14th October 2016
The onshore rig count increased 15 (11 targeting gas) this week, bringing the total to 516 compared with 751 a year ago. Rigs targeting oil added 4, standing at 432, up 37% (116) since bottoming out the week of May 22.
Oil prices have jumped above $50 a barrel after OPEC met in Algiers in September and agreed to cut oil production to a range of 32.5 - 33 million barrels a day. This week, Russia said it is willing to participate in OPEC’s decision to cap oil supplies. It appears that Saudi Arabia and Russia want higher oil prices in the current market and will try to make that happen.
Assuming, therefore, that all these parties agree to production cuts that supports the rebalancing of the market, it should be expected that crude oil prices will firm over the next three months and rise during 2017. OPEC and Russia hope that with reduced supply oil prices will rise, avoiding a future supply shortfall amid current global cuts in capital spending.
However, if production is cut too quickly and the cut drives prices above $60 a barrel, it risks U.S. production growing significantly and once more putting downward pressure on oil prices. Prices may need to be higher for a prolonged period before shale producers react en masse and ramp up drilling activity.
Of course, we have been here before, temporary oil price spikes on limited details that would do little to change the market fundamentals. It’s the massive inventory overhang that continues to put downward pressure on prices. It remains to be seen if OPEC/Russia in practice carry out much of anything, other than agreeing to agree that production constraint is needed.
Global demand growth is expected to reach 1.4 million barrels a day in 2016 and 1.2 million in 2017.
Global oil supply rose 600,000 barrels per day year-over-year in September. Non-OPEC production in September was up nearly 500,000 barrels per day on higher volumes from Russia and Kazakhstan. In the U.S., oil production dropped below 8.7 million barrels per day, its lowest level since May 2014 and more that 750,000 barrels per day below 2015.
OPEC crude output rose to a record high of 33.64 million barrels per day, as Iraq pumped at record rates and Libya reopened export terminals. Production from OPEC members stood 900,000 barrels per day above a year ago.
The signals are clear that global production continues to increase and this certainly will continue to put downward pressure on oil price in the near term….OPEC/Russia will need to cut crude production if they want higher oil prices sooner rather than later.
A somewhat bearish EIA report was issued this week. Crude stocks increased by 4.9 million barrels; however, the U.S. had another material decline in crude production. Overall crude production decreased by 17,000 barrels per day, despite an increase in Alaska’s production. Crude production (excluding Alaska) decreased by 36,000 barrels per day, a large weekly decline indicating that additional rigs will be needed to stop U.S. production decline.
Sources: EIA Weekly Update and GCA Analysis
Despite the fact that oil prices have climbed closer to $50 per barrel, the energy industry is a long way from recovery. At least 135 oil and gas companies are on the verge of bankruptcy due to low crude oil prices, according to a DebtWire Analytics report.
When oil prices were trading around $100 a barrel back in 2010, energy companies spent hundreds of millions of dollars developing new shale fields and buying new drilling equipment.
But when oil prices plummeted to lows of $26 per barrel in early 2016, many of those companies found themselves crushed under outstanding notes, lines of credit and reduced cash flow.
The total number of active onshore rigs increased to 516. When compared to a November 2014 figure of 1,876 active rigs, the current level is approximately 72% below the 2014 high.
Across the three major unconventional oil basins, the oil rig total decreased to 259 (down 6 last week), with Eagle Ford down 4, Permian down 2 and Williston flat.
Total U.S. rig count (including the Gulf of Mexico) stands at 539, up 15 last week, with rigs targeting oil up 4. The horizontal rig count increased to 431, up 18 last week.
Oil prices came under pressure, as a drop in U.S. fuel inventories provided support but ample crude supplies kept any gains in check.
Brent, the global benchmark for oil, was down $0.10 to US$51.66 a barrel, reflecting a loss of 0.19% on the week.
WTI crude rose $0.24 to US$50.04 a barrel, up 0.48% on the week.
U.S. Supply and Demand
Sources: EIA Weekly Update and GCA analysis
U.S. crude oil refinery inputs averaged 15.6 million barrels per day, with refineries at 85.5% of their operating capacity last week. This is 480,000 barrels per day less than the previous week’s average.
U.S. gasoline demand over past four weeks was at 9.3 million, up 2.3% from a year ago. Total commercial petroleum inventories decreased by 5.1 million barrels last week.
On the supply side, EIA data indicated that total domestic crude production decreased 17,000 barrels to 8.450 million barrels a day. The total Lower 48 production now stands at 7.969 million barrels per day.
U.S. crude imports averaged about 7.9 million barrels per day last week, an increase of 151,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 7.9 million barrels per day, ~8.9% above the same four-week period last year.
Crude oil inventories increased 4.9 million barrels from the previous week and remain at historically high levels. The crude stored at Cushing (the main price point for WTI) saw a decrease of 1.4 million barrels; total storage is 61.3 million barrels (~68% utilization).
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