Crude Pierced $50 per Barrel; Turning on Supply is the Fear.

Crude Pierced $50 per Barrel; Turning on Supply is the Fear.

27th May 2016

The onshore rig count was flat this week.  Crude price moved above $50 per barrel briefly; the rig bloodletting could be over and a period of stability starting. However, rig flat lining will not halt crude production decline immediately. 

The price of oil rose momentarily above $50 a barrel as declines in U.S. oil inventories and crude production raised hopes the glutted market is firmly moving toward a balance. However, the first move above $50 since November 2015 also comes with concerns that higher prices could just turn on more supply.

Oil discoveries have fallen to a six decade low, the smallest since 1952, based on Rystad Energy analysis. The lack of discoveries could have a negative impact on long term supply; however, meeting demand growth in the short term should be far less concerning given the resources available in OPEC and in North America that can be brought to the market.

Global climate targets are likely to curb crude consumption such that existing resources could be sufficient to meet demand growth for 10 to 15 years. This could provide the time required for the energy industry to restructure their exploration programs to meet long term crude demand.

Explorers are likely to remain laser-focused on containing costs and extracting resources from existing assets where risks are lower and project cycle times are reduced.

Turning to natural gas, demand is emerging as an issue for LNG, with top buyers such as Japan and South Korea experiencing declining demand, with increased purchases by China and India compensating, but not quickly enough to offset rising supply. The oversupply of LNG may actually worsen in coming years as more U.S. projects ramp up and the last of the eight major Australian ventures come to full production. This means buyers increasingly hold the upper hand, making it more likely that producers will have to accept lower prices in order to grow demand.

Weekly Recaps

Drilling Activity

The total number of active onshore rigs remains at 380, down 1,496 (~80%) from a November 2014 high of 1,876.  Across the three major unconventional basins, the oil rig total deceased to 185 (down 2 last week), with Eagle Ford and Williston each down 1, and Permian flat. The horizontal rig count remained at 314, flat last week.

Total U.S. rig count (including the Gulf of Mexico) stands at 404, flat last week, with rigs targeting oil down 2 for a 39-week total decline of 350.   The average weekly decline rate is steady at ~9 oil rigs per week.

Oil Price

Despite the recent retreat, prices are still up nearly 90% from a 13-year low in February, due to disruption to production in Canada and Africa. Production in the U.S. also continues to slide; last week, U.S. crude output fell 8% on-year to 8.8 million barrels a day.

Brent, the global benchmark for oil, was up $0.54 to US$49.30 per barrel, reflecting a gain of 1.1% on the week. 

WTI gained $1.06 to US$49.29 per barrel, reflecting a gain of 2.2% on the week.

U.S. Supply and Demand

U.S. crude oil refinery inputs averaged 16.3 million barrels per day, with refineries at 89.7% of their operating capacity last week. This is 92,000 barrels per day less than the previous week’s average.

U.S. gasoline demand over past four weeks was at 9.6 million, up 3.9 percent from a year ago.

On the supply side, EIA data indicated that U.S. oil production in the Lower 48 was down 20,000 barrels per day, with total production at 8.265 million barrels per day. The past 18 week decline total stands at 454,000 barrels per day (an average of ~25,222 barrels per week).

U.S. crude imports averaged 7.3 million barrels per day last week, a decrease of 362,000 barrels per day from the previous week.  Over the last four weeks, crude oil imports averaged 7.6 million barrels per day, ~10.9 % above the same four-week period last year.

Crude oil inventories decreased 4.2 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 decrease of 0.7 million barrels, total storage is 67.6 million barrels (~89% utilization).

Sources: EIA Weekly Update and GCA analysis

 

 

 

 

 

 

 

 

 

 

Authors

Crude Pierced $50 per Barrel; Turning on Supply is the Fear.

P Kevin Galvin

Principal Advisor, Field Development Planning - kevin.galvin@gaffney-cline.com

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