11th September 2015
The downward rebasing of the onshore rig fleet continued this week, taking the two-week decline to 30 (14 more) and leaving the total number of active rigs at 817, a new low (9 below the mid-July 2015 level and 12 below that recorded in May 2009). Overall, it is now down 1,059 (56%) from a November 2014 high of 1,876.
The latest decline clearly reflects the latest bout of oil price weakness, and the sentiment attached to that. While this Q3 change is too soon to have impacted production itself, its potential future impact is being foreshadowed by the ~1 million barrels per day impact that the late 2014 – early 2015 price fall appears to have had (see discussion below on EIA numbers).
Although not the focus to date of GCA’s Oil & Gas Monitor, alarm bells may now be starting to sound on the LNG front. With new supplies having recently hit the market from both East and West Coast Australia, and PNG; with Japan having restarted its nuclear power program and demand looking like it has peaked this year, and with economic uncertainty in China, the imminent start of exports from the U.S. (the first, from Cheniere’s Gulf Coast facility, are due later this year), is this the next “LTO” to disrupt global markets?
U.S. Drilling Activity.....
Total U.S. rig count (including the GOM) declined 16 last week, with rigs targeting oil declining by 10, for a two-week total of 23. Across the three major unconventional basins, the oil rig total declined to 396 (down 3 last week), with the Eagle Ford, Permian, and Williston down 1 week-on-week. Horizontal rigs decreased by 11.
Oil prices rose Thursday after the Energy Information Administration (EIA) reported a significant drop in crude oil production in the Lower 48 states. However, what do the numbers really show?
This week’s weekly report said that oil output in the Lower 48 fell by 208,000 barrels a day in the seven days to September 4, the largest drop since October 2013. However, during the same period, Alaskan production grew 125,000 barrels per day, putting total U.S. production down 83,000 barrels a day at 9.1 million barrels a day. Nevertheless, this is the lowest level since January.
For oil bulls, this could be a reason to celebrate. Oil traders are closely watching production statistics for signs that U.S. output is falling as producers cut spending on new production, helping shrink the global glut of oil that has weighed on oil prices.
As always, a word of caution on data quality. As noted last week, the EIA has just revised its approach to data collection by obtaining much more of its data directly from the producers, rather than State agencies. This is seen as an improvement in data quality. However, historic data (reported as “actual”) is still subject to revision over time, and care needs to be taken when looking at differences over time to really understand what is coming from revised data and what is resulting from actual activity changes. (See also further discussion under “GCA Analysis”.)
U.S. Supply and Demand…..
U.S. crude oil refinery inputs averaged 16.1 million barrels per day, 1 million barrels per day less than the peak at the end of July. Refineries operated at 90.9% of their operating capacity, a drop of 6% from the peak at the end of July.
U.S. crude imports averaged 7.5 million barrels per day, down by 396,000 barrels per day from the previous week. Over the past four weeks, crude oil imports have averaged 7.6 million barrels per day, 0.5% above the same four-week period last year.
Crude inventories increased 2.6 million barrels, driven by the futures market that is providing incentives to store more crude from a much wider and consistent contango structure. Looking back at the second week of January when refinery inputs were at a similar level, U.S. production and not imports was the driver of stock increase. With U.S. crude oil production clearly in decline, it is the economics of crude storage that is encouraging an increase in crude stocks.
The WTI futures market is currently trading in a contango of around US$1.16 between the first and third month, which is not much higher than the US$0.99 average since 2005. The contango suggests that the U.S. market is only moderately oversupplied and there will be enough storage capacity available to accommodate inventory build over the next few months.
Global News Stories....
WASHINGTON – A House subcommittee swiftly approved legislation authorizing crude exports on Thursday, while putting off the most divisive fights for later. The Energy and Power Subcommittee approved the bill by voice vote, the first step in a process that could get the measure before the full House this month.
DOHA, Qatar – OPEC has become more pessimistic about the future of oil prices this year amid plentiful supplies and softening demand from China, the group’s members said this week.
Notwithstanding the bump on Thursday on the back of the EIA data, oil prices slumped Friday and eyed a sizable drop for the week, pressured by news that Saudi Arabia does not back holding an emergency OPEC meeting aimed at stopping crude’s slide.
The U.S. EIA said in a short-term market report that total crude oil production will decline 4.3% from expected full-year 2015 levels to 8.8 million barrels per day by 2016. EIA forecasts were revised down by 100,000 bpd from August.
The EIA indicated in their updated short-term energy outlook (STEO) that total crude oil production will see a decline of about 1 million barrels per day to 8.6 million barrels per day by September 2016, from a peak of 9.6 million barrels per day now shown as having been reached in April 2015.
There is still “noise” in the numbers as changes in data and data sourcing are reflected in ongoing updates. For example, it is only in its September forecast data that the EIA appears to have reconciled “actual” production (though June 2015). As can be seen in the chart below, there have been significant revisions (both up and down) between initial estimates and the current report. As of now, the forecast through end 2016 still reflects the same trend as previously, just adjusted monthly to reflect a new starting point as “actual” numbers are updated. However, this is likely to change when the EIA updates its annual forecast later this year.
Ignoring the detail of these adjustments, the trend is very clear. The current EIA projection is that by late 2016 U.S. oil production will be some 500,000 to 750,000 barrels per day lower than was being forecast at the start of this year. Oil price is impacting activity, and activity is impacting production and the outlook for future production. That trend is set to continue a while yet.
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