A Sign of the Times, Oil Price Surged in Response to Canadian Wildfires then Fell

A Sign of the Times, Oil Price Surged in Response to Canadian Wildfires then Fell

6th May 2016

Overall, the onshore rig count declined this week, down 4 (1%) while conversely, across the three major oil basins, rigs reversed a six-week decline trend and increased by 1.  This begs the question: have recent oil price increases been enough to bring optimism for the future?  The outlook for commodity prices is improving and Halliburton’s CEO indicated this week that in his view the U.S. rig count may have bottomed out and will likely start to rise later this year.

In the immediate term, weakness in crude oil prices early in the week were reversed by three supply disruptions: the worst wildfire in Alberta’s history, which is threatening Canada's oil sands region; escalating tensions in Libya; and other various global outages.  These events sparked concern about a near-term crude oil supply shortage, and served as a reminder that supply-demand balances can change quite fast.  However, as crude stocks are relatively high at the moment, price did not spike as much as it otherwise might have done.  The key takeaway on this is that the market temporarily did price in the aforementioned supply disruptions.  By contrast, last year when the market was substantially oversupplied (~2 million barrels per day), it would not have responded to losing half a million barrels a day.

As the crude market moves closer to balance, supply security will become an important talking point among energy ministers.  Concerns that the current decline in upstream oil investments – about 40% over the past two years – could lead to higher prices has precipitated a dialog about policies that could facilitate oil investments and dampen future crude market volatility.

Such dialog may be too little too late.  As GCA has previously stated  (see 1 April 2016 Monitor), even if oil prices climbed substantially above US$60 per barrel due to supply disruption, U.S. crude production would be unable instantly (such as storage) to reverse its current trend of falling output. It would take years – not months – to mobilize the resources required to bring a significant number of rigs back to well pads.

 

Weekly Recaps

Drilling Activity

The total number of active onshore rigs now stands at 391, down 1,485 (~80%) from a November 2014 high of 1,876.  Across the three major unconventional basins, the oil rig total increased to 190 (up 1 last week), with Eagle Ford down 3, Williston down 1, and Permian up 5.  The horizontal rig count is now 318, down 6 last week.

Total U.S. rig count (including the Gulf of Mexico) stands at 415, down 5 last week, with rigs targeting oil down 4 for a 36-week total decline of 338.  The average weekly decline rate slowed to ~9 rigs per week.

Oil Price

Oil prices fell as investors cashed in on a 20% rise over the past month, outweighing the impact of crude production cuts in Canada where a huge wildfire has disrupted oil sands operations.

Brent, the global benchmark for oil, was down about two bucks to US$45.85 a barrel, reflecting a loss of 4% on the week.

WTI crude slid seventy-nine cents to US$45.07 a barrel, down 2% on the week.

U.S. Supply and Demand

U.S. crude oil refinery inputs averaged 16 million barrels per day, with refineries at 89.7% of their operating capacity last week.  This is 139,000 barrels per day more than the previous week’s average.

U.S. gasoline demand over the past four weeks was at 9.5 million, up 5.8% from a year ago.

On the supply side, EIA data indicated that U.S. oil production in the Lower 48 was down 30,000 barrels per day, with total production at 8.395 million barrels per day.  The past fifteen-week decline total stands at 324,000 barrels per day (an average of ~21,600 barrels per week).

U.S. crude imports averaged 7.7 million barrels per day last week, an increase of 110,000 barrels per day from the previous week.  Over the last four weeks, crude oil imports averaged 7.8 million barrels per day, ~8.4% above the same four-week period last year.

Crude oil inventories increased 2.8 million barrels from the previous week and persist at historically high levels.  The crude stored at Cushing (the main price point for WTI) saw an increase of 0.3 million barrels, pushing total storage to 66.3 million barrels (~87% utilization).

Sources: EIA Weekly Update and GCA Analysis

Authors

A Sign of the Times, Oil Price Surged in Response to Canadian Wildfires then Fell

P Kevin Galvin

Principal Advisor, Field Development Planning - kevin.galvin@gaffney-cline.com
A Sign of the Times, Oil Price Surged in Response to Canadian Wildfires then Fell

Jeanne-Mey Sun

Vice President and Global Head of Business Consulting - Jeanne-Mey.Sun@gaffney-cline.com
A Sign of the Times, Oil Price Surged in Response to Canadian Wildfires then Fell

Bob George

Regional Director: Americas - bob.george@gaffney-cline.com

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