5th February 2016
The onshore rig count saw a significant decline this week, down 46 (8%) as price continues to hammer light tight oil (LTO) operator cash flows. However, in the three key oil basins (Eagle Ford, Permian, and Williston), the decline was 10 oil rigs (a 3% decline).
In the U.S., commercial stockpiles have risen in 16 of the past 19 weeks and now stand at more than 500 million barrels for the first time since 1930, the height of the East Texas oil boom.
ExxonMobil presented their 2016 World Energy Outlook (WEO) last week and they put forward a view that U.S. LTO production would grow to just under 12 million barrels per day by 2040. They indicated that the past few years have seen considerable improvements in tight oil well performance and drilling efficiency. They also said that tight oil is now an established, globally competitive source of liquid supply and can adjust relatively quickly to changes in demand.
OPEC presented their 2015 World Oil Outlook (WOO) at the end of December 2015 and they put forward a view that LTO production would grow to just under 5 million barrels per day by 2040. They indicate that tight oil growth is expected to face limitations that lead to a plateau of ~5.6 million barrels per day, starting around 2025, followed by a slight decline towards 2040.
In both forecasts, demand rises to ~112 million barrels per day, which indicates that their forecast difference is driven by the supply side. OPEC’s WOO view clearly points to an increase in OPEC production through 2040 and indicates that their market share will grow from the current ~40% to ~46% by 2040.
ExxonMobil views U.S. LTO production as a growth opportunity and one that will provide a return on investment far into the future, whereas OPEC sees LTO more as a harvest-type opportunity that will balance the global crude market. Both forecasts appear to be reasonable and grounded in sound expectations concerning the development of the global oil market.
However, U.S. LTO production and activity levels would be very different in the two forecasts. In the growth case postulated by ExxonMobil, U.S. LTO production increases would drive activity back toward 2014 rig levels, an increase of 70% from current activity levels, and LTO would be a growth engine for the U.S. economy once again. The OPEC harvest/stagnation case, on the other hand, would keep U.S. LTO production below today’s rig levels and would provide no growth to the U.S. economy.
While very different in quantum, in both the XOM and OPEC scenarios LTO production would supply the marginal barrels required to balance the global oil market. Since there would be less LTO in the market in the OPEC case than in the ExxonMobil case, the LTO marginal barrels in the OPEC case are lower cost. Therefore, in the OPEC case the lower volume would be reflecting a lower price scenario. By contrast, in the ExxonMobil growth scenario, the much higher volume would reflect a higher price scenario.
The total number of active onshore rigs now stands at 571, down 1,305 (~70%) from a November 2014 high of 1,876. Across the three major unconventional basins, the oil rig total declined to 276 (down 10 last week), with Eagle Ford and Williston down 2 and Permian down 6. The horizontal rig count is now 457, down 30.
Total U.S. rig count (including the Gulf of Mexico) stands at 571, down by 48 last week, with rigs targeting oil down 29 for a 23-week total decline of 206. As such, the average weekly decline rate is now 9 rigs per week. Rigs targeting gas declined 19 and now stand at 104.
Oil headed for a weekly drop as growing U.S. crude stockpiles signaled a persisting global glut that’s proving a hurdle for any sustained rally.
Brent, the global benchmark for oil, was down 12 cents to US$34.32 a barrel, while WTI crude slid US$1.73 to US$31.53 a barrel.
U.S. Supply and Demand
U.S. crude oil refinery inputs declined slightly to an average of 15.6 million barrels per day, with refineries at 86.6% of their operating capacity last week. This continues to be on trend with 2015 declines as refineries take seasonal maintenance outages.
On the supply side, EIA data indicated that U.S. oil production in the Lower 48 remained flat last week, with total production at 8.703 million barrels per day.
U.S. crude imports averaged 8.3 million barrels per day last week, an increase of 647,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 8 million barrels per day, ~8% above the same four-week period last year.
Crude oil inventories increased ~7.8 million barrels from the previous week, with the change in stocks driven by the increase in imported crude. Crude in storage at Cushing (the main price point for WTI) increased by 0.8 million barrels, taking the total crude in storage to 64.2 million barrels (~71% utilization).
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