Iran Deal Agreed ... Lower Crude Price Needed to Accommodate Iran Barrels in 2016?

Iran Deal Agreed ... Lower Crude Price Needed to Accommodate Iran Barrels in 2016?

17th July 2015

The total number of active oil and gas drill rigs showed a small decline of 6 this week with rigs targeting oil decreasing by 7.  The decrease in rig count now stands at 1,048 (56%) from a November 2014 high of 1,876 to 828 on 17 July 2015.

While the rig count had seemingly bottomed out over the past few weeks, Brent crude oil price has fallen from $65 in early-mid June to approximately $57 today, with WTI dropping even further from nearly $62 to very close to $50 today.  Given other factors the question does need asking is whether this is a temporary respite, or whether a further slide may be on the horizon.

Current events in Greece and China, and a deal with Iran occur against the backdrop of a growing world oil-production surplus.  The surplus consists of over-production and weakening demand growth.  Over-production should be the easier problem to solve; however, based on the EIA July 2015 Drilling Productivity Report, NAM shale oil production decline is being offset by higher rig productivity (drilling only in the sweet spots).  The report shows that legacy production is declining faster than new well production, which is providing a small gap for the additional OPEC production; but at the current decline trend (see Figure 1) and Iran production certain to come to the market in 2016, additional rigs may need to be dropped in 2015 to bring the market into balance in 2016.   

Figure 1. U.S. Shale Oil Production - January 2015 to August 2015 (Source: EIA and Gaffney, Cline & Associates) 

Unconventional production has not declined meaningfully so far, and OPEC remains determined to maintain or increase its production.  The standoff could be resolved by lower price.  Clearly the few months of lower oil prices in late 2014 and early 2015 were insufficient to force unconventional production low enough to balance supply and demand.  A longer period of  lower prices in 2015, Brent below $60, may be needed for NAM shale oil production to be forced lower by 2016. 

Looking at other short-term pricing metrics, U.S. refineries processed an average of 16.8 million barrels of crude oil per day, operating at 95.3% utilization. 

Data indicated that imports were up by 38,000 barrels per day, averaging about 7.4 million barrels per day, 1.3% below the same four-week period in 2014.  This could be an indication that current surplus barrels in the global market are finding buyers outside the U.S. market.   

U.S. commercial crude inventories deceased by 4.3 million barrels from the previous week, bringing the total barrels removed from crude stocks over the past 11 weeks to 30 million.  U.S. production and imported barrels have fallen short of U.S. refinery demand by an estimated 400,000 barrels per day over the past 11-week period.  At the current level of U.S. refinery demand, draw down of U.S. crude inventories should continue, assuming U.S. production continues to decline and additional imported barrels are not available to fill the demand gap.       

Across the three major unconventional oil basins, rigs decreased by 3, with the Eagle Ford down 4, Permian up 3, and Williston down 2 week-on-week.  Rig activity over the past week included the decrease of 4 horizontal rigs.

Authors

Iran Deal Agreed ... Lower Crude Price Needed to Accommodate Iran Barrels in 2016?

P Kevin Galvin

Principal Advisor, Field Development Planning - kevin.galvin@gaffney-cline.com
Iran Deal Agreed ... Lower Crude Price Needed to Accommodate Iran Barrels in 2016?

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