U.S. Production and Rig Count Stable; Oil Price Retreats ... All Calls Possible in the Short Term

U.S. Production and Rig Count Stable; Oil Price Retreats ... All Calls Possible in the Short Term

10th July 2015

While the rig count for the week more or less flatlined, the bigger story of the week has been the oil price.  Closing last week at $56.54, WTI dropped to $50.68 on Monday, catching the market by surprise.  A number of theories have sought to explain this, though none appear definitive. They include, alone or in combination, Greece, Iran, China, an unexpected expansion of U.S. crude stockpiles, higher output numbers by Saudi and Iraq, a strengthening U.S. Dollar and an increase in U.S. rigs drilling for crude oil.  WTI recovered somewhat over the course of the week, trading at $52.18 mid-Friday, but still down $4.36 (-8%) on the week.  (WTI closed the day at $52.74, down $3.80 (-7%).  Brent also fell over the week, although slightly less, from $60.51 to $58.22 mid-Friday.)

While the short term appears permeated by skittishness and rumor (nothing new there), in the background fundamentals have slowly been trending in a price-favorable direction of late with stocks declining, U.S. production peaking (ish) and, particularly with respect to the medium term, deferral of major projects to reflect CAPEX curtailment.  Alongside that, U.S. gasoline consumption and global demand appear to be eating into any surplus.  If all this is to be believed, the issue that remains is when both come into balance (or, more importantly, when the market is convinced they are as good as there), as signaled by a price response.

The U.S. EIA estimates that total U.S. crude oil production declined by 50,000 barrels per day in May compared with April, and that production is expected to continue to fall through early 2016. With projected U.S. crude oil production of 9.3 million barrels per day in 2016 and with EIA’s growth projection of 1.4 million barrels per day in global consumption, demand could balance the market in early 2016. 

However, offsetting this both WPX and Pioneer have both indicated that, if price stays constructive, they will add rigs targeting oil with the goal to increase production. Undoubtedly they are not the only companies with this thinking.  While restarting larger global projects will be dependent upon a clearer long-term perspective in oil price, the ability to restart U.S. unconventional activity almost as soon as price shows any signs of life becomes perhaps the biggest challenge to calling the world as being in fundamental balance and prices moving to reflect long run marginal supply cost. 

Looking also at other short-term pricing metrics, U.S. refineries processed an average of 16.6 million barrels of crude oil per day, operating at 94.7% utilization.  U.S. refiners continue to grow exports, which is increasing their exposure to global demand swings. 

Source: EIA 7 July 2015

EIA data indicated that imports were down by 197,000 barrels per day, averaging about 7.3 million barrels per day, which was reflected in a stock increase of 0.4 million barrels.  The return to historic oil import levels continues the trend of increasing oil in storage and putting downward pressure on crude oil price.

Doing the rest of the numbers, the total number of active drill rigs increased by 1 this week, which appears to be driven by portfolio balancing and less about adding rigs to increase production.

The decline in rig count now stands at 1,042 (56%) from a November 2014 high of 1,876 to 834 on 10 July 2015.

Across the three major unconventional oil basins, oil rigs decreased by 2, with the Eagle Ford down 5, Permian up 8, and Williston down 5 week-on-week.  Rig activity over the past week included the decrease of 3 horizontal rigs.


U.S. Production and Rig Count Stable; Oil Price Retreats ... All Calls Possible in the Short Term

Bob George

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

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