Prediction is Very Difficult, Particularly When it Involves the Future*

Prediction is Very Difficult, Particularly When it Involves the Future*

4th September 2015

While oil prices continued their gyration this week (Brent trading in the range US$47 to US$54 per barrel; WTI in the range US$42 to US$49, the onshore rig count resumed its decline, decreasing by 16 and now standing at 831.  That is down 1,045 (56%) from a November 2014 high of 1,876, but still up 2 from its June 2015 low.

GCA is currently updating its analysis of future U.S. production from the three major LTO plays.

U.S. Drilling Activity.....

Total U.S. rig count declined 13 last week, all from rigs targeting oil.  Across the three major unconventional basins, the oil rig total declined to 399 (down 8 last week), with the Eagle Ford down 5, Permian down 2, and Williston down 1 week-on-week.  Horizontal rigs decreased by 13. 

While not as large as the weekly declines seen in the first part of 2015, the direction is more reflective of the impact of another bout of oil price weakness.

Oil Price…..

Back in May, GCA noted that (referring to the first rig count increase for six months):

“It will be interesting to see how the market reacts to such a small numeric, but highly symbolic change.  Bulls and bears on near-term future oil prices still appear fairly evenly split, with half seeing a false dawn before US$50 per barrel appears again, and the other half still expecting further gains by the end of the year.  Reality is that no-one really knows, and everyone is focusing on weekly data to confirm or repudiate whichever trend they feel more comfortable with. 

GCA remains of the view that, absent a major external event, it is going to take a while for supply-demand fundamentals to assert themselves.  There is still a lot of oil in one form of storage or another, available to upset any short-term rally in prices and we still have yet to see the 2-3 million barrels per day of Canadian Heavy Oil, and oil from Brazil pre-salt, Deep Water and other major global projects which were underway before the crash and will still be adding large quantities of oil to the market in the next 1-3 years.  The real question, perhaps, is whether it is the Known Unknowns or Unknown Unknowns that will be the driver of near-term prices.”

Given the ~US$25 swing in the market over the past three weeks the only conclusion with regard to fundamentals that it feels safe to draw right now is that the fundamentals in question are all attributes of the financial market, not the fundaments of supply and demand.  Each piece, or half-piece, of data reported now seems to have an exaggerated impact on the market.  This will probably continue a while yet.

This week’s “news” that fed into the oil price was the release of the August 2015 Petroleum Supply Monthly by the EIA (for data through June).  This now incorporates the first survey-based reporting of U.S. monthly crude oil production, collecting monthly oil production data from a sample of operators in 15 individual states and the federal Gulf of Mexico.  The EIA’s past estimates of U.S. oil production had been based on tax information and other production data directly from state agencies.  Much of the past information was lagged and incomplete at the time of reporting, and this approach improves estimates by representing more than 90% of the country’s oil production.

Source: EIA Monthly Crude Production Data

The net effect is to change the June estimate of U.S. production from 9.431 to 9.296 million barrels per day.  Under its previous approach, the EIA had estimated that the U.S. had actually increased production by 20,000 barrels of oil a day in the first six months of the year.  Under its revised approach, it is now saying production actually decline by 130,000 barrels per day, an overall reduction in estimate of 150,000.

U.S. Supply and Demand…..

U.S. crude oil refinery inputs averaged 16.39 million barrels per day, 269,000 barrels per day less than the previous week’s average.  Refineries operated at 92.7% of their operating capacity, a drop of 1.7% from the previous week due to unexpected outages and incidents. Refinery input has deceased 700,000 barrels per day from a peak input of 17.1 million barrels per day the week ending 31 July.

U.S. crude imports averaged 7.9 million barrels per day, up by 656,000 barrels per day from the previous week.  Over the past four weeks, crude oil imports have averaged 7.7 million barrels per day, 0.2% above the same four-week period last year.

Source: EIA Weekly Update and GCA Analysis

Total U.S. oil stocks remain above their five-year highs.  Crude inventories increased 4.7 million barrels, the biggest one-week increase since April and counter to market expectations.  This unexpectedly large increase, which included a decrease of 0.4 million barrels to stocks at the Nymex delivery point of Cushing, Oklahoma, boosted stockpiles to 455.4 million barrels.  Over the past 18 weeks (peak demand), 36 million barrels have been withdrawn from stockpiles, an average of 2 million barrels per week.

U.S. crude oil stocks are set to rise over the next few months as the summer driving season ends and refineries enter the autumn turnaround season.  Rising stock could indicate a continuing oversupply in the oil market and put downward pressure on crude prices.  However, with U.S. production declining, crude stock increase could be more about economics than physical needs.   

Global News Stories....

On Tuesday, the American Petroleum Institute reported a large rise in domestic crude stocks.  With the summer driving season drawing to a close and refineries preparing to shut down for maintenance, those inventories can be expected to build, and prices typically decline when they do.

The supply and demand dynamics have not changed much: essentially, production levels have not fallen as much as expected despite worse-than-expected economic growth globally.  The most recent manifestation of this is the panic around China's economic growth slowing.  Turmoil in the Middle East and Russia, which has historically driven the oil price up, continues with little apparent impact on the market.

Crude futures extended losses on news that Shell's Nigerian unit has lifted force majeure on Bonny Light exports following the repair and re-opening of the Trans Niger Pipeline (TNP) and Nembe Creek Trunkline (NCTL).

Also adding pressure was news that President Barack Obama has the backing of enough Senate votes to sustain a veto of any congressional resolution blocking Iran's agreement on its nuclear program with world powers.

GCA Analysis…..

GCA is currently updating its analysis of future U.S. production from the three major LTO plays.  Back in February this year, based on an analysis of the Bakken, indicated that a halving of the rig count could, by the end of 2016, cause as much as a 2 million barrel per day decline from a number of forecasts then in the market.  However, while a large decline in expectation, what this actually represented was production actually staying fairly flat to only slightly declining. 

Initial results from the update using the new EIA data (which should be completed by around the end of September), shows that the February scenario was in fact quite robust; the main aspect that it underestimated was the extent to which focusing on core areas and overall efficiencies have continued to sustain production.  Looking at the detail of where and how these improvements arise, and the differences between Operators, will be a key part of GCA’s analysis along with the impact they are likely to have on the ever-changing economics of continued activity.  

Source: August 2015 EIA Data

 

* With apologies to Niels Bohr

 

Authors

Prediction is Very Difficult, Particularly When it Involves the Future*

P Kevin Galvin

Principal Advisor, Field Development Planning - kevin.galvin@gaffney-cline.com

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