23rd October 2015
The U.S. onshore rig count continued lower this week, releasing 2 more rigs for a nine-week decline of 101. Is this the bottom of the latest rig count adjustment? With oil prices not moving significantly one way or the other, this would seem to be at least a temporary equilibrium.
16 Oct 2015 - U.S. Refinery Input Declines … Crude Oversupply Remains!
09 Oct 2015 - Oil Rig Decline Continues ... Beware of Oil’s “Dead Cat Bounce”!
02 Oct 2015 - Rig Count Doesn’t So Much Decline … As Plummet!
EIA’s October update to the Drilling Productivity Report indicates that the gains in drilling productivity, which have been such a feature of the past and the ability to maintain production with only half the rigs, is now slowing down significantly and is forecast to halt altogether. The same report also forecasts a decline in November LTO production of 93,000 barrels per day, the largest monthly production decline since the start of data analysis in 2007.
If the EIA report is correct, to maintain production (at least by those operators who choose to try and do so) would require an actual up-tick in rigs. Whether such a requirement would outweigh others still dropping rigs for economic or other reasons, remains to be seen; but this may offer some support to the rig count going forward.
The following chart shows the EIA's October updated forecast of U.S. production through the end of the year, which shows an exit rate of about 9 million barrels per day. GCA has superimposed on that data a revised forecast from July onwards, with the help of GCA’s North American Unconventional Model. This adjusted forecast, assuming a rig count in line with present levels, indicates that in practice U.S. production could exit at about 150,000 barrels per day lower than that, at about 8.85 million barrels per day, consistent with the latest EIA decline forecast (not shown in their production estimate).
The resilience of the U.S shale producers has surpassed expectations as they have extracted efficiencies from their operations and redeployed drilling assets to the most prolific sections of existing plays. However, this should not disguise the fact that the collapse in oil prices has completely changed the complexion of the shale revolution, and now the focus is on survival.
With the oil market remaining oversupplied, and OPEC’s strategy of holding output steady to force other countries to adjust their production is working, there appears no reason why this producer group should want to change their tactic now. However, this is still a fragile state of affairs. As production drops and prices rise, it should be expected that rigs will be added and shale output will once again increase, and from a more efficient cost base.
The overall effect of this is a general downward trend, but with shorter-term up-cycles. Thus, it is likely that there is still a while to go before any form of rebound can be expected although, as ever, this is not to be confused with any impact of responses to less-expected events.
U.S. Drilling Activity…..
The total number of active rigs now stands at 752, down 1,124 (~60%) from a November 2014 high of 1,876. Across the three major unconventional basins, the oil rig total declined to 354 (down 2 last week), with Eagle Ford up 1, Permian down 3, and Williston flat. Horizontal rigs were flat, a strong indication that onshore unconventional drilling productivity is influencing operator rig releases.
Total U.S. rig count (including the GOM) was flat last week, with rigs targeting oil declining by only 1 for an eight-week total of 81.
A glut in global crude oil and refined product supplies, which have battered the energy market for over a year, continued to take its toll on oil prices.
Benchmark Brent crude oil dropped about 2 dollars to US$47.78 a barrel for a weekly decline of 4% on ongoing supply concerns.
U.S. crude for December was also down about 2 dollars to US$44.67 a barrel for a 4% drop.
U.S. Supply and Demand…..
U.S. crude oil refinery inputs stayed at an averaged 15.3 million barrels per day, with refineries at 86.4% of their operating capacity last week.
On the supply side, U.S. oil production in the Lower 48 was flat last week keeping total production to 8.606 million barrels per day.
U.S. crude imports averaged 7.5 million barrels per day last week, an increase of 156,000 barrels per day from the previous week.
Crude oil inventories increased by 8.0 million barrels from the previous week; the crude build comes from lower processing of oil in the U.S. as refiners shut down for maintenance after the peak summer driving season.
Looking forward to next week, assuming an increase of 2 to 5 million barrels, the October 2015 crude storage would be on trend with the same four-week period in 2013 and 2014. However, this is with a much larger decline rate (7% in 2014 vs. 12% in 2015) in crude refinery demand (i.e., U.S. production decline has helped reduce the crude forced into storage.)
The low refinery runs will continue and crude inventories are expected to rise significantly over the next several weeks. At 476.6 million barrels, U.S. crude inventories still remain above historical levels.
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