Oil Glut Is Diminishing: When – Not If – Will U.S. LTO Production Respond?

Oil Glut Is Diminishing: When – Not If – Will U.S. LTO Production Respond?

15th April 2016

The onshore rig count continued its ongoing decline this week, down 6 (1.5%).  However, with oil prices having rallied in response both to the diminishing oversupply and signals ahead of the Doha meeting, it begs the question as to when will rig decline stop and (subsequently) production growth return?

Crude prices have started to recover from the twelve-year lows seen earlier this year, with Brent touching US$45 per barrel briefly mid week, before falling back slightly.  While this reflected positive sentiment surrounding the Doha meeting, it was then tempered by perception of what is likely in practice to follow.  Nonetheless, the IEA indicated this week that in its view the global oil surplus is forecast to diminish to ~200,000 barrels a day in the last six months of the year, moving the market closer to balance.

As a result, the global oil market may call on U.S. light tight oil (LTO) to fill the gap by 2017, as supply starts to tighten.  For this scenario to play out, spot prices would need to rise and stay there for several months before capital would likely be put back to work.

When and by how much U.S. LTO production comes back remains the biggest question marks. Right now, it appears from the current supply and demand forecast that the global oil market will need incremental output from somewhere to resume growing by 2017.  U.S. LTO could fill this role, although hurdles exist.  Saudi Arabia may step in and tap some of its spare capacity, while the rest of OPEC also vies to pump at maximum levels and plows capital into new investments to capture market share.

While the call for U.S. LTO production could certainly influence the global oil price, lower development costs for OPEC producers may constrain its potential rebound and limit the rise in crude price.  While sentiment generally seems to have moved over the past month to the market having reached bottom, nothing thus far would suggest we have moved out of an extended period of (potentially dampened, at least compared to price movements in the first quarter of this year) price volatility as shorter-term factors mix with the longer-term fundamental dynamics of demand and marginal supply cost.  

Sources: IEA and GCA Estimates

 

Weekly Recaps

Drilling Activity

The total number of active onshore rigs now stands at 412, down 1,464 (~80%) from a November 2014 high of 1,876.  Across the three major unconventional basins, the oil rig total decreased to 202 (down 3 last week), with Eagle Ford, Williston, and Permian down 1 each.  The horizontal rig count is now 335, down 6 last week.

Total U.S. rig count (including the Gulf of Mexico) stands at 440, down 3 last week, with rigs targeting oil down 3 for a 33-week total decline of 323.  The average weekly decline rate continues at ~10 rigs per week.

Oil Price

Oil bulls, curb your enthusiasm.

Pessimism from the World Bank, coupled with jitters ahead of a weekend meeting for oil producers in Doha, pushed the price of crude oil sharply lower Friday.

Brent, the global benchmark for oil, was up ninety-three cents to US$42.84 a barrel, reflecting an increase of 2% on the week.

WTI crude rose fifty-eight cents to US$40.35 a barrel, up 1% on the week.

U.S. Supply and Demand

U.S. crude oil refinery inputs averaged 15.9 million barrels per day, with refineries at 89.2% of their operating capacity last week.  This represents a decrease of ~2% from last week and a 492,000 barrel per day decease in refinery demand below the previous week’s average.

U.S. gasoline demand over the past four weeks was at 9.4 million, up 5.7% from a year ago.

On the supply side, EIA data indicated that U.S. oil production in the Lower 48 was down 25,000 barrels per day, with total production at 8.459 million barrels per day.  The past twelve-week decline total stands at 260,000 barrels per day (an average of ~22,000 barrels per week).

U.S. crude imports averaged 7.94 million barrels per day last week, an increase of 686,000 barrels per day from the previous week.  Over the last four weeks, crude oil imports averaged 7.8 million barrels per day, ~4.1% above the same four-week period last year.

Crude oil inventories increased 6.6 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 reduction of 1.7 million barrels, taking the total storage to 64.6 million barrels (~85% utilization).

Sources: EIA Weekly Update and GCA Analysis

Authors

Oil Glut Is Diminishing: When – Not If – Will U.S. LTO Production Respond?

P Kevin Galvin

Principal Advisor, Field Development Planning - kevin.galvin@gaffney-cline.com
Oil Glut Is Diminishing: When – Not If – Will U.S. LTO Production Respond?

Jeanne-Mey Sun

Vice President and Global Head of Business Consulting - Jeanne-Mey.Sun@gaffney-cline.com
Oil Glut Is Diminishing: When – Not If – Will U.S. LTO Production Respond?

Bob George

Global General Manager - bob.george@gaffney-cline.com

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