4th December 2015
The U.S. onshore rig count declined further this week, down 2 and looks to face continued pressure into 2016. The OPEC meeting both confirmed no near-term move to cut, and that output is now officially 1.5 million barrels per day higher (now 31.5 million barrels per day), which is what everyone thought it was anyway.
Rumors concerning the OPEC meeting had caused WTI to fall below US$40 per barrel mid-week, jump back up, and then again fall back to oscillate around this psychological pricing point.
Onshore rigs now stand at 712, with the key basins Eagle Ford and Bakken oil rigs holding at 60 and the Permian now at 209, shedding 19 oil rigs for November. Even if they stay at this level, GCA estimates that unconventional production would only decline a further 400,000 barrels per day or so by the end of 2016, to around 3.7 million barrels per day (from a little over 4 million in November). For end-2016 production to fall to 3 million barrels per day, reached on the way up only 2 years ago, GCA’s unconventional basin model indicates that the rig count would have to fall more than 50% from current levels (down to below 20% of last years’ high).
Lower-cost imported crude continues to be delivered to refineries, driving LTO production into Cushing storage. Crude inventory has increased 34 million barrels over the past three months, trending higher when compared to the past two-year historical data. The current low oil price could continue to divert surplus crude into storage, with the expectation that future price will allow the capture of higher economic rents.
Total working crude storage capacity has grown from 465 million barrels in September 2011 to 551 million barrels in September 2015 (according to the EIA), and is set to expand further in 2016.
EIA estimates 70.2% utilization of working crude oil storage capacity in Cushing and the Gulf Coast on a combined basis, only slightly below the record utilization level of 71.2% set in the week ending April 24 of this year. The U.S. Gulf Coast region contains 55% of the crude oil storage capacity, and Cushing contains another 13%. As of the week ending November 27, these two locations held 67% of the crude oil inventories.
Additional storage is required for operational reasons to maintain an uninterrupted flow of oil to refineries. However, some extra storage is more speculative in character and is used to make money when the oil market is trading in contango (spot price is lower than future price). In 2015, the market has been in contango every day and, with interest rates close to zero, most of the contango remains to be shared between the owner of the crude oil and owner of the storage space.
Storage utilization levels along the Gulf Coast and at Cushing are often assessed separately; however, their combined utilization is currently most relevant and, despite high crude oil inventories and storage capacity utilization, there is still more than 100 million barrels of capacity available in these two areas.
U.S. Drilling Activity…..
The total number of active onshore rigs now stands at 712, down 1,163 (~62%) from a November 2014 high of 1,876. Across the three major unconventional basins, the oil rig total declined to 331 (down 7 last week), with Eagle Ford flat, Williston down 2 and Permian down 5. Horizontal rigs lost 1 and now stand at 568, down 800 year to date.
Total U.S. rig count (including the GOM) declined 7 last week, with rigs targeting oil decreasing by 10 for a 14-week total decline of 129. The average decline per week remains at 9 rigs.
Oil prices fell on Friday after news that OPEC was planning to maintain its production at near record highs, despite depressed prices.
Brent, the global benchmark for oil, was down US$1.72 at US$43.17 a barrel, reflecting a loss of 4% on the week.
U.S. crude slid US$1.96 to US$40.01 a barrel, down 5% on the week.
U.S. Supply and Demand…..
U.S. crude oil refinery inputs increased to an averaged 16.8 million barrels per day, with refineries at 94.5% of their operating capacity last week.
On the supply side, U.S. oil production in the Lower 48 increased by 36,000 barrels per day last week, with total production at 8.673 million barrels per day. U.S. production continues to withstand low price pressure and continued rig decline.
U.S. crude imports averaged 7.7 million barrels per day last week, an increase of 414,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 7.4 million barrels per day, 0.5% above the same four-week period last year.
Crude oil inventories increased by 1.2 million barrels from the previous week, with the crude build being driven by imported oil. Cushing’s storage (the main price point for WTI) increased by 0.4 million barrels, taking the November total increase to 5.4 million barrels.
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