Another Week this Year Not for the Faint of Heart …

Another Week this Year Not for the Faint of Heart …

28th August 2015

While oil prices gyrated this week due to China growth concerns and U.S. gasoline consumption, the onshore rig count declined for the first time in 4 weeks, decreasing by 6 and now standing at 848.  That is down 1,016 (54%) from a November 2014 high of 1,876, but up 18 (3%) from its June 2015 low.

Oil had a real roller-coaster week, with West Texas Intermediate falling below US$38 per barrel at the start of the week (a new post-financial-crisis low), before rising as much as 10% at one point on Thursday afternoon and closing out the week at almost US$45 per barrel.

U.S. Drilling Activity.....

Total U.S. rig count declined by 8 last week, although rigs targeting oil remained flat.  Across the three major unconventional oil basins, rig count was flat (up 6 last week), with the Eagle Ford down 2, Permian up 2, and Williston flat week-on-week. Horizontal rigs decreased by 5.

Oil Price…..

The drop in U.S. oil price to below US$40 a barrel has started talk that lower oil prices will persist longer, which could lead to more carnage in the rig count.  The latest plunge in prices comes as growing worries about a Chinese economic slowdown adds to the excess supply concerns, and Saudi Arabia has repeated its position that it will hold its production and let the market set the price.

The price impact on the U.S. shale boom has been mixed so far.  The U.S. rig count, a closely watched gauge of drilling activity, has fallen by more than 1,000 from a year ago to 885, as of August 21. However, U.S. production output, while now declining, has been declining slower than expected, and is adding to the pressure to lay down more rigs to support the production decline needed to balance the global oil market. 

Source: BHI U.S. Rig Count and GCA Analysis

The prospect of an economic slowdown in China pummeled international oil prices that were already being driven down by Saudi Arabia’s relentlessly high production, new Iraqi output and stubbornly prolific pumping by U.S. independent shale oil producers.  Soon, assuming the nuclear deal with Tehran takes effect, Iran will boost production, adding to the supply side too.

U.S. Supply and Demand…..

Total U.S. oil stocks remain above their five-year highs.  Crude inventories fell 5.5 million barrels, the biggest one-week decline since early June and counter to market expectations, which was for an increase of 1 million barrels.  Despite this unexpectedly large decrease, which included an addition of 0.3 million barrels to stocks at the Nymex delivery point of Cushing, Oklahoma, oil prices continued lower following the data release.

U.S. crude oil refinery inputs averaged 16.7 million barrels per day, 117,000 barrels per day less than the previous week’s average.  Refineries operated at 94.5% of their operating capacity.  Refinery input has deceased 400,000 barrels per day from a peak input of 17.1 million barrels per day the week ending 31 July.

Consumption of gasoline and other fuels dropped by about 2 million barrels a day in the week, the EIA indicated, with gasoline accounting for more than 500,000 barrels a day of that decline.  Gasoline demand is likely to wane at the end of the busy summer-driving season, which could weigh on oil price, along with seasonal refinery maintenance, which typically lowers demand for crude oil in the fall.

Source: EIA weekly Update and GCA Analysis

U.S. crude imports averaged 7.2 million barrels per day, down by 839,000 barrels per day from the previous week.  Over the past four weeks, crude oil imports have averaged 7.5 million barrels per day, 1.7% below the same four-week period last year.

Global News Stories....

Sinopec Corp , Asia's largest refiner,  plans to cut back operations at its refineries by around 5% in the fourth quarter compared with the first half of the year as fuel inventories rise and demand for diesel slows, industry sources told Reuters.

BP’s Whiting refinery, the largest refinery in the Midwest, made a quicker-than-expected return to action this week.  BP released a statement saying that the large crude distillation tower that went offline and caused gasoline prices to spike in the Midwest has “safely restarted,” and that output would ramp up over time.

On Monday, August 24, 2015, West Texas Intermediate crude oil closed at US$38 per barrel, the lowest price since the financial crisis in 2009.  Many factors contribute to the drop in oil prices, but one of the biggest concerns is the weakening Chinese economy.  As China's economy shifts, the demand for construction and heavy industry will decrease, which will also lower the demand for oil.

Other contributing factors include oversupply and the Iran nuclear deal.  The oil market is preparing for an influx of Iranian oil after the nuclear deal stuck between the global powers and Tehran in June, which promises to lift sanctions on the country's crude oil.

With additional crude oil suppliers entering the market, the fight for market share and market position will intensify.  Cheaper oil may bring joy to consumers and businesses, but it also tests the limits of oil storage facilities, most of which are already close to being full.

Saudi Arabia is the only producer that could significantly affect prices.  With Brent close to US$40 per barrel, there will be more pressure for them to reconsider their strategy of pursuing market share. However, on Monday, the OPEC member poured cold water on such a scenario, reiterating the country’s position.  “Even if prices fall further, OPEC won’t cut,” a Saudi official said.  Saudi Arabia is indeed hurting from low oil prices, but just as its strategy is starting to bear fruit – U.S. oil production is declining – why stop now?

GCA Analysis…..

EIA estimates that global consumption in 2014 grew by 1.1 million barrels per day and in 2015 an additional 1.2 million barrels per day till July 2015.  Global production has been higher, growing by 2.3 million barrels per day in 2014 and increasing by an estimated additional 2.9 million barrels per day through July 2015. 

Source: EIA Short Term Energy Outlook August 2015 and GCA Analysis

Although the increase in global production has been similar, the source of supply has been different.  In 2014, global production growth was from countries outside of the OPEC, particularly the United States, while production from OPEC fell.  In contrast, growth in 2015 has come from both non-OPEC and OPEC countries.  EIA estimates that production in 2015 has grown by 2.9 million barrels per day through July.

In a world of oversupply where nobody wants to cut production, it is the market that ultimately rebalances through price.  With 95 million barrels of global production, oversupply is estimated to be 2 million barrels per day.  While that may not seem bad, the amount of crude oil storage space in the world is limited, and so even a small oversupply, compounded for months, can put downward pressure on crude price.

Canada oil sands and U.S. shale oil are the two must significant marginal producers and much of the supply rebalance could come from these two resources.  Oil sands and shale oil currently produce approximately 8 million barrels per day which is equal to about 8% of global production.  There is room for both oil sands and shale oil, but these two resources are producing 25% too much and that has started to change. According to the latest production update from the EIA, U.S. crude oil production in July and August declined by 240,000 barrels per day.

Authors

Another Week this Year Not for the Faint of Heart …

P Kevin Galvin

Principal Advisor, Field Development Planning - kevin.galvin@gaffney-cline.com
Another Week this Year Not for the Faint of Heart …

Bob George

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

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