18th November 2016
The onshore rig count increased 18 this week, bringing the total to 565 compared with 727 a year ago (down 22%), but up ~50% since the low in late May 2016. Rigs targeting oil increased 19, standing at 471, up 49 % (155) since May. Of the extra 19 oil rigs, 58% (11 rigs) mobilized to the Permian Basin areas.
While OPEC continues its mixed signals on supply containment, activity by LTO producers continues to reflect a combination of efficiency gains, reduced supply and service costs, and perhaps the benefit of some hedging when prices top $50 per barrel. U.S. production has flatlined since the middle of the year and, given that there has now been a steady six month upward trend in rig count, US production should also soon begin rising.
Sources: EIA Weekly Update and GCA Analysis
With one of the most difficult election campaigns in U.S. history now behind us, the impact on the U.S. energy sector is awaited. Donald Trump has made it no secret that he wants to reduce regulation on the fossil fuel industry and encourage more drilling and production, and to lessen dependence on imports. This includes lifting or lightening restrictions with respect to federal lands, in the Gulf of Mexico and in the Arctic. While the industry (although not necessarily the markets and other segments of the population) is likely to welcome any such reduction, the irony is that more drilling now would add to the oversupply problem that sent oil prices spiraling lower from about $110 two years ago.
In addition to the drilling and production side of the industry, the proposed Keystone XL and Dakota Access oil pipelines have sparked major controversy and have fallen victim to the current administration. The rhetoric, at least, of the Trump presidency would appear likely to green light both. While the oil industry would presumably embrace the enhanced access brought on by these pipelines, the economics and timing may need revisiting in the context of current the North American supply glut.
Of course these policies not only affect oil, but also natural gas. In GCA’s view the easing of coal restrictions is unlikely to make a dent in natural gas’ inroads into the power generation market share, which continues to benefit from low prices. Further, stimulus of the tight oil sector could bring with it even more zero-cost associated gas, squeezing the dry gas producers into ever higher quality acreage.
With the Thanksgiving holiday falling on 24-25 November, the next newsletter will be issued Monday, 28 November. Starting in December, GCA plans to enhance coverage by routinely exploring some of these gas themes both at home and abroad. After two years of turmoil in the oil markets, it looks like it may now be gas’ turn for a rocky ride, especially outside the US.
The total number of active onshore rigs increased to 565. When compared to a November 2014 figure of 1,876 active rigs, the current level is approximately 70% below the 2014 high.
Across the three major unconventional oil basins, the oil rig total increased to 295 (up 9 last week), with Eagle Ford down 1, Permian up 11 and Williston down 1.
Total U.S. rig count (including the Gulf of Mexico) stands at 588, up 20 last week, with rigs targeting oil up 19. The horizontal rig count increased to 470, up 13 last week.
Brent, the global benchmark for oil, was up $1.97 to US$46.32 a barrel, reflecting a gain of 4.44% on the week.
WTI crude rose $1.92 to US$45.16 a barrel, up 4.44% on the week.
U.S. Supply and Demand
Sources: EIA Weekly Update and GCA analysis
U.S. crude oil refinery inputs averaged 16.1 million barrels per day, with refineries at 89.2% of their operating capacity last week. This is 309,000 barrels per day less than the previous week’s average.
U.S. gasoline demand over past four weeks was at 9.2 million, down 0.3% from a year ago. Total commercial petroleum inventories increased by 7.01million barrels last week.
On the supply side, EIA data indicated that total domestic crude production decreased 11,000 barrels to 8.681 million barrels a day. The Lower 48 crude production now stands at 8.167 million barrels per day.
U.S. crude imports averaged about 8.4 million barrels per day last week, an increase of 0.981 million barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 8.0 million barrels per day, ~12.6% above the same four-week period last year.
Crude oil inventories increased 5.3 million barrels from the previous week and remain at historically high levels. The crude stored at Cushing (the main price point for WTI) was up 0.7 million barrels; total storage is 59.2 million barrels (~65% utilization).
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