21st October 2016
The onshore rig count increased 14 (11 targeting oil) this week, bringing the total to 530 compared with 749 a year ago. Rigs targeting oil added 11, standing at 443, up 40% (127) since bottoming out five months ago in late May.
After a plunge in the price of crude over the past two years, along with the elimination of tens of thousands of jobs, oil companies are proving surprisingly adept at pumping oil out of the ground. With crude trading in a range of US$40 to US$50 a barrel for most of 2016, and now hovering just above this, producers are poised to rebound if OPEC / Russia deliver on their public stance and manage to keep prices stable in 2017.
The debate now, also playing out at the Oil and Money Conference in London this week, is less about whether the market is reaching balancing point today, as whether the cutbacks in investment herald new supply problems at the end of the decade. Playing in to this is the extent to which the large reductions in cost (example, BP’s rumoured reduction in costs at Mad Dog 2 from more than US$20 billion to some $9 billion) reflect structural reduction, and how much reflect the pressure on the services sector that is unlikely to be sustainable for long.
Deepwater drilling has been curtailed in places like Gulf of Mexico, as have multibillion dollar projects around the world. According to the U.S. Labor Department, drillers have eliminated nearly 20,000 jobs in the U.S. over the past 12 months. Once growth regions where the fracking boom transformed the economy (like Bakken and Eagle Ford) have abruptly decelerated their drilling activity, U.S. crude production is expected to exit 2016 at 700,000 barrels per day below where it started.
Although crude prices have forced frackers to shut down drilling rigs across the U.S. shale patch, from the Bakken fields of North Dakota to the Eagle Ford in South Texas, there’s one region where the profits are still flowing: the Permian Basin, a 75,000-square-mile patch stretching across West Texas into New Mexico.
Forty-eight percent of the active oil rigs in the U.S. are working in the Permian Basin. Its output continues to grow and signs indicate that the Permian will stay in the money in 2017 as drillers and investors flock to the region.
Drillers have added ~80 oil rigs in the Permian region since May, bringing the total in October to more than 200. Wells are producing more oil at faster rates, enticing billions of dollars of fresh investment. Permian-related oil and natural gas companies have raised US$9 billion in new equity this year.
Next year could be a test of strength for OPEC / Russia, the world’s largest oil exporters, as it tries to regain control of the market and stabilize prices. After two years of their pumping at full capacity, and helping drive prices to 12-year lows in January, they now appear willing to pull back.
OPEC agreed to the outlines of a plan to lower the group’s production by as much as 750,000 barrels a day during the September meeting in Algiers. Will OPEC follow through with its production cuts and help revive global oil producers?
Sources: EIA Weekly Update and GCA Analysis
The total number of active onshore rigs increased to 530. When compared to a November 2014 figure of 1,876 active rigs, the current level is approximately 72% below the 2014 high.
Across the three major unconventional oil basins, the oil rig total increased to 271 (up 12 last week), with Eagle Ford up 1, Permian up 11 and Williston flat.
Total U.S. rig count (including the Gulf of Mexico) stands at 553, up 14 last week, with rigs targeting oil up 11. The horizontal rig count increased to 445, up 14 last week.
Brent, the global benchmark for oil, was down $0.08 to US$51.58 a barrel, reflecting a loss of 0.15% on the week.
WTI crude rose $0.58 to US$50.62 a barrel, up 1.16% on the week.
U.S. Supply and Demand
Sources: EIA Weekly Update and GCA analysis
U.S. crude oil refinery inputs averaged 15.4 million barrels per day, with refineries at 85% of their operating capacity last week. This is 182,000 barrels per day less than the previous week’s average.
U.S. gasoline demand over past four weeks was at 9.1 million, up 0.2% from a year ago. Total commercial petroleum inventories decreased by 3.6 million barrels last week.
On the supply side, EIA data indicated that total domestic crude production increased 14,000 barrels to 8.464 million barrels a day. The total Lower 48 production now stands at 7.975 million barrels per day.
U.S. crude imports plunged and averaged about 6.9 million barrels per day last week, a decrease of 954,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 7.6 million barrels per day, ~3.1% above the same four-week period last year.
Crude oil inventories decreased 5.2 million barrels from the previous week and remain at historically high levels. The crude stored at Cushing (the main price point for WTI) saw a decrease of 1.6 million barrels; total storage is 59.7 million barrels (~66% utilization).
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