8th July 2016
The onshore rig count continues to move up, adding 9, and reflects a six week gain of 41. Oil rigs are up significantly by 21 the past two weeks; increasing to 351 from 330, a growth of 6%. Perhaps operators are providing an early signal that they see the need to increase or at least maintain, future US crude production.
Oil prices fell nearly 5 percent on Thursday after a government report on fuel stocks reinforced worries about an oil glut returning. The prospect of reduced refinery input rates adds to the downward pressure on crude prices.
The report said that crude inventories are declining at a slower pace than expected. Stockpiles of gasoline remain high, even though people drive more during the summer. The US being oversupplied in fuel has stalled an oil-price rally that began in February.
US gasoline stockpiles have been running above last year’s level and the year-on-year build-up has increased rather than decreased as the summer driving season started.
The recent string of week-over-week increases in the onshore oil rig count could be a positive event, but also should have been expected at this stage in the cycle. Rig count tends to lag increases in oil price by as much as a quarter.
Oil has enjoyed a strong quarter; it’s possible that will boost rig count in the 2H 2016.
Oil has traded between $45 and $51 a barrel in the last month after almost doubling from a 12-year low in February during supply disruptions and falling U.S. crude production. The recovery has prompted operators to begin returning drilling rigs to service, leading to an expectation that the decline in production will slow.
The EIA’s weekly report data mostly meet market expectation; Crude production decreased by 194,000 barrels, although 80% of the drop came from Alaska and is likely to revert during the coming weeks. The lower 48 crude production decreased by 38,000 per day; A decent decline and continues the downward trend.
U.S. crude inventories dropped eight of the last nine weeks to 524.4 million barrels, the lowest since March 11. It was a lesser reduction than the forecast 2.5 million-barrel decline and the 6.7 million drop reported by the industry-funded American Petroleum Institute. Crude stocks have fallen from an 87-year high of 543.4 million barrels in the last week of April.
While 2015 was a year of plunging prices and the first six months of this year saw hefty price recoveries; it is likely that there will be more choppy volatility in 2H 2016 as the crude market continues its rebalancing.
Sources: EIA Weekly Update and GCA analysis
Higher than normal temperatures to start the summer is helping put U.S. natural gas prices on course for the biggest gain in 8 years. Natural gas prices has surged 18 percent this year, rallying from a 17 year low.
A slowdown in natural gas production is amplifying the effect of the hot weather on the supply glut. Rigs drilling for gas slid to the lowest count since 1987 in the week ending 3 June. The EIA latest forecast shows that production from the Marcellus gas play will fall for a fourth straight month in July.
The total number of active onshore rigs increased to 421, down 1,456 (~77%) from a November 2014 high of 1,876. Across the three major unconventional basins, the oil rig total increased to 213 (up 6 last week), with Eagle Ford flat, Williston up 2 and Permian up 4. The horizontal rig count increased to 343, up 11 last week.
Total U.S. rig count (including the Gulf of Mexico) stands at 440, up 9 last week, with rigs targeting oil up 10 for a 45-week total decline of 315. The average weekly decline rate now stands at ~7 oil rigs per week.
Crude-oil prices dropped on growing concerns that a glut of gasoline will persist despite strong summertime driving demand.
Brent, the global benchmark for oil, was down $3.09 to US$46.48 a barrel, reflecting a loss of 6.23% on the week.
WTI crude slid $3.04 to $45.16 a barrel, down 6.3% on the week.
U.S. Supply and Demand
U.S. crude oil refinery inputs averaged 16.7 million barrels per day, with refineries at 92.5% of their operating capacity last week. This is 8,000 barrels per day less than the previous week’s average.
U.S. gasoline demand over past four weeks was at 9.8 million, up 2.5% from a year ago.
On the supply side, EIA data indicated that U.S. oil production in the Lower 48 was down 38,000 barrels per day, with total production at 8.088 million barrels per day. The past 24 week decline total stands at 631,000 barrels per day (an average of ~26,292 barrels per week).
U.S. crude imports averaged 8.4 million barrels per day last week, an increase of 808,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 8.0 million barrels per day, ~11.6% above the same four-week period last year.
Crude oil inventories decreased 2.2 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 0.1 million barrels; total storage is 64.1 million barrels (~71% utilization).
Sources: EIA Weekly Update and GCA analysis
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