8th April 2016
The onshore rig count continued its decline this week, albeit slightly slower and falling 6 (1.5%). We also made a triple play with onshore oil rigs, crude production, and crude inventory all declining during the same week.
01 Apr 2016 - Turning Round A Supertanker … It Ain’t That Quick!
25 Mar 2016 - Capitulation by Light Tight Oil Operators as Rig Count Continues Its Descent
18 Mar 2016 - Bottoms Up! But The Glass Will Refill More Slowly Than Some May Think …
OPEC and other oil producers are scheduled to meet in Doha on April 17 to continue their talks on an agreement to freeze production. However, while a Doha deal (action, not words …) might help curb the global oil glut and set a floor under oil prices, a sustained recovery will require the “invisible hand”. In other words, a cut in global oil supply as well as further increases in demand are required to rebalance the market. In the meantime, the only “producer” that is walking the walk is the United States, where companies are doing what the market (their shareholders and their external financiers) demands.
Here are the key drivers of oil price to watch:
U.S. crude production ... firmly in decline, but for how long?
U.S. light tight oil (LTO) production has been saddled with the blame for the current oil glut that has decimated prices since mid-2014, but LTO output is now firmly on the decline (see 18 December 2015 Monitor). For the past 14 weeks, LTO production has decreased ~200,000 barrels per day. By 1Q 2017 GCA expects U.S. supply to hit ~8.3 million barrels per day, a ~1.5 million barrel per day decline from its peak in April 2015.
Global production ... over stressed by low prices and sudden outages?
Low crude prices increase the probability of unexpected production outages because of producers focusing on maximizing short-term production to offset revenue deterioration, ahead of undertaking the routine preventative measures that prevent such occurrences. These production outages will continue to impact spot prices and increase oil price volatility as the rebalancing in the market lingers into 2017.
Global demand ... concerns about China’s economy (i.e., will it be sluggish)?
Demand is dicey. The IEA forecast sees ~1.2 million barrels per day growth this year and if that level is reached or surpassed, then rebalancing of the market could start toward the end of 2016. Non-OPEC production (for the most part U.S. LTO) is in decline and any call on U.S. production to increase because of price spikes could take 18-24 months to realize (see 1 April Monitor). However, other analyses suggest that the IEA’s demand growth forecast could be at the top end of the range; if correct, this would just push the balancing point out even further.
The meeting in Doha to discuss a cap on output is in reality likely to have a limited medium term impact on prices, because participants are already pumping near record amounts of crude and have little to no motivation to lose market share. To find real signals of a sustained price recovery, it is better to look at what is happening to U.S. production, rather than the words (banter) between major producers on freezing output. As the chart above illustrates, just as the U.S. production increase in 2015 of 1 MMbopd – driven by oil at US$100 per barrel – foretold the likely fall in prices, the forecast decrease for 2016/17 of 1.4 MMbopd – with oil at below US$50 per barrel – is the only real market action out there that is a real signal of a future price recovery. It’s just the timing that remains uncertain ...
The total number of active onshore rigs now stands at 418, down 1,458 (~80%) from a November 2014 high of 1,876. Across the three major unconventional basins, the oil rig total decreased to 205 (down 6 last week), with Eagle Ford down 1, Williston down 2, and Permian down 3. The horizontal rig count is now 341, down 5 last week.
Total U.S. rig count (including the Gulf of Mexico) stands at 443, down 7 last week, with rigs targeting oil down 8 for a 32-week total decline of 320. The average weekly decline rate continues at ~10 rigs per week.
Oil prices rallied on an unexpected decline in U.S. crude stockpiles.
Brent, the global benchmark for oil, was up US$3.24 to US$41.91 a barrel, reflecting an increase of 8% on the week.
WTI crude rose US$2.85 to US$39.77 a barrel, up 8% on the week.
U.S. Supply and Demand
U.S. crude oil refinery inputs averaged 16.4 million barrels per day, with refineries at 91.4% of their operating capacity last week. This represents an increase of 1% above last week and a 199,000 barrel per day increase in refinery demand above the previous week’s average.
U.S. gasoline demand over the past four weeks was 9.36 million, up 4.2% from a year ago.
On the supply side, EIA data indicated that U.S. oil production in the Lower 48 was down 20,000 barrels per day, with total production at 8.484 million barrels per day. The past eleven week decline total stands at 227,000 barrels per day (an average of ~21,000 barrels per week). The weekly reported data continue to show that U.S. LTO production is diminishing.
U.S. crude imports averaged 7.3 million barrels per day last week, a decrease of 494,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 7.8 million barrels per day, ~2.1% above the same four-week period last year.
Crude oil inventories decreased ~4.9 million barrels from the previous week and persist at historically high levels. The crude stored at Cushing (the main price point for WTI) increased 0.357 million barrels, taking the total storage to 66.3 million barrels (~87% utilization).
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