24th April 2015
The Baker Hughes U.S. onshore rig count decline continued this week, dropping 23 rigs compared to drops of 34 and 42 for the prior two weeks. The rig count has now declined by 978 (52%) from a November 2014 high of 1,876, to 898 on 24 April 2015. Rigs active in the Gulf of Mexico gained 1 week-on-week bringing the total to 34 (26 oil focused and 8 gas focused).
- 17 April 2015 - U.S. Onshore Drops 34 Rigs, GOM Adds 1; Crude Prices Rally
- 10 April 2015 - U.S. Onshore Drops 42 Rigs, GOM Up 2; Storage Builds at Gulf Coast
- 02 April 2015 - Rig Count Decline Pace Continues to Slow: U.S. Production Decline Largest in Three Months
While oil prices hit new highs for 2015 (Brent closed above $65 per barrel, and WTI closed at just over $57), and Saudi Arabia and OPEC continue to indicate that oil price will move up and that supply and demand will come into balance by the end of 2015, the message from a number of the Majors this week was to expect continued "weakness" in oil price for a few years yet.
The EIA data this week showed that US oil stocks increased 5.3 million barrels overall. However, the makeup of storage additions across the U.S. is quite different. PADD 3, which covers the U.S. Gulf Coast added 5.5 million barrels, reflecting a continued global surplus as U.S. refiners continue to buy oil at spot prices and store it. In contrast, PADD 2, which covers the Midwest (including Cushing, Oklahoma), had an overall withdrawal of 500,000 barrels while Cushing storage increased 700,000 barrels. Overall, U.S. inventories now sit at some 200 million barrels above historical levels and it is likely that oil stocks will remain at high levels until global oil supply and demand come into balance.
One of the key attributes of the U.S. unconventional revolution is that it is a Real Option play. Thus, in addition to the PADD storage, there is substantial additional storage both as a result of the "drill but don't complete" inventory (also known now as “fracklog”) that has been building since the turn of the year and can be turned on in relatively short order, and the slightly slower but nevertheless still relatively fast reacting storage essentially caused by the falling rig count and activity levels.
Taking these views and data points suggests that a volatile market should continue to be expected until such time as demand exceeds the ability of the market to respond. In the short term there is a price response to production and production plan curtailments, and increasing demand from lower prices and buying for storage. However, as that price rise continues, so it starts to see storage (PADD or unconventional) reversal, pushing prices back down, albeit progressively to an increasing baseline.
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