Demand Trumps Supply Decline

Demand Trumps Supply Decline

17th June 2016

For the third week running the onshore rig count increased; this time by 10, for a three week total of 23 rigs added. By adding rigs operators would appear to be indicating that they believe in the $50 oil scenario and that, for some of them at least, this can work.

However, crude prices snapped a month-long winning streak, declining for six straight sessions to close below US$50 per barrel; Brent closed Thursday at US$47 per barrel (Brent), before recovering around half of that loss on Friday.  The weakness first followed the prospect that the decline in U.S. crude production since April last year could be reversed as the number of drilling rigs continues to increase, but was intensified by global economic fears impacting the demand outlook.

The Bank of England intensified their warnings about the risks of the U.K. leaving the European Union, saying the damage could extend to global markets and the world economy, a point upheld by Federal Reserve Chair Janet Yellen in the U.S. central bank’s decision to hold interest rates steady.

U.S. crude demand was weaker than expected with U.S. refinery input down 112,000 barrels per day as compared to last year at this time. This directly impacted the amount of crude withdrawn from storage and with the large amount of existing crude inventory and the short-term nature of supply interruptions; it’s unlikely the price of oil will rise higher than this year’s peak.

Prices may have advanced ahead of the curve, given that the recent price declines come amid declining U.S. crude production and lower crude inventories, which dropped last week ~ 933,000 barrels, according to data from the U.S. Energy Information Administration.


Sources: EIA Weekly Update and GCA analysis

North Dakota’s (Bakken) oil output fell the most in history in April, 70,414 barrels per day less than March and nearly three times the EIA’s forecasted decline of 26,259 barrels per day for April. The North Dakota Department of Mineral Resources indicated that the slide in crude production is expected to accelerate through May and into the summer months.  

Total natural gas production is forecast to decline for a fifth consecutive month in July to 45.8 billion cubic feet per day, the lowest level since July 2015. Natural gas production would be down ~0.5 billion cubic feet per day from June, the largest monthly decline since March 2013.   

Weekly Recaps

Drilling Activity

The total number of active onshore rigs increased to 398, down 1,476 (~78%) from a November 2014 high of 1,876.  Across the three major unconventional basins, the oil rig total increased to 198 (up 4 last week), with Eagle Ford up 2, Permian up 4 and Williston flat. The horizontal rig count increased to 326, up 3 last week.

Total U.S. rig count (including the Gulf of Mexico) stands at 424, up 10 last week, with rigs targeting oil up 9 for a 42-week total decline of 329.   The average weekly decline rate deceased and stands at ~7.8 oil rigs per week.

Oil Price

Crude oil prices rose on Friday for the first time in seven days, but trading remains volatile less than a week before Britain goes to the polls over its EU membership.

Brent, the global benchmark for oil, was down $2.29 to US$48.59 a barrel, reflecting a loss of 4.5% on the week.

WTI crude slid $2.08 to US$47.44 a barrel, down 4.2% on the week

U.S. Supply and Demand

U.S. crude oil refinery inputs averaged 16.3 million barrels per day, with refineries at 90.2% of their operating capacity last week. This is 100,000 barrels per day less than the previous week’s average.

U.S. gasoline demand over past four weeks was at 9.6 million, up 2.9 percent from a year ago.

On the supply side, EIA data indicated that U.S. oil production in the Lower 48 was down 28,000 barrels per day, with total production at 8.189 million barrels per day. The past 21 week decline total stands at 530,000 barrels per day (an average of ~25,238 barrels per week).

U.S. crude imports averaged 7.6 million barrels per day last week, a decrease of 83,000 barrels per day from the previous week.  Over the last four weeks, crude oil imports averaged 7.6 million barrels per day, ~9.8 % above the same four-week period last year.

Crude oil inventories decreased 0.9 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 increase of 0.9 million barrels; total storage is 66.5 million barrels (~88% utilization).

Sources: EIA Weekly Update and GCA analysis

Authors

Demand Trumps Supply Decline

P Kevin Galvin

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

Signup to receive our latest articles

We're here to help