Oil Rig Decline Continues ... Beware of Oil’s “Dead Cat Bounce”!

Oil Rig Decline Continues ... Beware of Oil’s “Dead Cat Bounce”!

9th October 2015

The U.S. onshore rig count continued its deep dive this week, releasing 16 more rigs for a seven-week decline of 90.

Crude input to U.S. refineries (crude oil demand) from the peak in week 31 (first week of August) to the current week 40 is declining much faster, when compared to historical data.  With crude oil demand declining at a faster pace, the rate of U.S. production decline could impact crude required to be placed into storage until crude input to U.S. refineries reverses.

Source: EIA Weekly Update and GCA Analysis

The total number of active rigs now stands at 763, down 1,113 (~60%) from a November 2014 high of 1,876.  Across the three major unconventional basins, the oil rig total declined to 362 (down 13 last week), with Eagle Ford down 2, Permian down 10, and Williston down 1.  Horizontal rigs decreased by 11, bringing the total number to 598.

Total U.S. rig count (including the GOM) declined 14 last week, with rigs targeting oil declining by 9 for a six-week total of 70.

Oil Price….

The oil price is set for gains of almost 11% this week, its largest weekly increase since late August, after oil industry executives warned that this year's fall below US$50 would force higher-cost producers to reduce output.

However, crude oil stocks are a fundamental driver of oil prices and U.S. inventories are more than 100 million barrels above the 5-year average and more than 90 million barrels above the 5-year maximum.  OECD stocks are similarly over-supplied and any discussion of higher oil prices may be irrelevant until world production declines enough to begin working through inventory volumes.

U.S. Supply and Demand…..

U.S. crude oil refinery inputs averaged 15.6 million barrels per day, with refineries at 87.5% of their operating capacity last week.

Looking on the supply side, U.S. oil production in the Lower 48 increased (GOM deepwater projects ramping up) by 58,000 barrels per day last week, bringing total production up to 8.685 million barrels per day.

U.S. crude imports averaged 7.1 million barrels per day last week, down by 486,000 barrels per day from the previous week.

With crude oil demand at 15.6 million barrels per day, down 403,000 barrels per day and imports down 486,000 barrels per day, crude oil inventories increased by 3.1 million barrels from the previous week.  At 461.0 million barrels, U.S. crude inventories remain above historical levels.

Source: EIA Weekly Update and GCA Analysis

A U.S. Energy Information Administration (EIA) report on Tuesday indicated that global crude oil demand for 2016 would rise by the fastest rate in six years, suggesting the crude surplus that has pushed prices down since June last year is easing faster than expected.  However, with U.S. refinery input in decline ... how far down will U.S. crude oil demand sink before it turns?

Authors

Oil Rig Decline Continues ... Beware of Oil’s “Dead Cat Bounce”!

P Kevin Galvin

Principal Advisor, Field Development Planning - kevin.galvin@gaffney-cline.com
Oil Rig Decline Continues ... Beware of Oil’s “Dead Cat Bounce”!

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