(As Always) Crude Price is Reacting to Supply and Demand Fundamentals

(As Always) Crude Price is Reacting to Supply and Demand Fundamentals

22nd April 2016

The onshore rig count declined this week, down 7 (2%).  While oil prices have been responding to the diminishing oversupply in the market, the current oil price is still too low to halt the decline in rigs.  Despite the news out of Doha on Sunday which, as expected, caused the oil price to stutter, it continued to firm by adding US$3-4 per barrel during the week.  This principally reflects the strengthening focus on falling non-OPEC production, helping rebalance a market dogged by oversupply. 

While current global oversupply is thought to be around 1.5 million barrels per day, U.S. production is expected to fall by ~700,000 barrels per day from year ago levels (see 18 December 2015 Monitor).  However, additional fall-offs in Venezuela, Mexico, and Colombia could bring the total decrease in crude supply to more than 1 million barrels per day in 2016.  

As a further measure of the impact in North America, as of April 14, 21 companies in North America (US (20) and Canada (1))1 have filed for bankruptcy in 2016, with more to come even if prices continue to firm as a number are already in default.  This compares to 42 companies for the whole of 2015.

With a short-term pipeline cut in Nigeria (250,000 barrels) and other systemic production disruptions, the global crude market is beginning to look more balanced, which current price movements reflect.  On the other hand, if the decline in non-OPEC production proves to be insufficient to fully balance the market, price weakness will continue into 2017.

Source: http://www.investing.com/commodities/crude-oil-historical-data

Turning for a moment to the gas market, is the potential for U.S. LNG exports beginning to impact global gas prices?  Europe is awash with low-priced natural gas, thanks to Russia and Norway using a Saudi-like tactic to hold market share.  This would seem to be similar to the global oil market where Saudi Arabia, the biggest producer, boosted output last year to fend off U.S. shale drillers resulting in the collapse of crude oil prices.  Gas prices in the U.K., the region’s biggest market, fell 38% in the past year.  (See GCA’s recent article on the emergence of global hub pricing: Evolving Natural Gas Paradigms – Risks and Opportunities for Industry Participants.)

 

Weekly Recaps

Drilling Activity

The total number of active onshore rigs now stands at 405, down 1,471 (~80%) from a November 2014 high of 1,876.  Across the three major unconventional basins, the oil rig total decreased to 195 (down 7 last week), with Eagle Ford down 2, Williston flat and Permian down 5.  The horizontal rig count is now 332, down 3 last week.

Total U.S. rig count (including the Gulf of Mexico) stands at 431, down 9 last week, with rigs targeting oil down 8 for a 34-week total decline of 331.  The average weekly decline rate continues at ~10 rigs per week.

Oil Price

Oil traded near its highest level in almost five months after U.S. output dropped to the lowest since October 2014.

Brent, the global benchmark for oil, was up US$2.62 to US$45.46 a barrel, reflecting an increase of 6% on the week.

WTI crude rose US$3.64 to US$43.99 a barrel, up 9% on the week.

U.S. Supply and Demand

U.S. crude oil refinery inputs averaged 16.1 million barrels per day, with refineries at 89.4% of their operating capacity last week.  This represents an increase of 163,000 barrels per day from the previous week’s average.

U.S. gasoline demand over the past four weeks was at 9.4 million, up 3.9% from a year ago.

On the supply side, EIA data indicated that U.S. oil production in the Lower 48 was down 19,000 barrels per day, with total production at 8.440 million barrels per day.  The past thirteen-week decline total stands at 279,000 barrels per day (an average of ~21,500 barrels per week).

U.S. crude imports averaged 8.2 million barrels per day last week, an increase of 247,000 barrels per day from the previous week.  Over the last four weeks, crude oil imports averaged 7.8 million barrels per day, ~2.1% above the same four-week period last year.

Crude oil inventories increased 2.1 million barrels from the previous week and persist at historically high levels.  The crude stored at Cushing (the main price point for WTI) saw a reduction of 0.3 million barrels, taking the total storage to 64.3 million barrels (~85% utilization).

Source: EIA Weekly Update and GCA Analysis

 

1 Source: Haynes and Boone, LLP; Oil Patch Bankruptcy Monitor

 

Authors

(As Always) Crude Price is Reacting to Supply and Demand Fundamentals

P Kevin Galvin

Principal Advisor, Field Development Planning - kevin.galvin@gaffney-cline.com
(As Always) Crude Price is Reacting to Supply and Demand Fundamentals

Jeanne-Mey Sun

Vice President and Global Head of Business Consulting - Jeanne-Mey.Sun@gaffney-cline.com
(As Always) Crude Price is Reacting to Supply and Demand Fundamentals

Bob George

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

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