12th August 2016
The onshore rig count increased for a seventh consecutive week, adding 17, for an eleven week gain of 22% (up 84), with the Permian taking the lion’s share. Rigs targeting oil now stand at 396, up 25% (80) since bottoming out the week of 22 May.
This is the largest weekly increase since early October 2014.
Although oil prices have been soft now for the last 4-5 weeks, they surged more than 4% on Thursday on buying triggered both by a statement by Saudi Arabia that talks on price stabilization are set to take place in late September, and an International Energy Agency (IEA) forecast that crude markets are tightening. This latter point is consistent with the increase in rigs over the past seven weeks, also anticipating an improvement in fundamentals.
However, while markets are finding instant gratification in positive news (or statements), in the bigger picture prices still remain weak and prone to reversal amid concerns of swelling stockpiles that stand at record highs. According to the IEA, traders struggling to sell cargoes are hoarding the most barrels on board tankers at sea since the end of the 2008-2009 financial crises.
The latest IEA weekly update showed U.S. crude oil inventories increased for the third consecutive week bring the total to 4.2 million barrels while gasoline stocks took another tumble, decreasing 2.8 million barrels.
Sources: EIA Weekly Updates, Oi l& Gas Journal, IEA Crude Market Report, OPEC Monthly Report and GCA Analysis
Crude oil refinery inputs averaged 16.6 million barrels per day last week which was 413,000 barrels per day lower than the same time period in 2015. Crude oil inventory rose 1.1 million barrels last week and imports remained elevated at 8.4 million barrels, 11.5% above the same four week period last year.
GCA’s analysis (illustrated above) supports that oil stored on board tankers at sea is being offloaded to onshore storage in the U.S. The crude oil inventory increases over the past three weeks has been caused by elevated imports way above the 2016 average of 7.9 million per day and lower than expected refinery demand.
U.S. refineries are starting their seasonal maintenance early, current demand is weaker than 2015 and this would suggest that less oil, not more, would be imported into the U..S. However, with onshore storage setting at 67% utilization, oil traders and refineries may see this is an opportunity to move crude to less expensive onshore storage in anticipation of higher demand in the fourth quarter.
GCA’s analysis shows that global stock change in July/August is in deficit a little over 500,000 barrels per day; which would indicate that global supply and demand is near balance. Global oil markets will continue to re-balance this year as a pick-up in demand from refiners absorbs record output from several Arabian Gulf producers, the International Energy Agency indicated in their latest Oil Market Report.
Refiners around the world will process record volumes of crude this quarter as their demand rebounds after falling in the second quarter and that will shrink brimming crude stockpiles.
Iraq has reached agreement with BP, Shell and Lukoil to restart stalled investment in oil fields the firms are developing, allowing projects that were halted in 2016 to resume and crude production to increase in 2017.
The IEA’s latest oil report said global demand in 2017 would slow to 1.2 million barrels a day from the 1.3 million previously expected. The downgrade in oil demand is a result of dimmer global macroeconomic outlook.
The total number of active onshore rigs increased to 464, down 1,415 (~75%) from a November 2014 high of 1,876. Across the three major unconventional basins, the oil rig total increased to 247 (up 14 last week), with Eagle Ford and Williston up 1 and Permian up 12. The horizontal rig count increased to 375, up 13 last week.
Total U.S. rig count (including the Gulf of Mexico) stands at 481, up 17 last week, with rigs targeting oil up 15 for a 49-week total decline of 277. The average weekly decline rate now stands at ~5.6 oil rigs per week.
Oil prices steadied after the International Energy Agency forecast crude markets would rebalance in the next few months following several years of heavy overproduction.
Brent, the global benchmark for oil, was up $2.28 to US$46.18 a barrel, reflecting a gain of 5.19% on the week.
WTI crude rose $2.21 to $43.76 a barrel, up 5.32% on the week.
U.S. Supply and Demand
U.S. crude oil refinery inputs averaged 16.6 million barrels per day, with refineries at 92.2% of their operating capacity last week. This is 255,000 barrels per day less than the previous week’s average.
U.S. gasoline demand over past four weeks was at 9.8 million, up 1.7% from a year ago. Total motor gasoline inventories decreased by 2.8 million barrels last week.
On the supply side, EIA data indicated that total domestic crude production declined by 15,000 barrels to 8.44million barrels a day. The data indicated that U.S. oil production in the Lower 48 was down 2,000 barrels per day, with total production at 8.020 million barrels per day. The past 29 week decline total for the lower 48 stands at 688,000 barrels per day (an average of ~23,725 barrels per week).
U.S. crude imports averaged over 8.4 million barrels per day last week, a decrease of 334,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 8.4 million barrels per day, ~11.5% above the same four-week period last year.
Crude oil inventories increased 1.1 million barrels from the previous week and persist at historically high levels. The crude stored at Cushing (the main price point for WTI) saw an increase of 1.2 million barrels; total storage is 65.3 million barrels (~72.6% utilization).
Sources: EIA Weekly Update and GCA analysis
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