Confidence, Not Instant Gratification, Is What Is Required

Confidence, Not Instant Gratification, Is What Is Required

29th April 2016

The onshore rig count declined this week, down 10 (3%).  While oil prices have continued to respond to the diminishing oversupply, price still remains too low - or has not been rising for long enough - to halt the decline in rigs.

This week, BP, Pioneer Natural Resources, and rig supplier Nabors Industries all indicated that a crude price above US$50 per barrel would provide the needed boost to cash flow that could encourage rigs to return to their drilling pads.

In addition, Bloomberg indicated that a crude price of US$53 per barrel could stop the bleeding of cash at the world’s 50 largest publicly traded oil and gas sector companies.  However, not only will a US$50 price need to be reached, it will need to be sustained for some time before operators start sanctioning projects with economic returns at US$50.

It is confidence that oil prices at least have a new floor, as well as further headroom, that is required and not just the instant gratification of having reached a new milestone.  Talk of returning to drill pads should bring a stinging reminder of last year’s failed attempt to restart activity too early after oil prices rose (temporarily, in hindsight).  Operators should be a bit more guarded this time and be certain that price is truly calling for additional drilling activity.

Exactly when oil prices will hit such a level and how long it will need to stay there is a question to which there is no certain answer, at least not today.  Even as oil rallies, there is still hesitation to forecast higher prices due to the uncertainty that current gains might not be sustainable.

The price of crude has increased by ~70% from the decade-lows (mid to high US$20s) it hit earlier this year.  Much of the movement is grounded on hopes that declining U.S. crude production will help balance an oversupplied market.  But should we buy into the price rally?  Is the glut indeed on the wane given current U.S. stockpiles (the EIA reported an increase of 2 million barrels this week) and given the potential for increased supply from OPEC?  Last year, the oil price rallied in the spring only to collapse in the second half of the year.

However, there are clear signs that the market is moving toward balance.  For example, the decline in U.S. crude production thus far in 2016 stands at 260,000 barrels a day (65,000 barrels per day per month).  However, there is still a potential oversupply from OPEC’s spare production capacity of 2.98 million barrels a day that should sound alarms and dampen the return of drilling activity, and the big question of how much “unofficial” storage there is out there that could be “un-stored” very quickly if the price is favorable.  This is obviously weighing on minds as the Brent strip is actually in backwardation for the July contract.

Source: EIA Weekly Data

 

Weekly Recaps

Drilling Activity

The total number of active onshore rigs now stands at 395, down 1,481 (~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 3, Williston flat, and Permian down 2.  The horizontal rig count is now 324, down 8 last week.

Total U.S. rig count (including the Gulf of Mexico) stands at 420, down 11 last week, with rigs targeting oil down 11 for a 35-week total decline of 342.  The average weekly decline rate continues at ~10 rigs per week.

Oil Price

Oil prices ticked higher on Friday on a weaker U.S. dollar and signs that the market oversupply has started to dwindle.  Brent crude was heading for its biggest monthly rise in seven years on Friday, touching fresh 2016 highs.

Brent, the global benchmark for oil, was up US$2.35 to US$47.81 a barrel, reflecting an increase of 5% on the week.

WTI crude rose US$1.87 to US$45.86 a barrel, up 4% on the week.

Natural Gas Price

As summer heating demand increases, exports to Mexico will increase and LNG demand remains on track to increase.  Working gas in storage continues to keep a lid on spot natural gas prices. However, the long end of the NYMEX Henry Hub curve is showing an increase from US$2.09 today to US$3 by the end of this year.

U.S. Supply and Demand

U.S. crude oil refinery inputs averaged 15.8 million barrels per day, with refineries at 88.1% of their operating capacity last week.  This represents a decrease of 257,000 barrels per day from the previous week’s average.

U.S. gasoline demand over the past four weeks was 9.4 million, up 5.6% from a year ago.

On the supply side, EIA data indicated that U.S. oil production in the Lower 48 was down 15,000 barrels per day, with total production at 8.425 million barrels per day.  The past fourteen-week decline total stands at 294,000 barrels per day (an average of ~21,000 barrels per week).

U.S. crude imports averaged 7.6 million barrels per day last week, a decrease of 637,000 barrels per day from the previous week.  Over the last four weeks, crude oil imports averaged 7.7 million barrels per day, ~1.2% above the same four-week period last year.

Crude oil inventories increased 2 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 1.7 million barrels, pushing total storage to 66 million barrels (~87% utilization).

Sources: EIA Weekly Update and GCA Analysis

 

Authors

Confidence, Not Instant Gratification, Is What Is Required

P Kevin Galvin

Principal Advisor, Field Development Planning - kevin.galvin@gaffney-cline.com
Confidence, Not Instant Gratification, Is What Is Required

Jeanne-Mey Sun

Vice President and Global Head of Business Consulting - Jeanne-Mey.Sun@gaffney-cline.com
Confidence, Not Instant Gratification, Is What Is Required

Bob George

Global General Manager - bob.george@gaffney-cline.com

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