Production Stalling Out

Production Stalling Out

26th August 2016

The onshore rig count reversed direction after 8 weeks of increases, but down only 1 rig, for a thirteen week gain of 92 rigs (up 25% since mid-May).  Against this the Permian continued its trend of adding oil rigs (plus 3), and now stands at 199.  Rigs targeting oil remained flat at 406, up 28% (90) since bottoming out the week of 22 May.

Iran’s comeback also seems to have stalled seven months after sanctions were lifted. Their production levels have taken on significance in recent weeks as OPEC prepares for talks next month in Algeria on supply side constraints. Iran’s oil production stands at 3.85 million barrels per day in August according to reports from their oil minister. However, the IEA says Iran’s oil production actually fell in July to 3.6 million barrels per day. The country’s ability to reach pre-sanction levels above 4 million barrels per day, and the manner in which this has factored into future pricing outlooks, is now beginning to be queried.

Iran has confirmed that it plans to participate in next month’s discussion in Algeria on oil output but indications are that they will not soften their resolve to return to pre-sanction production level.

Oil production in China is reported as following the global trend of decline in non-OPEC countries as a result of lower capital investment caused by the oil price crash. Additionally, oil production likely peaked in 2015 at around 4.3 million barrels per day according to new data it released. This latest development has significant implications globally as the country seeks to meet its shortfall with imports.

The EIA weekly data indicated that U.S production returned to a decline this week by decreasing by 49,000 barrels per day. A decline, after the 152,000 barrels per day increase reported last week, strengthens GCA’s assessment that U.S crude production in the short term will continue downward and exit 2016 at around 8.2 million barrels per day.

The increase in crude prices over the last few weeks could have more to do with fundamentals than the upcoming talk of OPEC/Russia production constraint. However, it looks like global supply (Nigeria and Libya production returning to more normal levels) is more likely to increase over the next year and price risk remains tilted to the downside without major production cuts. The crude market remains well supplied from a diverse resource base.

Sources: EIA Weekly Updates and GCA Analysis

Oil was set for its largest weekly decline in a month after the Saudi energy minister watered down expectations that the world's largest producers might agree next month to limit their output.

U.S. crude exports are poised to climb to a record in September as oil traders take advantage of a widening price differential between the Brent and WTI benchmarks and cheaper transportation cost.

The first ethane shipment out of Enterprise Products Partners’ (EPP) new export terminal in Morgan’s Point, Texas, is preparing to set sail for Norway. The terminal, located on the Houston Ship Channel, is the second to open in the United States, and has an export capacity of up to 200,000 barrels of liquefied ethane per day.

Ethane can either be extracted along with other natural gas plant liquids (NGPL) and sold separately, or left in the processed gas and sold as part of the natural gas stream. Recent rapid growth in natural gas production from resources rich in NGPL has yielded higher quantities of ethane than the U.S. market can absorb, leading to growing amounts of ethane left in the processed gas stream. Increased ethane exports could slow or reverse this trend.

Natural gas produced in the Marcellus and Utica formations, located primarily in Pennsylvania and Ohio, respectively, tends to be rich in ethane.

Weekly Recaps

Drilling Activity

The total number of active onshore rigs decreased 1 to 472.  When compared to a November 2014 figure of 1,876 active rigs, the current level is approximately 75% below the 2014 high.

Across the three major unconventional basins, the oil rig total increased to 256 (up 4 last week), with Eagle Ford up 1, Williston flat and Permian up 3.

The horizontal rig count decreased to 379, down 3 last week. Total U.S. rig count (including the Gulf of Mexico) stands at 489, down 2 last week, with rigs targeting oil flat for a 51-week total decline of 267.

Oil Price

Oil prices are still getting a slight boost from signs of widespread cooperation among oil exporters, but bloated stockpiles are capping gains.

Brent, the global benchmark for oil, was down $0.86 to US$49.71 a barrel, reflecting a loss of 1.70% on the week.

WTI crude slid $0.62 to $47.58 a barrel, down 1.29% on the week.

U.S. Supply and Demand

U.S. crude oil refinery inputs averaged 16.7 million barrels per day, with refineries at 92.5% of their operating capacity last week. This is 186,000 barrels per day less than the previous week’s average.

U.S. gasoline demand over past four weeks was at 9.7 million, up 1.8% from a year ago. Total motor gasoline inventories remained unchanged last week.

On the supply side, EIA data indicated that total domestic crude production declined by 49,000 barrels to 8.597 million barrels a day as output in Alaska increased marginally. The total Lower 48 production now stands at 8.065 million barrels per day. The past 31-week decline total for the Lower 48 stands at 643,000 barrels per day (an average decline of ~20,700 barrels per day per week).

U.S. crude imports averaged over 8.6 million barrels per day last week, an increase of 449,000 barrels per day from the previous week.  Over the last four weeks, crude oil imports averaged 8.5 million barrels per day, ~13.3% above the same four-week period last year.

Crude oil inventories increased 2.5 million barrels from the previous week and persist at historically high levels. The crude stored at Cushing (the main price point for WTI) saw an increase of 0.4 million barrels; total storage is 64.9 million barrels (~72% utilization).

Sources: EIA Weekly Update and GCA analysis

Authors

Production Stalling Out
Production Stalling Out

P Kevin Galvin

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

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