Production to Exceed Demand Growth

Production to Exceed Demand Growth

16th September 2016

The onshore rig count decreased 4, bringing the total to 486 compared with 811 a year ago. The Permian continued its dominance in adding rigs (up 2), and now stands at 202 (all targeting oil). Rigs targeting oil added 2, standing at 416, up 32% (100) since bottoming out the week of May 22.

Two years into an oil rout that saw West Texas Intermediate oil fall to about $26 a barrel in February 2016, the risk continues to be to the downside. As LTO producers became more efficient and Saudi Arabia, Russia and Iran boost output more than forecast. A modest supply deficit in 2H 2016 looks to turn to a surplus early next year.

The International Energy Agency (IEA) and OPEC have issued reports this week indicating the glut will persist longer than previously thought. The IEA said Tuesday that oil stockpiles will continue to accumulate through 2017 amid slack demand in India and China. The IEA downgraded its global oil demand predictions by about 100,000 barrels a day for this year; although still growing by 1.3 million barrels a day. It also reduced the forecasts by about 200,000 barrels a day in 2017, with consumption increasing more slowly at 1.2 million barrels a day.

The IEA said that in China, ongoing economic slowdown and reports of heavy flooding dented industrial oil use and transport fuel demand for 2016. Moreover, OPEC this week predicted that supplies outside the group would grow next year rather than fall, as they had previously forecasted.

Meanwhile, indications are that Nigeria and Libya are now in a position to bring back shut in production and start ramping up oil exports in October. Nigeria and Libya returning production could mean an additional 1 million barrels per day of crude entering the market.

OPEC producers are scheduled to meet with non-OPEC producer Russia in Algeria September 27 to discuss freezing or capping output levels. While it behooves the producers to reach an agreement to show cohesion, any action will do little to support prices. The advent of shale oil, which can be brought on or taken off the market more quickly than conventional oil, appears to have undermined the group’s effectiveness of managing supply.

The latest data indicates that the world will continue to be well supplied with oil and the hope of a balance between supply (production and stock drawdown) and demand in 2017 looks very bleak.

The global production surplus reversed direction because production increased and consumption decreased. Both the IEA and EIA have indicated that higher OPEC production levels are a major cause of the continued crude oversupply. Iran, Iraq and Saudi Arabia have increased their crude oil production by 2.74 million barrels per day since January 2014. With Nigerian and Libyan shut in production returning, a production freeze by OPEC may not have that much impact in firming crude prices.

At the recent trading range in WTI prices, U.S. operators are beginning to feel the pain again causing U.S oil rig growth to begin to diminish.  

Sources: EIA Weekly Update and BHI Weekly Rig Data

Midstream consolidation continued the week with the Enbridge/Spectra merger.  Nearly 82% of large-diameter pipeline miles and 62% of all pipeline miles (predominantly natural gas) in the United States are owned by 10 companies. Kinder Morgan Inc., with 32,000 miles of large-diameter pipeline, has more than double the mileage of TransCanada Corporation, which acquired Columbia Pipeline Group in July 2015. The merger of Energy Transfer Equity LP and Williams Companies, Inc. that was recently canceled would have resulted in a large natural gas pipeline conglomerate ranked second to Kinder Morgan, which owns about 19% of all U.S. pipelines.

Most of the top-10 companies, which include some large regional players, are common carrier pipelines regulated by the Federal Energy Regulatory Commission (FERC). The top five companies have national or international scale operations.

Weekly Recaps

Drilling Activity

The total number of active onshore rigs decreased to 486.  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 increased to 263 (up 2 last week), with Eagle Ford up 1, Williston down 1 and Permian up 2.

Total U.S. rig count (including the Gulf of Mexico) stands at 506, down 2 last week, with rigs targeting oil up 2. The horizontal rig count decreased to 394, down 2 last week.

Oil Price

Oil prices fell to roughly two-week lows as news of rising Iranian exports and returning supplies from Libya and Nigeria fueled concerns that the global glut will persist.

Brent, the global benchmark for oil, was down $2.54 to $46.10 a barrel, reflecting a loss of 5.22% on the week.

WTI crude slid $3.19 to $43.26 a barrel, down 6.87% on the week.

U.S. Supply and Demand

Sources: EIA Weekly Update and GCA analysis

U.S. crude oil refinery inputs averaged 16.7 million barrels per day, with refineries at 92.9% of their operating capacity last week. This is 200,000 barrels per day less 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 increased by 35,000 barrels to 8.493 million barrels a day as output in Alaska increased marginally. The total Lower 48 production now stands at 8.035 million barrels per day. The past 34-week decline total for the Lower 48 stands at 675,000 barrels per day (an average decline of ~19,853 barrels per day per week).

U.S. crude imports averaged about 8.1 million barrels per day last week, an increase of 0.993 million barrels per day from the previous week.  Over the last four weeks, crude oil imports averaged 8.2 million barrels per day, ~10.1% above the same four-week period last year.

Crude oil inventories decreased 0.6 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 1.2 million barrels; total storage is 62.2 million barrels (~69% utilization).

Authors

Production to Exceed Demand Growth

P Kevin Galvin

Principal Advisor, Field Development Planning - kevin.galvin@gaffney-cline.com
Production to Exceed Demand Growth

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