Drawing a Trend from 2 Data Points …

Drawing a Trend from 2 Data Points …

10th June 2016

For the second week running the onshore rig count increased; this time by 6, for a two week total of 13 rigs added.  With oil having traded above US$50 per barrel all week, there is a feeling that the decline in rigs has ended.  Sustaining oil price above US$50 per barrel will be important in cementing confidence in the market, but if this can be sustained for a while longer then expect more operators to return to the drill pads.  The spectre at this feast is Q2 2015, where even higher prices offered hope but in reality presaged nothing but more misery.  However, fundamentals are better now, and … 

… or should it be “but “?  This week also saw the first reported increase in U.S. crude production in 13 weeks, 10,000 barrels per day according to the latest EIA’s data.  While this could be a signal that U.S. operators are returning to the well pads that would be very quick for just a two-week increase in rigs.  While it could also have been the turning-on of wells drilled but not completed that caused the weekly increase it is probably more likely that it’s a one off data point reflecting a correction to prior reporting.  According to the latest EIA Short-Term Energy Outlook, U.S. crude production fell by 150,000 barrels per day in May, the greatest monthly production decline so far since the production peak over a year ago in April 2015.

In total, U.S. crude production has declined ~500,000 barrels per day since the start of the year from 9.2 million barrels per day in January 2016 to 8.7 million barrels per day last month.  EIA forecast that U.S. crude production will decrease another ~600,000 barrels per day by October 2016 for a total decline of ~ 1.10 million barrels per day (to just over 8 million barrels per day).  This is without considering that we have just entered hurricane season in the Gulf of Mexico that could bring addition crude production outages.

Declining U.S. production, U.S crude stock inventory withdrawals and production outages in Canada, Nigeria and Venezuela have provided support to drive oil prices higher, with a reasonable expectation that continued U.S. production decline and global demand growth will continue to support crude oil prices.

Oil gained market share in the world’s fuel mix last year for the first time since 1999, BP PLC said Wednesday in its annual review of global energy statistics.  After a world-wide glut drove prices down more than 50% since 2014, BP’s report showed a shifting global energy landscape.  Overall demand is showing a “gradual deceleration,” BP said, the result of world-wide economic weakness.

Supporting the BP energy outlook, the World Bank reduced its forecast for the global economy.  The agency forecasted that the world economy would expand 2.4 percent in 2016, down from 2.9 percent it expected in January.

The U.S. Geological Survey this week indicated that Western Colorado has 40 times more natural gas than previously reported, potentially making it the second largest formation in the country after the Marcellus Shale formation in Pennsylvania and neighboring states.  GCA will be keeping a keen eye on this development to analysis its potential impact on future U.S. natural gas supply, although at current gas prices the exploitation of such volumes would be severely challenged.

Weekly Recaps

Drilling Activity

The total number of active onshore rigs increased to 388, down 1,486 (~79%) from a November 2014 high of 1,876.  Across the three major unconventional basins, the oil rig total increased to 192 (up 2 last week), with Eagle Ford and Permian flat and Williston up 2. The horizontal rig count increased to 323, up 4 last week.

Total U.S. rig count (including the Gulf of Mexico) stands at 414, up 6 last week, with rigs targeting oil up 3 for a 41-week total decline of 338.   The average weekly decline rate deceased and stands at ~8.2 oil rigs per week.

Oil Price

U.S. oil prices moved above $50 a barrel for the first time since July. Crude has nearly doubled in value since hitting decade-lows earlier this year.

Brent, the global benchmark for oil, was up $1.28 to US$50.88 a barrel, reflecting a gain of 2.58% on the week.

WTI crude increased $0.86 to US$49.52 a barrel, up 1.77% on the week.

U.S. Supply and Demand

U.S. crude oil refinery inputs averaged 16.4 million barrels per day, with refineries at 90.9% of their operating capacity last week. This is 211,000 barrels per day more than the previous week’s average.

U.S. gasoline demand over past four weeks was at 9.6 million, up 2.6 percent from a year ago.

On the supply side, EIA data indicated that U.S. oil production in the Lower 48 was down 8,000 barrels per day, with total production at 8.217 million barrels per day. The past 20 week decline total stands at 502,000 barrels per day (an average of ~25,100 barrels per week).

U.S. crude imports averaged 7.7 million barrels per day last week, a decrease of 134,000 barrels per day from the previous week.  Over the last four weeks, crude oil imports averaged 7.6 million barrels per day, ~9.5 % above the same four-week period last year.

Crude oil inventories decreased 3.2 million barrels from the previous week and persist at historically high levels. The crude stored at Cushing (the main price point for WTI) saw a decrease of 1.3 million barrels; total storage is 65.6 million barrels (~86% utilization).

Authors

Drawing a Trend from 2 Data Points …

P Kevin Galvin

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

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