12th February 2016
The onshore rig count saw another significant decline this week, down 30 (6%) as light tight oil (LTO) operator cash flows shrink and rigs are taken off the well pad. In the three key oil basins (Eagle Ford, Permian, and Williston), the drop was 13 oil rigs (a 5% decline).
U.S. oil prices fell for a sixth straight day on Thursday - approaching the 13-year lows that were reached last month - weighed by brimming crude inventories. For the week ending February 5, government data indicated that crude inventories in Cushing hit all-time highs, just shy of 65 million barrels.
An uncertain price trajectory for 2016 and a continued decline in rig activity in North America means that U.S. LTO production is under pressure and expected to decline ~750,000 barrels per day this year (see 18 December 2015 Monitor).
Over the medium and long-term horizons, however, there is a diversity of views on the prospects for LTO. In last week's Monitor we compared the world energy outlooks of ExxonMobil and OPEC. The former suggests that LTO drilling activity could begin to see a recovery by 2020. On the other hand, OPEC’s view is that LTO drilling activity could stay at current levels well beyond 2020.
This week, BP weighed in with their Energy Outlook 2035 (EO2035). They put forward a view that U.S. LTO production would peak in 2030 at just under ~9 million barrels per day and decline to ~8 million barrels per day in 2035. BP’s view differs somewhat from ExxonMobil in that BP believes Canadian oil sands production growth will return and project capital could favor long- over short-cycle LTO investments.
In all three forecasts (BP, ExxonMobil, and OPEC), demand rises to ~112 million barrels per day in 2040, which indicates that long-term forecast differences are driven by differences in long-term supply side expectations. However, in the near-term, BP’s demand forecast for 2015 to 2020 indicates a higher growth rate than both ExxonMobil and OPEC. BP’s view is that the current low price will stimulate demand and that higher demand will help balance the global oil market. Another difference in the BP demand forecast compared to ExxonMobil and OPEC is seen starting in 2025. BP sees demand growth beginning to slow after 2025, similar to the ExxonMobil demand forecast. However, whereas ExxonMobil sees continued growth past 2040, BP appears to be indicating that by 2040 demand growth could be flat.
Consistent with the ExxonMobil view, BP sees U.S. LTO production as a growth opportunity and one that will provide a return on investment into the future, whereas OPEC believes LTO production will remain stagnant with zero growth into the future.
The total number of active onshore rigs now stands at 516, down 1,360 (~73%) from a November 2014 high of 1,876. Across the three major unconventional basins, the oil rig total declined to 261 (down 13 last week), with Eagle Ford down 2, Williston down 3 and Permian down 8. The horizontal rig count is now 433, down 25.
Total U.S. rig count (including the Gulf of Mexico) stands at 541, down by 30 last week, with rigs targeting oil down 28 for a 24-week total decline of 234. The average weekly decline rate now stands at 8.5 rigs per week.
Oil prices rallied on Friday, rebounding from a 13-year low the previous day, on speculation of production cuts among some of the world’s biggest suppliers.
Brent, the global benchmark for oil, was down US$1.52 to US$32.80 a barrel, reflecting a loss of 3% on the week.
WTI crude slid US$2.40 to US$29.13 a barrel, down 7% on the week.
U.S. Supply and Demand
U.S. crude oil refinery inputs declined slightly to an average of 15.5 million barrels per day, with refineries at 86.1% of their operating capacity last week. This continues to be on trend with 2015 declines as refineries take seasonal maintenance outages.
On the supply side, EIA data indicated that U.S. oil production in the Lower 48 declined for the first time in 5 weeks by 30,000 barrels per day, with total production at 8.673 million barrels per day. This could be the start of the long awaited U.S. LTO production decline trend that expects ~750,000 barrels per day to be wiped out this year.
U.S. crude imports averaged 7.1 million barrels per day last week, a significant decrease of 1.1 million barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 7.7 million barrels per day, ~5% above the same four-week period last year.
Crude oil inventories deceased ~0.8 million barrels from the previous week. The change in stocks was driven by the significant reduction in imported crude, which could simply be due to a delay in offloading of tankers. Crude in storage at Cushing (the main price point for WTI) increased by another 0.5 million barrels, taking the total crude in storage to 64.7 million barrels (~71% utilization).
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