Surprise US Inventory Decline

Surprise US Inventory Decline

28th October 2016

The onshore rig count increased 5 this week, bringing the total to 535 compared with 738 a year ago. Rigs targeting oil dropped 2, now standing at 441, up 40 %( 125) since bottoming out five months ago in late May. Rigs targeting gas increased 6, bring the total to 114, compared with 197 a year ago. 

Domestic crude stockpiles fell by 553,000 barrels, according to the Energy Information Administration (EIA). This is in contrast to a gain of 2 million barrels, forecast by analysts surveyed by Bloomberg, and a 4.75 million barrel increase, which was reported Tuesday by the industry-funded American Petroleum Institute.

Oil prices drew support from the unexpected drop in U.S. crude inventories, and larger than expected falls in stocks of gasoline and distillates, reported this week by the EIA. This could be indicating that a long-awaited market rebalancing is underway. The global stock overhang must be reduced in order to stabilize prices. Whilst such reduction is largely in the hands of OPEC, the re-balancing appears to be already taking place in the U.S.

The market is keeping an eye on escalating protests in Venezuela against the rule of President Nicolas Maduro, although there was no sign of any impact on the OPEC member's oil output. Venezuelan production has been falling this year as low prices hit investment.

The World Bank is raising its 2017 forecast for crude oil prices to $55 per barrel from $53 per barrel as members of OPEC prepare to limit production after a long period of unrestrained output.

Energy prices, which include oil, natural gas and coal, are projected to jump almost 25 percent overall next year, a larger increase than anticipated in July. The revised forecast appears in the World Bank’s latest Commodity Markets Outlook. In the same report, oil prices in 2016 are expected to average $43 per barrel, unchanged from the July report.

A technical meeting at OPEC's headquarters this week is supposed to come up with recommendations on how to implement the supply cutback, expected to be agreed at the oil ministers' next meeting on Nov. 30. The OPEC plan is designed to speed up the removal of a supply glut that is keeping oil prices at less than half their level of mid-2014, cutting exporters' income and leading to investment cuts by oil companies worldwide.

Sources: EIA Weekly Update and GCA Analysis

Looking at movements in gas rigs in recent weeks, the weekly natural gas rig count increased by 11 during the week ending October 14, 2016 according to Baker Hughes. This is the largest increase in natural gas-directed rigs since the week ending October 31, 2014, when the natural gas rig count increased by 14. Although the number of active natural gas rigs has been increasing in recent weeks, the current number in operation is still below the 192 gas rigs active at this time last year.  The active count is stll about 25% of the recent peak of 401 natural gas rigs in operation in September 2013.

Currently, most of the active natural gas-directed rigs are in the Marcellus (34 active rigs in Pennsylvania and West Virginia), followed by the Haynesville (16 active rigs in Louisiana and Texas) and the Utica (15 rigs active in Ohio and Pennsylvania).  Of the 11 additional natural gas rigs, more than half are in Louisiana, with 2 of these rigs in the Haynesville basin. Activity also increased in the Marcellus where the natural gas rig count rose by 2. No basins reported a decline in the number of natural gas rigs in operation for the week ending October 14, 2016.

Compared to last year, natural gas rig count declines have been the steepest in Texas (including both the Eagle Ford and Permian basins) and the Niobrara basin (in Colorado and Wyoming). The only 2 major natural gas-producing basins that do not show year-on-year declines in the natural gas rig count are the Utica formation (15 active rigs) and the Arkoma Woodford formation in Oklahoma (4 active rigs).

Weekly Recaps

Drilling Activity

The total number of active onshore rigs increased to 535.  When compared to a November 2014 figure of 1,876 active rigs, the current level is approximately 71% below the 2014 high.

Across the three major unconventional oil basins, the oil rig total increased to 276 (up 5 last week), with Eagle Ford and Permian flat and Williston up 5.

Total U.S. rig count (including the Gulf of Mexico) stands at 557, up 4 last week, with rigs targeting oil down 2. The horizontal rig count increased to 450, up 5 last week.

Oil Price

Oil prices firmed, supported by the surprise decline in U.S. inventories, suggesting that the global glut in supply is slowly being worked through.

Brent, the global benchmark for oil, was down $1.45 to US$50.13 a barrel, reflecting a loss of 2.81% on the week.

WTI crude decreased by $1.34 to US$49.28 a barrel, down 2.65% 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 85.6% of their operating capacity last week. This is 182,000 barrels per day more than the previous week’s average.

U.S. gasoline demand over past four weeks was at 9.1 million, up 0.1% from a year ago. Total commercial petroleum inventories decreased by 8.7 million barrels last week.

On the supply side, EIA data indicated that total domestic crude production increased 40,000 barrels to 8.504 million barrels a day. The total Lower 48 production now stands at 8.003 million barrels per day.

U.S. crude imports averaged about 7.0 million barrels per day last week, an increase of 109,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 7.4 million barrels per day, ~2.1% above the same four-week period last year.

Crude oil inventories decreased 0.6 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 1.3 million barrels; total storage is 58.4 million barrels (~65% utilization).

Authors

Surprise US Inventory Decline

P Kevin Galvin

Principal Advisor, Field Development Planning - kevin.galvin@gaffney-cline.com
Surprise US Inventory Decline

Bob George

Regional Director: Americas - bob.george@gaffney-cline.com

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