15th July 2016
The onshore rig count continues to show positive gains, adding 4, and reflects a seven week gain of 45. Rigs targeting oil, since bottoming out the week of 22 May has increased by 41 and now stands at 357.
Operators are sending a clear signal that current prices support additional drilling activity. On the other hand, at crude prices below $50 WTI, the increase in drilling activity will be limited to only the very best acres.
The crude market has undergone a startling transformation, moving from a first quarter 2016 crude surplus of 2.58 million barrels per day to near balance in the second quarter of the year.
The crude oil supply/demand balances are expected to transition to balance and then to a deficit supply state in the back half of 2016 and continue in an under supply market into 2017.
First half 2016 Production decline in the U.S., Nigeria(perhaps temporary) and Venezuela is estimated to be ~1.3 million barrels per day and global oil demand increase is expected to be 1.4 million barrels per day in 2016; the global crude supply/demand balance now indicates a supply deficit exiting 2016.
Oil prices are not expected to fully react to the fundamental under supply until global crude inventories return to more normal levels in late 2017 or early 2018. Once global crude inventories have diminished, oil fundamentals would begin to support prices that closely link to long run marginal production cost.
Sources: EIA Weekly Update / July STEO and GCA analysis
U.S. shale oil drillers have made significant strides in adapting to lower crude oil prices by improving well performance (high grading development acres) and lowering cost by pushing for lower rates from companies that provide rigs, pipes and completion services. It is estimated that shale drillers have cut the cost of producing new oil by as much as 40% in the past two years.
Russian natural gas pipeline prices at the German border are now less than half of their levels at the start of 2015. Declining natural gas prices were accompanied by increasing Russian and Norwegian exports to countries in the European Union. Natural gas pipeline exports from Russia and Norway, Europe's two largest natural gas suppliers, have been steadily increasing since the spring of last year.
In total, exports from these two countries to Europe were 16% higher in the last three quarters of 2015 as compared to the same period of 2014, and 23% higher in the first quarter of 2016 as compared to the same months last year.
The total number of active onshore rigs increased to 425, down 1,451 (~77%) from a November 2014 high of 1,876. Across the three major unconventional basins, the oil rig total increased to 214 (up 1 last week), with Eagle Ford flat, Williston down 1 and Permian up 2. The horizontal rig count increased to 344, up 1 last week.
Total U.S. rig count (including the Gulf of Mexico) stands at 447, up 7 last week, with rigs targeting oil up 6 for a 46-week total decline of 309. The average weekly decline rate now stands at ~6.7 oil rigs per week.
Oil prices weakened as confidence of a further recovery in the crude market waned amid signs the global glut in oil is shrinking at a slower pace than expected.
Brent, the global benchmark for oil, was up $1.16 to US$47.64 a barrel, reflecting a gain of 2.50% on the week.
WTI crude increased $0.71 to $45.87 a barrel, up 1.57% on the week.
U.S. Supply and Demand
U.S. crude oil refinery inputs averaged 16.5 million barrels per day, with refineries at 92.3% of their operating capacity last week. This is 143,000 barrels per day less than the previous week’s average.
U.S. gasoline demand over past four weeks was at 9.7 million, up 1.6% from a year ago.
On the supply side, EIA data indicated that U.S. oil production in the Lower 48 was down 14,000 barrels per day, with total production at 8.074 million barrels per day. The past 25 week decline total stands at 645,000 barrels per day (an average of ~25,800 barrels per week).
U.S. crude imports averaged 7.8 million barrels per day last week, a decrease of 522,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 8.1 million barrels per day, ~11.2% above the same four-week period last year.
Crude oil inventories decreased 2.5 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 0.2 million barrels; total storage is 63.9 million barrels (~70% utilization).
Sources: EIA Weekly Update and GCA analysis
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