First Half 2016 Assessment

First Half 2016 Assessment

22nd July 2016

For a fourth consecutive week, the onshore rig count increased, jumping 4.2% this week (up 18) and reflects an eight week gain of 16.6% (up 63). Rigs targeting oil, since bottoming out the week of 22 May has increased 17.4 %( up 55) and now stands at 371.

Crude futures are on track for weekly losses as traders’ reassessed U.S. data on oil stocks and excesses in oil products in Europe and Asia. While the market expects global oversupply of oil to ease in the 2H 2016, substantial amounts of crude remain in vessels at sea and storage tanks on land as the rebalancing struggles and takes longer than anticipated.

Higher and more stable oil price moving into 2H 2016 continues to encourage increase drilling in the U.S. shale plays, which may slow the pace of U.S. crude production declines but timing of the likely production increase remains a big question.

Exiting 1H 2016 the crude supply-demand balance is significantly tighter and the drawdown of crude inventories is ongoing, although a bit slower than the market expected. And despite production declines in the U.S. (Capital constrained), Canada (wild fires), Nigeria/Libya (political driven) and Venezuela (Capital constrained) the market appears to have adequate supply to meet existing crude demand.

Iraq significantly ramped up production and Iran has increased its output by ~800,000 barrels per day which has facilitated supply meeting global oil demand.

The sustained production drops in non-Opec countries are directly due to massive capital spending cuts. Much of the capital cuts have come from the U.S., where low oil prices had forced drillers to cut back on Shale/Deepwater plays. Production is coming down in the U.S., China, Columbia, Mexico, Brazil, Venezuela and other parts of the world and this has helped bring the crude market closer into balance exiting 1H 2016.

U.S. shale production is forecasted to decline another ~100,000 barrels per day in August for a 10th straight month. The weekly EIA reported data for total U.S. crude production indicates that the decline rate has increased over the past four weeks. The capital spending reductions could be starting to impact the pace of production decline at existing conventional oil fields due to a lack of regular maintenance.

Sources: EIA Weekly Update / July STEO and GCA analysis

The recent increases to the U.S oil rig count, higher and more stable crude prices and the report that private equity firms are returning to the oil patch are signals that market players are growing more confident that the energy crash is over and recovery is in progress.  

OPEC expects a rise in demand for its crude next year driven by 1.2 million barrels per day increase in global oil demand, continuing decline in non-OPEC supply by 100,000 barrels per day and drawdown of excess crude inventories in 2017. Will OPEC deliver the additional barrels when called by the market?

Shell put a hold on its LNG Canada project in Kitimat (Canada) due to adverse conditions in the global LNG market. The global LNG market is expecting supply to exceed demand, a situation that may last until the middle of the next decade.    

Weekly Recaps

Drilling Activity

The total number of active onshore rigs increased to 443, down 1,433 (~76%) from a November 2014 high of 1,876.  Across the three major unconventional basins, the oil rig total increased to 224 (up 10 last week), with Eagle Ford up 2, Williston flat and Permian up 8. The horizontal rig count increased to 357, up 13 last week.

Total U.S. rig count (including the Gulf of Mexico) stands at 462, up 15 last week, with rigs targeting oil up 14 for a 47-week total decline of 295. The average weekly decline rate now stands at ~6.3 oil rigs per week.

Oil Price

Crude stockpiles continue to damp oil prices. Inventories of crude and refined products in the U.S., the biggest oil consumer, swelled to a record 1.385 billion barrels last week.

Brent, the global benchmark for oil, was down $2.28 to US$45.36 a barrel, reflecting a loss of 4.79% on the week.

WTI crude slid $1.95 to US$43.92 a barrel, down 4.25% on the week.

U.S. Supply and Demand

U.S. crude oil refinery inputs averaged 16.9 million barrels per day, with refineries at 93.2% of their operating capacity last week. This is 319,000 barrels per day more than the previous week’s average.

U.S. gasoline demand over past four weeks was at 9.7 million, up 1.3% from a year ago.

On the supply side, EIA data indicated that U.S. oil production in the Lower 48 was down 29,000 barrels per day, with total production at 8.045 million barrels per day. The past 26 week decline total stands at 674,000 barrels per day (an average of ~25,923 barrels per week).

U.S. crude imports averaged 8.1 million barrels per day last week, an increase of 293,000 barrels per day from the previous week.  Over the last four weeks, crude oil imports averaged 8.0 million barrels per day, ~5.9% above the same four-week period last year.

Crude oil inventories decreased 2.3 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 increase of 0.2 million barrels; total storage is 64.1 million barrels (~71% utilization).

Sources: EIA Weekly Update and GCA analysis

Authors

First Half 2016 Assessment

P Kevin Galvin

Principal Advisor, Field Development Planning - kevin.galvin@gaffney-cline.com
First Half 2016 Assessment

Bob George

Regional Director: Americas - bob.george@gaffney-cline.com

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