Rigs and Price Flat. Second Quarter Results Begin … Reflecting Fundamentals of $50-$60 Oil

Rigs and Price Flat. Second Quarter Results Begin … Reflecting Fundamentals of $50-$60 Oil

31st July 2015

After last week’s big jump, the number of active onshore oil and gas rigs dropped slightly, down by 5.  However, the headline masks a continued (small) increase in the oil well count, but a larger decrease in gas wells.  The onshore rig count now stands at 840, down 1,036 (55%) from a November 2014 high of 1,876.  Prices stayed more or less flat during the week, hovering a little below US$50 per barrel for WTI, and a little above for Brent.  Of more interest this week are Second Quarter results that are starting to emerge and reflect price fundamentals.

U.S. Drilling Activity.....

After a significant increase in rig count last week, rig count shows little change as price continues to constrain E&P operator activity.  Market signals are clearly directing operators to show more discipline with their drilling activities and wait for global production to decline before adding rigs. Second Quarter results are showing the dramatic impact that price is having on cash flow with a new wave of capital cuts and layoffs starting.

Across the three major unconventional oil basins, rigs increased by 2, with the Eagle Ford down 2, Permian up 3, and Williston up 1 week-on-week.  Rig activity over the past week included the increase of 2 horizontal rigs.

U.S. Supply and Demand.....

Total U.S. oil stocks continue to be above their five-year highs; however, U.S. oil production continues to show signs of declining.  Oil inventories had a large decease last week of 4.2 million barrels, a surprise to the market that provided some support to price, including a withdrawal of 0.2 million barrels from stocks at the Nymex delivery point of Cushing, Oklahoma.  U.S. crude oil refinery inputs averaged 16.8 million barrels per day, 108,000 barrels per day less than the previous week’s average.  Refineries are now operated at 95.1% of their operating capacity.  U.S. crude imports averaged 7.5 million barrels per day, down by 396,000 barrels per day from the previous week, which contributed to the large withdrawal from crude stacks.  Over the past four weeks, crude oil imports have averaged 7.5 million barrels per day, 1.0% above the same four-week period last year.

Global Production News....

Pemex announced that their crude oil production for the quarter stood at 2.225 million barrels per day, down from 2.468 million barrels per day in the year-earlier period, a decline of 243,000 barrels per day of production or a 10% decline year-on-year.  Venezuela this week indicated that they are sourcing 70,000 barrels per day of light crude to blend with their heavy crude.  The latest EIA update on Russian crude production indicates a decline trend starting, which will provide OPEC an opportunity to fill that gap.  U.S. crude oil production continues to decline marginally, averaging 9.5 million barrels per day in 2015, off the peak in April 2015 of 9.7 million barrels per day.

GCA Analysis....

The average U.S. crude import in 2015 is running at 7 million barrels per day; adding this to the U.S. average 2015 production of 9.5 million barrels per day, provides a total crude oil input to U.S. refineries of 16.5 million barrels.  Price pressures for 2016 will be helped by U.S. crude oil refinery inputs (which have now remained strong over the past three months; see graph below), and global production outside of OPEC beginning to show signs of decline. However, U.S. shale oil operators continue to make improvements in their cost per barrel, and anecdotal data has indicted that, despite the messages from Q2 results, US$60 WTI will increase rig activity … which, alongside Iranian crude starting to flow and questionable demand from China, may be suggesting this as a short- to medium-term price cap, as the market continues its price discovery exercise.

Source: EIA July 2015 update and GCA analysis

Authors

Rigs and Price Flat. Second Quarter Results Begin … Reflecting Fundamentals of $50-$60 Oil

P Kevin Galvin

Principal Advisor, Field Development Planning - kevin.galvin@gaffney-cline.com
Rigs and Price Flat. Second Quarter Results Begin … Reflecting Fundamentals of $50-$60 Oil

Bob George

Global General Manager - bob.george@gaffney-cline.com

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