new record for oil and gasoline stores, a record drop in the US rig count, global rigs for January, et al

it seems we set a number of records, or encountered some unusual outliers, this week…first, we have new highs in both the amount of crude oil and the amount gasoline in storage, which isn’t too surprising considering that both hit record highs last week, and we’re at a time of year when inventories of both are normally increasing seasonally…we also saw the largest one week percentage drop in drilling rig activity, at least in the post fracking era, as nearly 8% of the rigs that were running last week have since been pulled out…and we also saw swings in the price of oil the likes of which we have not seen in seven years…oil prices were actually quite volatile all week, with contract prices for US WTI crude falling from $33.62 a barrel on Friday to $29.71 a barrel by the close on Tuesday, making for the largest two day drop in oil prices since January 2009, percentage-wise…but oil prices turned around and jumped 8% on Wednesday, despite the fact that reports of record inventories, that normally drive prices down, were released that same day…it was later revealed that the big price spike at that time was due to the unwinding of a $600 million triple short in the form of an Inverse Crude Oil Exchange Traded Note, which is a financial product designed to produce returns at the inverse of the benchmark oil price, wherein through a combination of short selling, derivatives trading and leveraging, such notes would pay three times the decline in the price of oil for the amount of money bet, but wherein losses are limited to the amount bet on the price change (unlike a straight short sale, where losses are theoretically limitless)…after the oil contract buying needed to unwind that aberrant short selling was done, US oil prices fell more than $1 a barrel to close at $31.72 on Thursday, and continued dropping Friday to close the week at $30.89 a barrel, down almost 9% for the week…

Record Oil Glut

so, we’ll start this week with the developments that led to the record inventories, and then go from there…the primary underlying reason for the big increase in oil inventories this week was a big jump in our imports of crude oil, which were higher by 647,000 barrels per day, rising from an average 7,609,000 barrels per day during the week ending January 22nd to an average of 8,256,000 barrels per day during the week ending January 29th…despite higher domestic oil production, those imports were 11.8% above the 7,387,000 barrels per day we were importing during the same week last year…over the first 4 weeks of this year, our oil imports have now averaged 8.0 million barrels per day, 7.8% higher than our imports during the first 4 weeks of 2015…

meanwhile, production of crude oil from US wells was barely changed, falling by just 7,000 barrels per day, from 9,221,000 barrels per day during the week ending January 22nd to an average of 9,214,000 barrels per day during the week ending January 29th…thus, our field production of crude oil in January averaged about 9,227,000 barrels per day over the past 4 weeks, roughly 100,000 barrels per day more than our average production during September and October, and remains above the 9,192,000 barrels per day that was being produced in the same 4 week period a year ago, despite a 70% drop in active oil drilling rigs over the period since then..

at the same time, our refineries were using 24,000 barrels per day less crude than they did last week, as refinery throughput averaged 15,615,000 barrels per day, a half a percent higher than the 15,544,000 barrels per day that was being refined during the week ending January 30th last year…as a result, there were 7,792,000 barrels of surplus oil left unused at the end of the week, and hence our stocks of crude oil in storage, not counting what’s in the government’s Strategic Petroleum Reserve, rose by that much to end the week at 502,712,000 barrels, the first time our oil stores have ever topped the 500 million level in 80 years of EIA record keeping…in fact, it was just 53 weeks ago that our oil inventories topped 400 million barrels for the first time…thus, the 502,712,000 barrels we had stored as of January 29th was 21.7% higher than the 413,060,000 barrels we had stored on January 30th last year, which itself was then an all time record for crude oil in storage…

now, you may be asking, if we’ve had such a glut of oil in storage all year, with typically 25% more oil in storage than the year before, why are we continuing to import so much oil than we were importing previously?   once again, that’s not because we need it for fuel or feedstocks, but rather it’s the work of oil traders…as we’ve mentioned several times in the past, oil future’s prices remain in contango, meaning that the contract price to deliver oil at dates in the future is higher than the current spot price, and higher than the widely quoted near term contract price for oil…what that means is that an oil trader can buy oil today and can simultaneously contract to deliver that oil at some higher price months hence, and guarantee a decent profit, if he can find a place to store that oil in the interim for a fee less than the difference between the current price and the future price…this might be best explained with a picture of Friday’s contract prices for several months in the future, which we’re including below…

February 6th 2015 oil quotes

the table above was obtained from a website called quotes.ino,com and it shows the results of Friday’s trading in several oil futures contracts at the New York Mercantile Exchange (NYMEX) for the US benchmark oil WTI, which trades under the symbol CL….as you can see by the second column, i’ve included the months from the current March contract price to the contract to deliver oil in January 2017, although the table i’ve clipped these quotes from includes prices for these dates through December 2024, and then a bunch of quotes for other oil trades called spreads, which aren’t our concern today….each line shows opening high, low, and closing contract prices for oil delivery in some future month; hence, the first line shows the widely quoted price of oil for delivery in March, which as we mentioned closed the week at $30.89 a barrel, and the last line shows the contract price for delivery of that same oil in January of next year, which closed this week at $40.79 a barrel…what that means is that an oil trader can contract to buy a 2 million barrel tanker of oil at $30.89 a barrel for delivery in March, and and the same time contract to sell that oil for almost $10 a barrel more 10 months in the future, which is instantly profitable, if he can find a place to store that oil for less than the difference…as a practical matter, said trader would probably be paying the global Brent price for imported oil, which have been trending about $1 a barrel more than WTI this week, but the principle of the the contango trade is the same: buy oil cheap, store it, and sell it at a profit in the future…theoretically, the other counter-parties to his two trades are equally satisfied with the prices they’ve voluntarily contracted to either sell oil for today, or to lock in a purchase price and delivery date of oil in the future…

Record Gasoline Stores

as we noted earlier, our refineries were processing 15,615,000 barrels of crude per day during the week ending January 29th, down just 24,000 barrels per day from the prior week, even though the US refinery utilization rate fell to 86.6%, down from 87.4% last week and down from 89.9% a year ago, about normal for this time of year…and with record gasoline inventories already stored, refinery production of gasoline fell further, from 9,377,000 barrels per day during week ending January 22nd to 8,642,000 barrels per day during week ending January 29th, which appears to be our lowest gasoline production since the week ending April 25th of 2014, when 8,625,000 barrels per day were produced…nonetheless, total motor gasoline inventories still increased by 5,938,000 barrels over the week to end at 254,399,000 barrels on January 29th, the first time on record that our gasoline supplies have topped a quarter billion barrels…(strangely enough, our imports of gasoline also rose over the same week, from 576,000 barrels per day during week ending January 22nd to 624,000 barrels per day during week ending January 29th, so we would not be surprised to see contango trading of gasoline as well)….at the same time, refinery production of distillate fuels (diesel fuel and heat oil) decreased slightly, from 4,452,000 barrels per day during the week ending January 22nd, to 4,435,000 barrels per day during the week ending January 29th…but since the weather has remained cold, our distillate fuel inventories fell for the 3rd week in a row, dropping by 777,000 barrels to 159,695,000 barrels, down 3.4% from the 5 year record high 165,554,000 barrels we had stored on January 8th, but still 18.8% higher than the 134,475,000 barrels of distillate fuels we had stored on January 30th last year, and near the upper limit of the average range for this time of year…for a visualization of how these inventory gluts have developed over the past year, we’ll include a graphic showing the change each week over the past 52 weeks, taken from the Zero Hedge coverage of this same report:

February 3 2016 oil and products inventories

there are four bar graphs included above and all of them are formatted similarly; on top is a graph of the weekly change in crude oil inventories, next is the change in oil inventories at the central US depot in Cushing Oklahoma, where oil prices are set; the third shows the change in inventories of gasoline, and the graph on the bottom is for inventories of distillates, with each graph starting at the end of last January and up to and including the data from the current EIA reports for January 29th…within each graph, each bar represents a week of the past year, with green bars indicating an addition to that inventory during the reference week, and red representing a withdrawal from that inventory that week, with the size of the bars indicating the volume in barrels of the addition or withdrawal….thus on the top graph we can see record volumes of crude being added to storage in February, March and April of last year, until the driving season, when higher refinery throughput meant oil inventories were being drawn out between May and October…but except for three weeks around the holidays, we’ve been adding crude every week since, and additions of the last three weeks pushed what crude was in storage to record levels…meanwhile, gasoline inventories, shown in the third chart, stayed fairly well balanced all year until December, when record additions five weeks in a row pushed those stores into record territory…lastly, on the bottom graph, inventories of distillate built up to near record levels from late November through early January as above normal temperatures reduced consumption of heat oil…with the colder weather of the last three weeks of January, those near record supplies are being drawn down but are still near the upper limit of their average range for this time of year…

lastly, so you can see how the last five weeks of increases in gasoline inventories compares to normal, we’ll include a graph of that:

image

in the above graph, taken from this week’s weekly Petroleum Status Report (62 pp pdf), the blue line shows the recent track of our gasoline inventories over the period from June 2014 to January 29, 2016, while the grey shaded area represents the range of our gasoline supplies as reported weekly by the EIA over the prior 5 years, essentially showing us the normal range of gasoline inventories as they fluctuate from season to season….here we can see that the blue line first rose above the normal range in December of 2014, and continued to set seasonal records as it rose rapidly through January of last year, not falling back into the normal range until last summer…but again this fall, gasoline inventories were above their normal range, but as of December they were still lower than last year’s records…but nearly 33 million barrels of gasoline have been added to storage over the last five weeks, which we see as a blue spike on the graph, which has taken our gasoline inventories to record levels, which as of this week are 5.7% higher than the January record set a a year earlier..

Record Percentage Drop in US Rig Count

it appears that this week saw the greatest percentage of active drilling rigs retired in one week in the 16 years of weekly Baker Hughes records, as 48 rigs were pulled out during the week ending February 5th, leaving 571, down from 619 last week, for a percentage reduction of nearly 7.8% in one week…certainly more rigs were pulled out in some weeks early last year, such as on March 6th, when they shut down 75 of the 1276 that were active back then, or during the week of February 13th, when 98 of the 1456 then active rigs were idled, but there were never any total cuts closer to 7% of those then active than on those dates…even scanning through the records of the 2009-2011 gas rig collapse shows nothing net of that percentage drop in one week, largely because oil drilling rigs were being added at the same time, ameliorating the total rig decline…nonetheless, this week Baker Hughes reported that the count of active oil rigs fell by 31 to 467 while the count of active gas rigs fell by 17 to 104 during the week ending February 5th, which was down from 1140 oil rigs, 312 gas rigs and 2 miscellaneous rigs that were actively drilling on the first weekend of February a year ago, and which was already down significantly from the highs set in the prior October and November…oil rigs had hit their fracking era high at 1609 working rigs on October 10, 2014, while the recent high for gas drilling rigs was the 356 rigs that were deployed on November 11th of that same year…

two drilling rigs were pulled out of the Gulf of Mexico during the week, so the Gulf count is now back down to 25, which is also down from 48 working in the Gulf and a total of 50 drilling offshore as of February 6th a year ago…there was also a rig set up on an inland lake in Texas, so there are now 2 rigs drilling through inland waters, with one also in Louisiana, down from the 9 that were set up on inland waters a year earlier… a net of 29 horizontal rigs were stacked this week, cutting the count of horizontal rigs down to 458, which was also down from the 1088 horizontal rigs that were in use the same week last year…in addition, 14 vertical rigs were also taken out of service, leaving 60, down from 233 last year at this time, and 5 directional rigs were also removed, dropping the directional rig count down to 53, which was down from the 135 directional rigs that were in use on February 6th of last year…

of the major shale basins, only the Barnett shale of the Dallas area saw a single rig added; they now have 4 rigs actively drilling, which is still down from the 19 that were in use there a year ago…elsewhere, the Ardmore Woodford of Oklahoma was down 2 rigs to 5, down from 7 rigs a year ago, and the Cana Woodford, also of Oklahoma, also stacked 2 rigs, leaving 37, down from 43 a year ago…in addition, the Eagle Ford of south Texas was down 4 rigs to 60 this week, which was down from 168 rigs last year at this time, and the Granite Wash of the Oklahoma-Texas panhandle region was down 5 rigs to 8 this week,and down from 39 rigs a year ago….the two major gas basins, the Haynesville of Louisiana and the Marcellus of the northern Appalachians, were both down 3 rigs; that left the Haynesville with 15 rigs, down from 43 a year ago, and the Marcellus with 31 rigs, down from 71 rigs a year earlier…the Mississippian of southwest Kansas and bordering states was down 1 rig to 10 and down from 53 rigs working the area a year ago, and the large Permian basin of west Texas and eastern New Mexico was down 2 rigs to 180, which was down from 417 rigs working last year at this time…the Utica shale, mostly of eastern Ohio, was down 1 rig to 13, which was down from last year’s 41, and lastly the Williston of North Dakota was down 2 rigs to 42, which was down from 137 rigs working there a year earlier..

not surprisingly, no states saw drilling rig increases this week…Texas saw the largest decrease, with 19 rigs stacked in the state, leaving 262 rigs active, down from the 654 that were drilling in the state a year ago…Oklahoma was down 8 rigs to 80, which was down from 176 drilling in the state on February 6th of 2015…5 rigs were pulled out of Louisiana, leaving 46, which was down from 107 rigs working the state a year earlier…in addition, Pennsylvania was down 3 rigs to 19, which was down from 54 a year ago, and North Dakota, Mississippi, Utah, and Wyoming were each down 2 rigs…that left North Dakota with 42, down from 132 a year earlier, Mississippi with 3, down from 8 a year earlier, Utah with just 1, down from 12 a year earlier, and Wyoming with 13, down from 42 on the same date a year ago…finally, Alabama, Ohio and Illinois were all down 1 rig, which left Alabama with no rigs, down from 7 a year earlier, Ohio with 13 rigs active, down from 39 a year ago, and Illinois also with none, vs the two that were drilling there the same week a year earlier…

Global Rig Count for January

Friday also saw the monthly release of the global rig count for January, which unlike the weekly count, is an average of the number of rigs running in each country for the month, rather than the total of those drilling at month end…January saw an average of 1,891 rigs drilling for oil and natural gas around the globe, which was down from 1,969 rigs drilling in December and down from the 3,309 rigs that were deployed globally in January of last year…unlike the past three months, when the lions share of the rigs that were pulled during the month came from North America, 50 of the 78 rigs retired this week had been working other continents, as oil prices are apparently now so low as to affect everyone…in North American, the US average rig count was down 60 rigs to 654, and down from 1,683 rig in January of 2015, while the Canadians saw a net addition of 32 rigs from December, as their average rose from 160 rigs to 192, which was still down from the 368 rigs in use in Canada in January of last year…

the Middle East saw rigs pulled out for the first time in 6 months, as the region was down 15 rigs to 407, which was also down from the 415 rigs deployed in the Middle East a year earlier…nonetheless, their offshore rig count was unchanged at 55, and up from 43 offshore platforms working in the region a year ago….the Saudis pulled out 5 rigs to reduce their total active drilling rig count up to 124, which was still up from the 119 rigs that were drilling in the Kingdom last January…Kuwait and Oman both idled three rigs; that left Kuwait with 40, which was down from 48 a year earlier, and Oman with 70, which was still up from the 61 rigs they were using to drill a year earlier…Qatar was the only country in the Middle East to see an increase in January, as they added 2 rigs, bringing their total count back up to 9, same as they had last January…

meanwhile, the Latin American countries saw a reduction 27 rigs, after idling 14 rigs in December, 10 rigs in November and 27 rigs in October, as the region averaged 243 rigs in January, including 51 offshore, down from a total of 351 rigs, which included 79 offshore rigs, in January of 2015….Argentina saw the largest pullback by far, as they were down 19 rigs to 72, which was down from 106 rigs that were in use in Argentina a year ago…Colombia and Brazil both idled 4 rigs; Colombia is now running just 8 rigs, down from a high of 48 in November of last year, while Brazil still has 34 rigs active, down from 47 a year earlier…only Mexico saw an increase, as they added 1 rig and now have 43 working, which is still down from the 69 rigs they had deployed a year ago at this time…

elsewhere, the Asia-Pacific region had 193 drilling rigs working in January, down from 198 in December and down from 232 last January…the largest decrease in the region was in Indonesia, where they reduced their 25 rigs to 20, which was down from the 36 rigs they were running a year ago…India also shut down 3 rigs, but they still have 97, which is down from the 108 the had deployed last January; meanwhile, the Thais added three rigs, bringing their total up to 18, which was an increase from the 15 rigs Thailand was running a year earlier…in addition, the rig count in Europe fell by 6 to 108 in January, which was down from 128 rigs working Europe a year ago, as Poland and Sakhalin Island both idled 2 rigs…the Poles are now running 10 rigs, which is still up from the 7 they were running a year ago, while Sakhalin Island, which is a Russian island in the Pacific but included in European totals, is now running 5 rigs, down from 7 last week and 6 rigs in January of 2015…finally, Africa was the only continent where rigs were added in January, as their count rose by 3 to 94, which was still down from 132 African rigs working a year earlier…Algeria, up 2 rigs to 11, was the only African nation with a rig variance greater than 1, as the Algerians were also up from 47 rigs a year ago…note that Iran, Russia, and China rig counts are not included in Baker Hughes international data, although China’s offshore area, with an average of 27 rigs active in January, is included in the Asian totals here…  

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