Saudi Arabia’s View ... Only the Strong Survive

Saudi Arabia’s View ... Only the Strong Survive

26th February 2016

The onshore rig count continued to decline this week -- albeit at a slower rate -- down 14 (3%).  In the three key oil basins (Eagle Ford, Permian, and Williston), the decline was 9 oil rigs (a 4% decline).

During the annual IHS CERAWeek Energy Conference in Houston this week, Saudi Arabia’s oil minister ruled out the prospect of a production cut by OPEC, saying “there is no sense wasting our time seeking production cuts.  That will not happen.”  In addition, the  oil minister made it crystal clear that Saudi Arabia’s strategy is to allow market forces -- Adam Smith’s “Invisible Hand” as we wrote about in last week's Monitor -- to rebalance global crude oil supply and demand.

The message is clear that OPEC will no longer play a role in balancing the global crude oil market.  The Saudi oil minister also clarified that Saudi Arabia has not declared war on shale or on production from any given company or country, but instead that Saudi Arabia is meeting its customers’ demand for crude oil.  He indicated that Saudi Arabia would continue producing alongside other producers and that “inefficient and uneconomic producers will have to get out.  This is tough to say, but it’s a fact.”

While others talk about production freezes or cuts, U.S. light tight oil (LTO) producers have actually reduced their crude oil production.  The most recent data reported by the EIA shows that U.S. crude oil production is in decline when comparing February 2016 to the same period last year, losing 155,000 barrels per day.

Apache Corp. expects oil and natural gas production to fall as much as 11% in 2016, the company said Thursday, a day after Continental Resources Inc. projected a 10% cut and Whiting Petroleum Corp., a 15% reduction.  Devon Energy Corp. forecast a 10% decline earlier in the month. 

This has had and will have the effect of allowing additional imported oil to meet U.S. refinery input demand.  Such demand has remained strong, and has required the call on imported crude oil to increase from an average of 6.8 million barrels per day in February 2015 to 7.6 million barrels per day today.  This is a 12% increase above the same period last year.

The last point to make concerning U.S. supply disposition is that U.S. crude oil supply and demand is nearly balanced, and that far less crude is being put into storage as compared to the same period last year.

As U.S. LTO producers continue to drop rigs and production declines further, additional imported crude could be required to meet U.S refinery input demand; otherwise, the shortfall will need to be met by drawing down stocks of crude in storage.  U.S. crude imports, changes in crude in storage, and the rig count are key indicators to monitor while the global crude oil market rebalances.

Sources: EIA’s Weekly Petroleum Updates and GCA Analysis

Weekly Recaps

Drilling Activity

The total number of active onshore rigs now stands at 473, down 1,403 (~75%) from a November 2014 high of 1,876.  Across the three major unconventional basins, the oil rig total declined to 239 (down 9 last week), with Eagle Ford down 8, Williston flat, and Permian down 1.  The horizontal rig count is now 397, down 19.

Total U.S. rig count (including the Gulf of Mexico) stands at 502, down 12 last week, with rigs targeting oil down 13 for a 26-week total decline of 273.  The average weekly decline rate now stands at 10.5 rigs per week.

Oil Price

Oil futures extended gains Friday on hopes that major producers would agree to limit output and support prices.

Brent, the global benchmark for oil, was up US$3.54 to US$36.60 a barrel, reflecting a gain of 11% on the week. 

WTI crude rose US$4.46 to US$33.90 a barrel, up 15% on the week. 

U.S. Supply and Demand

U.S. crude oil refinery inputs decreased 1% to an average of 15.7 million barrels per day, with refineries at 87.3% of their operating capacity last week.

On the supply side, the data show that U.S. production is continuing to decline.  EIA data indicated that U.S. oil production in the Lower 48 declined by 35,000 barrels per day, with total production at 8.588 million barrels per day.  The decline over the past three weeks stands at 115,000 barrels per day. 

U.S. crude imports averaged 7.8 million barrels per day last week, a decrease of 117,000 barrels per day from the previous week.  Over the last four weeks, crude oil imports averaged 7.8 million barrels per day, ~7% above the same four-week period last year.

Crude oil inventories increased ~3.5 million barrels from the previous week.  Crude in storage at Cushing (the main price point for WTI) increased 0.4 million barrels, taking the total crude in storage to 65.1 million barrels (~71% utilization).

Sources: EIA Weekly Update and GCA analysis

Authors

Saudi Arabia’s View ... Only the Strong Survive

P Kevin Galvin

Principal Advisor, Field Development Planning - kevin.galvin@gaffney-cline.com
Saudi Arabia’s View ... Only the Strong Survive

Jeanne-Mey Sun

Vice President and Global Head of Business Consulting - Jeanne-Mey.Sun@gaffney-cline.com
Saudi Arabia’s View ... Only the Strong Survive

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