Oil Enjoyed a Great 2nd Quarter.

Oil Enjoyed a Great 2nd Quarter.

1st July 2016

The onshore rig count reversed, adding 12 rigs, and reflects a five week gain of 32.  Total rig count now stands at 431 and with WTI trading in the US$47-$50 per barrel range the past seven weeks, rig count has bottomed.

With all the market noise from the Brexit chaos, the price of oil increase this quarter has gone unnoticed. Oil’s charge in recent months is set to see the biggest quarterly gain since 2009; when the world was dealing with the global financial crisis.

In the second quarter of 2016, future contracts for oil have risen by ~30% in New York trading and the rise could mark the best quarter since 2009. While oil has enjoyed a strong quarter, it is unlikely to be as positive for the industry in the 2H 2016.

Since pushing past the $50 per barrel in late May, downward pressure from supply fundamentals (return of Canada and Nigeria production) and excess crude storage overhang has caused oil to struggle to stay above the $50 per barrel mark.

A bullish decrease in crude oil stock this week, significant at first sight, can be explained by the decrease in crude imports. This follows last week’s very small decrease in crude inventories (vs. expectations) that was due to a very large increase in crude imports.

The timing of crude tanker lifting makes weekly data trends less significant, however, comparing the daily average for 1H 2015 (6.8 million) crude imports to 1H 2016 (7.8 million) shows that U.S. crude imports have increased by one million barrels per day. This is the result of U.S. crude production decline and an increase in refinery demand.

The most relevant data point in the EIA’s weekly update is the 55,000 barrel per day decrease in crude production, the largest since April 29, when crude production dropped 113,000 barrels per day. Over the past three weeks, U.S. crude production has seen large declines that appear to be increasing each week.

Sources: EIA Weekly Update and GCA analysis

U.S. operable atmospheric crude distillation capacity as of January 1, 2016 was 1.9% higher than at the beginning of 2015, reaching 18.3 million barrels per calendar day according to EIA's recently released annual Refinery Capacity Report. This is the largest increase in operable capacity since the 2.9% increase as of January 1, 2013 over the start of 2012 that resulted from the restart of East Coast refineries that had closed in 2011.

Prior to the Panama Canal expansion, only 30 of the smallest LNG tankers (6% of the current global fleet) with capacities up to 0.7 Bcf could transit the canal. The expansion has significant implications for LNG trade, reducing travel time and transportation costs for LNG shipments from the U.S. Gulf Coast to key markets in Asia.

By 2020, the United States is set to become the world's third-largest LNG producer, after Australia and Qatar. More than 4.0 Bcf/d of U.S. liquefaction capacity has long-term (20 years) contracts with markets in Asia, of which 3.2 Bcf/d is contracted to Japan, South Korea, and Indonesia

Weekly Recaps

Drilling Activity

The total number of active onshore rigs increased to 312, down 1,465 (~78%) from a November 2014 high of 1,876.  Across the three major unconventional basins, the oil rig total increased to 207 (up 4 last week), with Eagle Ford and Williston flat and Permian up 4. The horizontal rig count increased to 332, up 7 last week.

Total U.S. rig count (including the Gulf of Mexico) stands at 431, up 10 last week, with rigs targeting oil up 11 for a 44-week total decline of 325.   The average weekly decline rate now stands at ~7.4 oil rigs per week.

Oil Price

Oil prices rebounded in the second quarter after a historic two-year rout, but now face an unusual predicament: is the market now facing a supply surplus or a deficit?

Brent, the global benchmark for oil, was up $1.22 to US$49.57 a barrel, reflecting an increase of 0.52% on the week.

WTI crude rose $0.64 to $48.20 a barrel, up 0.34% on the week.

U.S. Supply and Demand

U.S. crude oil refinery inputs averaged 16.7 million barrels per day, with refineries at 93% of their operating capacity last week. This is 190,000 barrels per day more than the previous week’s average.

U.S. gasoline demand over past four weeks was at 9.7 million, up 1.8% 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 8.126 million barrels per day. The past 23 week decline total stands at 593,000 barrels per day (an average of ~25,782 barrels per week).

U.S. crude imports averaged 7.6 million barrels per day last week, a decrease of 884,000 barrels per day from the previous week.  Over the last four weeks, crude oil imports averaged 7.8 million barrels per day, ~12% above the same four-week period last year.

Crude oil inventories decreased 4.1 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 64.2 million barrels (~71% utilization).

Sources: EIA Weekly Update and GCA analysis

Authors

Oil Enjoyed a Great 2nd Quarter.

P Kevin Galvin

Principal Advisor, Field Development Planning - kevin.galvin@gaffney-cline.com
Oil Enjoyed a Great 2nd Quarter.

Bob George

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

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