9th September 2016
The onshore rig count increased 3 (none targeting oil) for a fifteen week gain of 110 rigs (up ~30% since mid-May). The Permian reversed its trend of adding rigs (down 2) and now stands at 200 (all targeting oil).
Rigs targeting oil were up 7 at 414, up 31% (98) since bottoming out the week of May 22. Tropical Storm Hermine, which threatened the GOM before moving to the East Coast week before last, led to the loss of 7 oil rigs; these rigs returned to service this week.
Sources: EIA Weekly Updates and GCA Analysis
Saudi Arabia and Russia agreed this week to cooperate on oil stabilization just weeks ahead of the informal oil discussion to be held in Algiers. The two did not announce any concrete action plan and with OPEC members and Russia pumping oil at record levels, they have little spare capacity to increase production. Therefore, the potential joint action discussion could be a symbolic gesture to shore up market sentiment since there is little to nothing to lose.
The majority of the market worry today is focused on the current imbalance in supply and demand. However, given the finite nature of the physical amount of oil in the world, perhaps the market should begin to focus more attention to falling supplies in the future, rather than today’s oversupply. Given the past two years’ severe oversupply, it’s not surprising that few are pointing to the possibility of a future supply squeeze. Price weakness is expected to return to balance the global oil market in 2017 and, at that stage, effective global spare capacity could fall to as little as 1% of demand (around 1 million barrels per day).
Systemic supply disruptions have had only limited impact on oil price in 2015-16 due to excess global oil stocks and OPEC's continued increases in production. Given the extreme fall in new production investments since 2014, the market will be much more susceptible to supply interruptions post 2017 and market focus is expected to shift to the availability of supply to meet demand.
Today, should the market be focused on the current oversupply or focused more towards the coming decline in crude supplies?
U.S. crude stocks declined last week in the biggest weekly drawdown since 1999 as imports to the Gulf Coast hit a record low, which was attributed to Tropical Storm Hermine. Crude inventories fell 14.5 million barrels for the week ended Sept. 2, compared with expectations for an increase, the U.S. Energy Information Administration reported.
Tropical Storm Hermine interrupted shipping routes and production last week, even though the storm eventually turned to the northeast and did not harm key facilities in the Gulf of Mexico region. This short event highlights the dependence on imported oil into the U.S. that is required to balance demand. A sustained reduction in imports would drawdown crude stocks and could require LTO production to increase and replace imported oil once again.
Sources: EIA Weekly Updates and GCA Analysis
U.S natural gas inventories stood at an all-time high of 2,480 Bcf at the beginning of the injection season on April 1, just exceeding the previous high of 2,478 Bcf set in April 2012. The relatively high storage levels this year reduced the volume of natural gas that is needed to be injected into storage and put downward pressure on the price.
The total number of active onshore rigs increased to 490. When compared to a November 2014 figure of 1,876 active rigs, the current level is approximately 74% below the 2014 high.
Across the three major unconventional basins, the oil rig total decreased to 261 (down 2 last week), with Eagle Ford and Williston flat and Permian down 2.
Total U.S. rig count (including the Gulf of Mexico) stands at 508, up 11 last week, with rigs targeting oil up 7. The horizontal rig count increased to 396, up 1 last week.
Oil prices edged lower on Friday but were still set for their first weekly gain in three weeks after Russia and Saudi Arabia agreed to work together to help rebalance the markets and after a surprisingly large drawdown in U.S. crude stocks.
Brent, the global benchmark for oil, was up $1.84 to US$48.64 a barrel, reflecting a gain of 3.93% on the week.
WTI crude rose $2.01 to $46.45 a barrel, up 4.52% on the week.
U.S. Supply and Demand
U.S. crude oil refinery inputs averaged 16.9 million barrels per day, with refineries at 93.7% of their operating capacity last week. This is 315,000 barrels per day more than the previous week’s average.
U.S. gasoline demand over past four weeks was at 9.6 million, up 3.2% from a year ago. Total motor gasoline inventories decreased by 3.4 million barrels last week.
On the supply side, EIA data indicated that total domestic crude production declined by 30,000 barrels to 8.458 million barrels a day as output in Alaska decreased marginally. The total Lower 48 production now stands at 8.030 million barrels per day. The past 33-week decline total for the Lower 48 stands at 678,000 barrels per day (an average decline of ~20,545 barrels per day per week).
U.S. crude imports averaged about 7.1 million barrels per day last week, adecrease of 1.8 million barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 8.2 million barrels per day, ~7.4% above the same four-week period last year.
Crude oil inventories decreased 14.5 million barrels from the previous week but remain at historically high levels. The crude stored at Cushing (the main price point for WTI) saw a decrease of 0.5 million barrels; total storage is 63.4 million barrels (~70% utilization).
Sources: EIA Weekly Update and GCA Analysis
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