14th August 2015
While oil price drifted down further this week, the onshore rig count increased by another 3 and now stands at 849. That is down 1,027 (55%) from a November 2014 high of 1,876, but up 19 from the June 2015 low of 830 despite oil having lost 25% of its value in the interim.
07 Aug 2015 - U.S. Demand Responds while Production is Resilient to Decline … Are Current Prices Sustainable?
31 Jul 2015 - Rigs and Price Flat. Second Quarter Results Begin … Reflecting Fundamentals of $50-$60 Oil
24 Jul 2015 - Rigs Up but Crude Price Down … Have E&P Operators Jumped the Gun?
The IEA indicated that non-OPEC supply growth slowed sharply from a 2014 record of 2.4 million barrels per day to 1.1 million barrels per day in 2015, and forecast a contraction in production growth of 200,000 in 2016.
Crude oil price has sunk this year even as U.S. gasoline demand expanded, stimulated by a growing economy and low prices. Total gasoline supplied to the U.S. market rose to an eight-year high of 9.7 million barrels per day last month, according to U.S. Department of Energy data.
U.S. Drilling Activity.....
Rig count remained essentially flat this week (up 3) as operators continue to defy crude price signals. Crude oil slipped below US$42 a barrel on Thursday, the lowest intraday price since March 2009, in effect suggesting that operators might want to show more discipline with their drilling activities and wait for global production to decline.
Across the three major unconventional oil basins, rigs increased by 2, with the Eagle Ford up 3, Permian up 1, and Williston down 2 week-on-week. Rig activity over the past week included the increase of 4 horizontal rigs.
U.S. Supply and Demand…..
Total U.S. oil stocks remain above their five-year highs while U.S. oil production continued to decline. While price drifted downwards, oil inventories continued their trend with another decrease last week of 1.7 million barrels, including a withdrawal of 0.1 million barrels from stocks at the Nymex delivery point of Cushing, Oklahoma.
U.S. crude oil refinery inputs averaged 17 million barrels per day, 46,000 barrels per day less than the previous week’s average. Refineries continued to operate at 96.1% of their operating capacity.
U.S. crude imports averaged 7.6 million barrels per day, up by 393,000 barrels per day from the previous week. Over the past four weeks, crude oil imports have averaged 7.6 million barrels per day, 1.1% below the same four-week period last year.
Global Production News....
U.S. crude futures have lost 30% since the start of June, set for the biggest drop since the West Texas Intermediate crude contract started trading in 1983. That beats the summer plunges during the global financial crisis of 2008, the Asian economic slump in 1998 and the global supply glut of 1986. It even surpasses the decline of 2011, when prices fell as much as 21% over the summer, as the U.S. and other large oil-importing nations released 60 million barrels of oil from emergency stockpiles to make up for the disruption of Libyan exports during the uprising against Muammar Qaddafi (Grant Smith, Bloomberg News | August 14, 2015 11:43 AM ET).
Crude oil price trajectories were influenced further by a Chinese decision to devalue the national currency. China has been struggling to arrest economic decline after two major crashes on the nation's stock exchange in July. Crude oil prices have been trading consistently lower because global demand still is not taking up the surplus in supply.
Global economic growth has been anemic. Developed economies are struggling and the countries that are doing well, such as the U.S., have implemented efficiency standards that are limiting oil demand. At the same time, emerging markets are slowing down, keeping a lid on demand growth for oil.
It also looks as if oil prices have not yet seen the floor just yet, as crude continues to slide following the release of the monthly oil market report on Tuesday from the Organization of the Petroleum Exporting Countries (OPEC). In July, OPEC posted the highest crude supply in more than three years, despite the global surplus. The group, which is responsible for 40% of world oil supplies, increased output by 100,700 barrels per day to 31.5 million last month.
EIA estimates that Iran has the technical capability to increase crude oil production by about 600,000 barrels per day by the end of 2016. EIA expects most of this increase would occur in the second half of 2016. These additional Iranian volumes are expected to put downward pressure on global oil prices in 2016, as Saudi Arabia and the other OPEC producers are not expected to make production cuts to accommodate additional Iranian volumes in a well-supplied global oil market.
Lower world oil prices in 2016 likely will result in lower non-OPEC production and slightly higher consumption, which may offset some or all of the higher Iranian production. Non-OPEC producers are expected to see their output fall as a result of high inventory builds and lower prices. In particular, EIA's outlook for U.S. crude oil production was revised downward by about 400,000 barrels per day in 2016.
Despite the shale sector's small market share, it has disrupted the entire oil industry because it has accounted for more than half of the increase in global supplies since 2010. Shale is more expensive to produce than oil from the giant conventional fields of the Middle East but cheaper than deepwater megaprojects, and competes directly against areas such as the North Sea and Canada's oil sands. As a result, the majority of analysis focuses exclusively on shale and OPEC, ignoring the effect of lower prices on non-OPEC non-shale output, which accounts for more than half of global liquids production.
A classic case of “prisoner's dilemma”: each producer will do what it thinks is best for itself, and not for producers as a whole.
The current crude oil oversupply simply does not want to relent and the U.S. E&P industry has become a victim of its own success. Crude oil producers have been unwilling or unable to reduce production; national oil companies are pumping at capacity to meet their social budgets. Large integrated majors are tied up in multi-year mega projects that cannot be started or stopped easily, and independent E&Ps would simply go broke if they cut production.
World oil demand is growing at its fastest pace in five years, but global oversupply is looking like it will continue through 2016, based on the latest EIA data. While a rebalancing has clearly begun, the process looks to be longer than expected, as a supply overhang persists through 2016 and global inventories are likely to increase.
The IEA indicated that assuming OPEC production continues at an estimated 31.7 million barrels per day, its recent three month average, the second half of 2015 would see supply exceeding consumption by 1.4 million barrels per day. A stronger demand outlook and slower non-OPEC production growth in 2016 suggests a raised call on OPEC crude for 2016 to 30.8 million barrels per day year-on-year. However, even this higher call on OPEC crude is still far below their production volumes, which are holding steady because of robust pumping from Saudi Arabia and Iraq.
Long term the price of crude oil will be set at the cost of the marginal barrel plus a reasonable profit for the E&P industry. Additionally, that price must reflect a reasonable profit for the oil service industry.
In the short term, while drilling activity has slowed (albeit currently flat), production remains flat and crude oil price continues to decline because of the oversupply that just does not seem to want to go away.
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