division at the International Energy Agency in Paris, in an interview Friday. “But how long does it take to reassemble crews, get the labor, the equipment and all the rest of it? This is what we don’t know.”

U.S. crude settled at $40.20 a barrel on Thursday, though the price dropped 40 cents immediately after Baker Hughes’ rig count report, and then edged back up slightly.

Atkinson noted U.S. oil producers haven’t hedged half as much of their crude production as they do in normal years to protect from falling prices. But Morgan Stanley recently noted oil hedging is “already rampant,” and if U.S. producers become more confident they can lock in $45 a barrel now for production in 2017, it could encourage some struggling oil producers to “turn to their bankers and say, ‘the worst is over, call off the bailiffs,’” Atkinson said.

“What’s the lag between companies saying ‘Hey, we’re back in business,’ and then actually producing oil? Is it six months, is it nine months? This is the uncharted territory,” he said. “There’s nothing to model it against because there’s nothing quite like this. It’s a moving target because these guys are coming out with swifter, smarter, more efficient ways of doing it.”

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About The Author

Collin Eaton joined the Houston Chronicle's team of energy reporters in 2013, after covering the financial industry for another publication. He writes mainly about U.S. oil companies and developments in international oil markets.