Production Restraint Desired

Production Restraint Desired

30th September 2016

The onshore rig count increased 9 (4 targeting gas), bringing the total to 500 compared with 779 a year ago. Rigs targeting oil added 7, standing at 425, up 35% (109) since bottoming out the week of May 22.

OPEC’s announcement of lower output, made at the OPEC meeting in Algeria on September 28, took the markets by surprise and confirmed that OPEC is alive and talking. The decision by OPEC to cut production in an effort to push up oil prices is unlikely to lead to any significant or long-term change in the market. The actual cut is trifling, taking production to between 32.5 million and 33 million barrels a day, from an estimated current production level of 33.5 million barrels per day.

As yet, it’s not clear who will shoulder the burden of the cuts; further details are due to be revealed in or before OPEC’s November meeting. There will be the usual doubts about whether the 14 member OPEC will be able to stick to the target it has set itself and every incentive for most OPEC members to ignore the cuts and keep output higher.

With Iran still expecting an output rise to its pre-sanction level of around 4 million barrels a day and with Libya and Nigeria recovering from crude export disruptions, the cartel’s output could be 1 million barrels above the established target.

OPEC has been an important player, exerting influence on the price of oil. The rise of US shale production means that OPEC is now only one factor, albeit important, in a much bigger equation. It’s very clear that there is more oil supply capacity than demand can utilize and that’s not going to change. OPEC has diminished control of the supply side and is no longer the sole swing producer. U.S. shale producers are keeping a keen eye on oil price and are poised to ramp up drilling and increase crude production when the signals indicate.

OPEC producers have badly miscalculated how resilient US shale is and OPEC is now in a ‘Catch 22’.  If OPEC cuts production volumes to engineer higher prices, effectively sending a signal to higher cost producers, then LTO producers can afford to increase their production. This means that the maximum upside for oil will be set at the marginal cost of a barrel of LTO production.

A somewhat bullish report was issued by EIA this week.  Crude stocks fell for the 4th consecutive week (a total decrease of 23 million barrels in September) and domestic production dropped, although by a small amount. Overall domestic production decreased by 15,000 barrels per day after increasing the previous two weeks. Two-thirds of the drop happened in Alaska, where production is very volatile. Production in the lower 48 (excluding Alaska) decreased by 5,000 barrels per day, a small drop that could indicate a reverse in the upward trend, after increasing by 33,000 barrels per day in the previous three weeks.

Sources: EIA Weekly Update and GCA Analysis

The Sabine Pass liquefaction terminal, the first liquefied natural gas (LNG) facility in the Lower 48 states, began planned maintenance of Trains 1 and 2, the only fully operational trains, on September 20. Both liquefaction trains will be completely shut down during maintenance, which is expected to last approximately four weeks.

Since the first cargo left Sabine Pass on February 24, an estimated 113 Bcf of LNG has been exported on 33 tankers from Trains 1 and 2 to 12 countries. More than half of the U.S. LNG exports were shipped to South America and the Caribbean (Brazil, Argentina, Chile, and the Dominican Republic), followed by Asia (India and China), the Middle East (United Arab Emirates, Kuwait, and Jordan), a small volume to Europe (Portugal and Spain), and Mexico. Sabine Pass is a six-train facility with a capacity of 0.59 Bcf/d for each train. Trains 4 and 5 are under construction, and Train 6 has been fully permitted.

Weekly Recaps

Drilling Activity

The total number of active onshore rigs increased to 500.  When compared to a November 2014 figure of 1,876 active rigs, the current level is approximately 73% below the 2014 high.

Across the three major unconventional oil basins, the oil rig total increased to 267 (up 5 last week), with Eagle Ford flat, Williston up 2 and Permian up 3.

Total U.S. rig count (including the Gulf of Mexico) stands at 511, up 5 last week, with rigs targeting oil up 2. The horizontal rig count increased to 402, up 8 last week.

Oil Price

The oil price was mixed as investors cashed in recent gains and skepticism grew over a tentative agreement to cut production among members of the Organization of the Petroleum Exporting Countries.

Brent, the global benchmark for oil, was up $1.92 to $49.01 a barrel, reflecting a gain of 4.08% on the week.

WTI crude rose $2.47 to $48.05 a barrel, up 5.42% on the week.

U.S. Supply and Demand

Sources: EIA Weekly Update and GCA analysis

U.S. crude oil refinery inputs averaged 16.3 million barrels per day, with refineries at 90.1% of their operating capacity last week. This is 253,000 barrels per day less than the previous week’s average.

U.S. gasoline demand over past four weeks was at 9.4 million, up 3.6% from a year ago. Total motor gasoline inventories increased by 2.0 million barrels last week.

On the supply side, EIA data indicated that total domestic crude production decreased 15,000 barrels to 8.497 million barrels a day. The total Lower 48 production now stands at 8.043 million barrels per day. The past 36-week decline total for the Lower 48 stands at 667,000 barrels per day (an average decline of ~18,528 barrels per day per week).

U.S. crude imports averaged about 7.8 million barrels per day last week, a decrease of 474,000 barrels per day from the previous week.  Over the last four weeks, crude oil imports averaged 7.8 million barrels per day, ~6.5% above the same four-week period last year.

Crude oil inventories decreased 1.9 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 0.6 million barrels; total storage is 62.1 million barrels (~69% utilization).

Authors

Production Restraint Desired

P Kevin Galvin

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

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