Ugly Start To 2016

Ugly Start To 2016

8th January 2016

The onshore rig count decided to mirror the oil price this week, declining 6% (down 36), with rigs targeting oil declining 4% (down 19).  A decline of this size was last seen during the first week of December 2015.  WTI ended the week at under US$33 a barrel (down 11%), a price level not seen since 2002.  Notwithstanding, U.S. production refuses to be flattened by low price pressures and the continued rig decline, with EIA data indicating that 55,000 barrels per day was added over the past four-week period.

OPEC published its 2015 World Oil Review on 23 December 2015.  Noteworthy takeaways in this publication are the projection of OPEC market share of global crude demand growing after 2020, as a result limiting their perception of the share to be taken by LTO to around current levels of production.  

This is logical given that OPEC’s undeveloped resources are low cost and logically should capture more of the future crude demand.  However, for OPEC to increase market share, they will require investment capital to bring their resources to market.  Just using a back of the envelope calculation, and assuming that the capital cost to develop the resource is US$10 per barrel, the investment required is about equal to 5-10 deep water projects on top of the capital investments needed to maintain current production of ~37 million barrels per day.

Of course, all of this assumes that the various OPEC nations actually spend the required capital in a timely fashion, that other production does not fall away unexpectedly, and that market demand grows as projected.  However, assuming all is indeed as OPEC projects, the net result is that the rig count would remain constrained far into the future.

The reasoning behind this potential outcome is that the larger the proportion of legacy production in the LTO production mix, the slower the overall production decline, and the lower the volume of new-drill production that is required to hold things steady (see 18 December 2015 Monitor).

Source: Adapted by GCA from OPEC 2015 World Oil Outlook

U.S. Drilling Activity…..

The total number of active onshore rigs now stands at 637, down 1,239 (~66%) from a November 2014 high of 1,876.  Across the three major unconventional basins, the oil rig total declined to 314 (down 16 last week) with Eagle Ford down 3, Williston down 4 and Permian down 9.  Horizontal rigs lost 31 and now stand at 518, down 783 year to date.

Total U.S. rig count (including the GOM) declined 34 last week, with rigs targeting oil down by 19 for a 19-week total decline of 157.  The average decline stands at ~8 rigs per week.  Rigs targeting gas declined 15 as warmer than expected weather continues to impact natural gas demand.

Oil Price….

The bears are mauling the crude oil market and they are not done yet.  The sentiment in the oil market is so bearish that an unexpected large drop in U.S. crude inventories did not help price rebound ... even a little!

Brent, the global benchmark for oil, was down about 4 dollars at US$32.94 a barrel, reflecting a loss of 11% on the week.

U.S. crude slid about 4 dollars to US$32.77 a barrel, down 11% on the week.

U.S. Supply and Demand…..

U.S. crude oil refinery inputs decease slightly to an average 16.6 million barrels per day, with refineries at 92.5% of their operating capacity last week.

On the supply side, U.S. oil production in the Lower 48 increased again by 20,000 barrels per day last week, with total production at 8.693 million barrels per day.  U.S. production continues to withstand low price pressure and continued rig decline.  EIA data indicates that 55,000 barrels per day was added over the past four-week period.   

U.S. crude imports averaged 7.5 million barrels per day last week, a decline of 382,000 barrels per day from the previous week.  Over the last four weeks, crude oil imports averaged 7.8 million barrels per day, ~6% above the same four-week period last year.

Crude oil inventories deceased 5.1 million barrels from the previous week, the stock change being driven by a decline in imported oil.  Cushing’s storage (the main price point for WTI) increased by 0.917 million barrels, taking the December total to 63.9 million barrels of crude in storage (~70% utilized), a fresh record high.

Source: EIA Weekly Update and GCA Analysis

 

 

Authors

Ugly Start To 2016

P Kevin Galvin

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

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