Output Freeze, Act II

Output Freeze, Act II

19th August 2016

The onshore rig count continued its upward march, increasing for the eighth consecutive week by adding 9.  This means that the increase over the past three months is now 25% (up 93), with the Permian again taking the lion’s share.  Rigs targeting oil now stand at 406, up 28% (90) since bottoming out the week of 22 May.

The news put out by the EIA that output jumped by 100,000 barrels per day (for the lower 48) also needs addressing.  In fact, this was simply a “re-benchmarking” to bring the weekly production data into line with the EIA’s latest production forecast model results. The EIA indicated that the weekly data could be adjusted again (down in GCA’s view) after the release of its monthly Short Term Energy Outlook, scheduled for September 7th.

In any event, production is continuing to fall, and GCA’s LTO production model suggests it will hit 8.2 million barrels per day the end of 2016.

Sources: EIA Weekly Updates, EIA Short Term Energy Outlook, EIA Monthly Energy Report, GCA LTO Production Forecast Model and State Production Data

Oil prices started to move up this week when Saudi Arabia’s Energy Minister Khalid al-Falih signaled his county would work with oil producers to stabilize crude prices.  Producers certainly want higher prices, but agreeing a level to freeze production will be the obstacle.  Saudi Arabia is already sending signals that it could boost oil production in August to a record, overtaking Russia, the world’s top oil producer.

Saudi Arabia is not alone in raising production: Iraq, OPEC’s second largest producer has already agreed new contracts with oil majors to develop its massive fields, which could bring on an additional 350,000 barrels per day in 2017.  Iran wants to take the county’s production from 3.6 to 4.6 million barrels per day within five years. 

With everyone at the table wanting higher prices with limited reduction to their market share, the challenge will be avoid a whack-a-mole outcome.  Additionally, if demand growth were to fall well short of the supply potential, this would bring back the oversupply condition that has been the fundamental issue for the past two years.

Weekly Recaps

Drilling Activity

The total number of active onshore rigs increased to 473, down 1,406 (~75%) from a November 2014 high of 1,876.  Across the three major unconventional basins, the oil rig total increased to 252 (up 5 last week), with Eagle Ford flat, Williston down 2 and Permian up 7.  The horizontal rig count increased to 382, up 7 last week.

Total U.S. rig count (including the Gulf of Mexico) stands at 491, up 10 last week, with rigs targeting oil up 10 for a 50-week total decline of 267.  The average weekly decline rate now stands at ~5.3 oil rigs per week.

Oil Price

Oil advanced, extending the longest winning streak in more than a year, as U.S. crude and gasoline inventories declined.

Brent, the global benchmark for oil, was up $4.39 to US$50.57 a barrel, reflecting a gain of 9.51% on the week.

WTI crude rose $4.44 to $48.20 a barrel, up 10.15% on the week.

U.S. Supply and Demand

U.S. crude oil refinery inputs averaged 16.9 million barrels per day, with refineries at 93.5% of their operating capacity last week.  This is 268,000 barrels per day more than the previous week’s average.

U.S. gasoline demand over past four weeks was at 9.8 million, up 1.7% from a year ago.  Total motor gasoline inventories decreased by 2.7 million barrels last week.

On the supply side, EIA data indicated that total domestic crude production increased by 152,000 barrels to 8.597 million barrels a day.  The U.S. oil production in the Lower 48 was up 100,000 barrels per day, with total production at 8.120 million barrels per day.  The past 30 week decline total for the lower 48 stands at 588,000 barrels per day (an average of ~19,600 barrels per week).

U.S. crude imports averaged over 8.2 million barrels per day last week, a decrease of 211,000 barrels per day from the previous week.  Over the last four weeks, crude oil imports averaged 8.4 million barrels per day, ~11.3% above the same four-week period last year.

Crude oil inventories decreased 2.5 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 0.8 million barrels; total storage is 64.5 million barrels (~71.7% utilization).

Sources: EIA Weekly Update and GCA analysis

Authors

Output Freeze, Act II

P Kevin Galvin

Principal Advisor, Field Development Planning - kevin.galvin@gaffney-cline.com
Output Freeze, Act II

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