Swelling Production Governs

Swelling Production Governs

23rd September 2016

The onshore rig count increased 5 (3 targeting gas), bringing the total to 491 compared with 805 a year ago. Rigs targeting oil added 2, standing at 418, up 32% (102) since bottoming out the week of May 22.

Crude oil prices extended a rally which is in contrast to trends in production. This week, Total confirmed its production was on pace for an average increase of 5 percent through 2019, with more than a dozen new start-ups on the schedule. Libya and Nigeria, two members of the Organization of Petroleum Exporting Countries, are both on the cusp of recovery and will increase production by an estimate 1 million barrels per day.

Russia and Saudi Arabia, the world’s top two oil producers, continue to indicate that something should be done to support prices. However, their actions suggest a different strategy. Saudi Arabia’s crude exports for the month of July reached a record high, increasing 166,000 barrels per day to 7.6 million barrels per day, compared with exports for the previous month. Russian production in September has increased to about 11.09 million barrels per day, the highest monthly average since the Soviet era.

Ministers from OPEC and non-member states could review proposals to keep production rates steady at meetings next week in Algeria and may turn its planned informal meeting into a formal session as it seeks ways to re-balance markets sooner and stabilize prices at a higher level. However, could this turn out once again to be all about talk and no action?

U.S. crude inventories fell sharply last week, the third straight week of declines. The U.S. Energy Administration (EIA) reported that crude inventories fell 6.2 million barrels for the week ended September 16. Crude stocks since the beginning of September have been reduced a total of 21.3 million barrels.

The inventory numbers are quite bullish; however, one may need to take the numbers with a grain of salt. The crude import, production and refining inputs in September do not point to an inventory draw of this magnitude. Crude imports rose 3.1 percent to 8.31 million barrels a day and production increased 0.2 percent to 8.5 million barrels a day last week. While refineries cut operating rates by 0.9 percentage points to 92 percent of capacity, the lowest level since June.

While the U.S. crude stock draws and oil price rally are strong indicators that conditions in the oil market are improving, they contrast with increasing production from OPEC and other major producers such as Russia. Additionally, U.S. crude production increased for a second consecutive week, a trend that is pointing towards a slowdown in U.S production decline.

Sources: EIA Weekly Update and GCA Analysis

U.S. imports from Canada rose about 17 percent to 3.46 million barrels a day last week, the EIA indicated in a preliminary report. That’s the most since the agency began collecting such data in 2010. Enbridge Inc.’s mainline system, the most important conduit for running Canadian crude into the U.S., has been running above its 2.4 million-barrel-a-day nameplate capacity and was full in August.

While Canada’s conventional oil is declining, oil-sands output continues to grow as projects initiated before the 2014 oil rout are completed. Canadian oil-sands companies are set to add about 390,000 barrels a day of capacity by the end of next year.

Weekly Recaps

Drilling Activity

The total number of active onshore rigs increased to 491.  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 oil basins, the oil rig total decreased to 262 (down 1 last week), with Eagle Ford down 1, Williston up 1 and Permian down 1.

Total U.S. rig count (including the Gulf of Mexico) stands at 511, up 5 last week, with rigs targeting oil up 2. The horizontal rig count increased to 402, up 8 last week.

Oil Price

Oil prices were mixed Friday, following two days of strong gains as the market approaches next week’s meeting of major oil producers with caution and skepticism.

Brent, the global benchmark for oil, was up $0.99 to $47.09 a barrel, reflecting a gain of 2.15% on the week.

WTI crude rose $2.32 to $45.58 a barrel, up 5.36% on the week.

US. Supply and Demand

Sources: EIA Weekly Update and GCA analysis

U.S. crude oil refinery inputs averaged 16.6 million barrels per day, with refineries at 92% of their operating capacity last week. This is 143,000 barrels per day less than the previous week’s average.

U.S. gasoline demand over past four weeks was at 9.5 million, up 4.1% from a year ago. Total motor gasoline inventories decreased by 3.2 million barrels last week.

On the supply side, EIA data indicated that total domestic crude production increased by 19,000 barrels to 8.512 million barrels a day. The total Lower 48 production now stands at 8.048 million barrels per day. The past 35-week decline total for the Lower 48 stands at 662,000 barrels per day (an average decline of ~18,914 barrels per day per week).

U.S. crude imports averaged about 8.3 million barrels per day last week, an increase of 247,000 barrels per day from the previous week.  Over the last four weeks, crude oil imports averaged 8.1 million barrels per day, ~9.0% above the same four-week period last year.

Crude oil inventories decreased 6.2 million barrels from the previous week but remain at historically high levels. The crude stored at Cushing (the main price point for WTI) saw an increase of 0.5 million barrels; total storage is 62.7 million barrels (~70% utilization).

Authors

Swelling Production Governs

P Kevin Galvin

Principal Advisor, Field Development Planning - kevin.galvin@gaffney-cline.com
Swelling Production Governs

Bob George

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

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