Market Forces Continue to Prevail

Market Forces Continue to Prevail

2nd September 2016

The onshore rig count increased 15 (7 targeting oil), after a single week decline, for a fourteen week gain of 107 rigs (up 28% since mid-May).  

The Permian continued its trend of adding oil rigs (plus 3), and now stands at 202.  Rigs targeting oil were up 1 at 407, up 29% (91) since bottoming out the week of 22 May.

OPEC and other producers such as Russia may resume talks on constraining output when they meet in Algeria later this month, after a similar effort to boost oil prices failed in April.

In November 2014 OPEC made a landmark policy shift, led by Saudi Arabia, refusing to cut production in the hope that lower prices would discourage higher-cost competitors that had eroded the group's market share. Further reinforcing a production free-for-all, OPEC abandoned its last remaining supply-management tool, an output ceiling, in December 2015.

As global oil prices fell from more than $ 100 a barrel in July of 2014 to less than $30 a barrel in January of 2016, markets expected to see a large drop in U.S. shale production. However, shale production actually increased during the drop in crude prices. Total U.S. production peaked in March 2015 and has only fallen by 17% since then. While large capital projects continue to be deferred or canceled around the world, LTO operators are still drilling new wells in every major U.S. shale basin.

Shale oil producers are learning how to get greater “bang for the buck” out of drilling and completion operations, leading to significantly increased oil production per well. While cost reductions are important reasons for shale’s resiliency, learning and innovation provides the most efficient ways of developing future wells.

Oil companies are continuing with deep cost cutting efforts through efficiency and standardization, to stay profitable as the supply glut pushes back a recovery in price. The energy sector has slashed jobs, projects and investments to deal with the 60 percent drop in crude prices over the past two years. Market forces has helped crude oil supply and demand to rebalance this year, however the potential return to the market of some 1.5 million barrels per day of shut in oil supply from Libya and Nigeria plus the uncertainty  concerning Iranian and Iraqi production level could push the drawdown of excess crude stocks far into 2017.

The market is saturated with stored crude well above usual levels and this has OPEC and non-OPEC countries striving to discuss supply constraints to accelerate the market rebalancing.

The Energy Information Administration's weekly update showed U.S. oil production to be down 60,000 barrels per day, but the decrease was overcome by an increase in imports. Crude oil imports increased by 275,000 barrels per day week-to-week, to average 8.9 million barrels per day in the week ended August 26, 2016. A crude import level last seen in May 2012.

The high import level caused inventories to grow by 2.3 million barrels and this marked the second week of significant increase, with last week's build being 2.5 million.  Market forces will continue to shift excess global crude stored at sea into less expensive onshore storage. 

Sources: EIA Weekly Updates and GCA Analysis

The U.S. average retail price for regular gasoline was $2.24/gallon (gal) on August 29, the lowest price on the Monday before Labor Day since 2004, and 27¢/gal lower than the same time last year.

The potential for hurricanes in the Gulf of Mexico led to evacuations of personnel from offshore platforms and declines in Gulf natural gas production this week. Late August to early September is generally the most active time of hurricane season, and several storm systems are currently forming in the Gulf and Atlantic. While Gulf of Mexico natural gas production has declined substantially over the past several years, it still totaled 3.6 billion cubic feet per day in 2015, or about 4.6% of total U.S. production.

Weekly Recaps

Drilling Activity

The total number of active onshore rigs increased to 487.  When compared to a November 2014 figure of 1,876 active rigs, the current level is approximately 74% below the 2014 high.

Across the three major unconventional basins, the oil rig total increased to 268 (up 7 last week), with Eagle Ford up 3, Williston up 1 and Permian up 3.

Total U.S. rig count (including the Gulf of Mexico) stands at 497, up 8 last week, with rigs targeting oil up 1. The horizontal rig count increased to 395, up 16 last week.

Oil Price

Oil prices rose on Friday as a report showing weaker U.S. jobs growth in August suppressed the dollar, pushing up commodities, but crude futures remained on track for a big weekly loss on supply glut concerns.

Brent, the global benchmark for oil, was down $2.91 to US$46.80 a barrel, reflecting a loss of 5.85% on the week.

WTI crude slid $3.14 to $44.44 a barrel, down 6.60% on the week.

U.S. Supply and Demand

U.S. crude oil refinery inputs averaged 16.6 million barrels per day, with refineries at 92.8% of their operating capacity last week. This is 64,000 barrels per day less than the previous week’s average.

U.S. gasoline demand over past four weeks was at 9.7 million, up 1.8% from a year ago. Total motor gasoline inventories remained unchanged last week.

On the supply side, EIA data indicated that total domestic crude production declined by 60,000 barrels to 8.488 million barrels a day as output in Alaska decreased marginally. The total Lower 48 production now stands at 8.015 million barrels per day. The past 32-week decline total for the Lower 48 stands at 693,000 barrels per day (an average decline of ~21,700 barrels per day per week).

U.S. crude imports averaged over 8.9 million barrels per day last week, an increase of 275,000 barrels per day from the previous week.  Over the last four weeks, crude oil imports averaged 8.5 million barrels per day, ~11.4% above the same four-week period last year.

Crude oil inventories increased 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 a decrease of 1.0 million barrels; total storage is 63.9 million barrels (~71% utilization).

Sources: EIA Weekly Update and GCA analysis


Market Forces Continue to Prevail

P Kevin Galvin

Facilities/Cost Engineer -
Market Forces Continue to Prevail

Bob George

Global General Manager -

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