what we learned from Doha, a new push for gas exports, new oil glut and rig count records again, etc

the meeting at Doha was a dud…there was no agreement between OPEC and other oil producers meeting at the Qatari capital last Sunday to freeze production or to take any other action whatsoever to control oil output…in fact, contrary to their intended purpose of limiting oil output, both the Saudis and the Russians indicated after the meeting that they’d be increasing their output… furthermore, now that we understand the issues in play, we can see that there is no chance that there’ll be any kind of agreement to freeze oil production at any time in the foreseeable future…

initial news from the conference early Sunday was that the 16 oil producers meeting in Doha, including the Saudis and the Russians, would agree to freeze their oil output until October, at which time they’d have another meeting and renegotiate from there…but before the meeting actually started, the Saudis said they wanted all OPEC members to participate, including Iran, despite previously insisting on excluding Iran because Iran had refused to freeze production….so they delayed the meeting till later in the afternoon in an attempt to address the differences between the Saudis position and the earlier draft agreement which excluded Iran….but that was to no avail, as the Saudis were uncompromising, and by evening the meeting fell apart without a freeze agreement or even an agreement to meet again at some time in the future…the early Asian market reaction, wherein quotes for U.S. crude for May fell 6.7% to $37.70 a barrel and the global benchmark Brent crude was down 6.9% to $40.14, was short-lived, as news that oil workers in Kuwait went on strike, threatening to take nearly 2 million barrels per day off the global market, steadied prices, which then closed Monday at $39.78 a barrel in the US and at $42.91 a barrel in Europe, both down less that one percent from last Friday…

now that the dust has settled, it’s pretty clear what had happened….over the 2 months leading up to the meeting, confidence that a deal to freeze output would get done was pretty high, as both Russian energy minister Alexander Novak and Ali al Naimi, the long time Saudi oil minister, had taken part in the original meeting with Qatar and Venezuela, and had voiced support for an agreement in the interim weeks…however, at the same time, and especially during the week prior to the Doha meeting, 30 year old Saudi Crown Prince Mohammed bin Salman insisted there would be no deal without Iran’s participation…we can now see that it was bin Salman who was calling the shots at last Sunday’s meeting….the tell is from reports from Venezuela oil minister Del Pino, who said that Saudi representatives at Sunday’s meeting didn’t have authority to negotiate a freeze, and hence they followed the dictates of bin Salman, and presumably his father the king, that there would be no deal unless their regional arch enemy Iran was also forced to freeze their output (at depressed levels)

thus, young Mohammad bin Salman has emerged as the power behind the Saudi crown…his father King Salman, who rose to the throne when King Abdullah died last January and who has often been described in reports as somewhat senile, is still active domestically, presiding over the largest jump in political beheadings in 20 years…but his favored son Mohammend, who often speaks of Saudi Arabia in the first person singular, has been gradually assuming all the important positions in the Kingdom, including Minister of Defense and Chief of the Royal Court…the outcome of this meeting at Doha confirms that he is in charge of Saudi energy policy as well, and that Ali al Naimi, who for 21 years has not only been the Saudi oil minister but also the voice of OPEC, is now answering to the young Crown Prince…fighting proxy wars with Iran in Syria and Yemen, the Saudis thus appear willing to cut off their nose to spite their face, and will do all in their power to drive the price of oil down, just to deny Iran full remuneration for their oil as they return to the global export markets…

New Energy Bill Fast Tracks Gas Export Facilities

back in the US, the Republican controlled US Senate passed a broad-ranging energy bill promoting everything from renewable energy to exports of fossil fuels by an 85-12 votedelayed for 2 months over an impasse on providing emergency aid to Flint, this so-called Energy Policy Modernization Act had broad bi-partisan support because it was turned into a Christmas tree with something on it for everyone, including a provision to designate forests as a carbon-neutral energy source that was introduced by senators Susan Collins from Maine and Amy Klobuchar from Minnesota, presumably at the behest of their timber interests…the earlier House passed version of this bill was more aimed at restricting Federal oversight and thus drew a veto threat from the White House, so it appears that this Senate version will be closest to what survives the reconciliation process and ends up as law..

while there’s undoubtedly much pro and con in this bill that we haven’t seen, what has attracted our attention are the provisions to speed the permitting process for liquefied natural gas exports…when i first read about those provisions, i assumed they were similar to others that had been included in other energy proposals, wherein a permit to build an export facility had to be granted within a year after a completed application, but i serendipitously stumbled onto SEC. 2201 in the text, under “Action on applications to export liquefied natural gas” which reads in part  “the Secretary shall issue a final decision on any application for the authorization to export natural gas under section 3(a) of the Natural Gas Act (15 U.S.C. 717b(a)) not later than 45 days after the later of— (1) the conclusion of the review to site, construct, expand, or operate the liquefied natural gas export facilities required by the National Environmental Policy Act of 1969 (42 U.S.C. 4321 et seq.); or(2) the date of enactment of this Act.”  thus it’s clear that someone seems to be in quite a hurry to get those LNG export facilities built and start shipping our natural gas to Asia and Europe, where gas prices still remain much higher than in the US…

that provision is particularly important to us here in Ohio because we are on the cusp of becoming the fastest growing natural gas producing state in the nation…last Friday, in the “Today in Energy” blog post from the Energy Information Administration (EIA) titled U.S. natural gas production reaches record high in 2015, they examined the states that are contributing the most growth to the increased output of natural gas in the US in 2015, and Ohio came in second, just a bit behind Pennsylvania…but while growth of natural gas production is slowing in Pennsylvania, it is still growing in Ohio, a fact which is most clearly illustrated by a bar graph from that EIA post which we’re including below…

April 16 2016 natural gas by state

the above bar graph was taken from the EIA “today in energy” blog post of last Friday and it shows the 5 states that have contributed the most to the increase in natural gas output over the past six years…the annual increase in the output of gas in billions of cubic feet per day is represented by a bar for each of those 6 years for each of those 5 states (in some cases as a negative)…understand, Texas still produces more gas than Pennsylvania, but Texas gas output is falling, and this graphic only shows the states where the major growth has been….in 2015, Pennsylvania’s natural gas output grew by 1.5 billion cubic feet a day, down from the 2.6 billion cubic feet a day growth the state logged in 2014…meanwhile, Ohio’s natural gas output grew by 1.4 billion cubic feet a day, up 41% from the less than 1 billion cubic feet a day growth we saw in 2014…assuming these trends continue, Ohio’s natural gas output growth will almost certainly surpass the growth of Pennsylvania natural gas in the coming year…thus, while the LNG exports that may be leaving from the Gulf Coast, New Jersey or Washington state will not necessarily have originated in Ohio, it will be Ohio where the rest of the country will be looking for the new gas to pick up the supply deficit created by those exports…

The Latest Oil Stats from the EIA

according to the latest reports from the Energy Information Administration, our imports of oil increased by nearly a quarter of a million barrels per day, which was almost the same amount of oil that we added to our record supplies of oil in storage over that period….however, oil traders took note of an even larger drawdown of our inventories of distillates, and drove the new June contract price of oil up to $43.73 a barrel, a new high for the year, despite the Doha failure earlier in the week…also contributing to the strength in the price for oil was another decrease in the rig count, and a 24,000 barrel per day drop in our field production of crude oil, which fell to an average of 8,953,000 barrels per day during the week ending April 15th, which was 4.4% lower than the 9,366,000 barrels per day we were producing during the same week last year…output of oil from US fields has now fallen 12 out of the last 13 weeks and is now 6.8% off the peak of last June 10th, the lowest it’s been since the week ending October 10th of 2014…

at the same time, our imports of crude oil averaged 8,178,000 barrels per day during the week ending the 15th, 247,000 barrels per day higher than the previous week and 5.4% higher than the 7,765,000 barrels per day we were importing during the week ending April 17th last year…but as this week replaced an even higher import week in the 4 week moving average of imports reported by the weekly Petroleum Status Report (62 pp pdf), and thus our oil imports still remain at the 7.8 million barrel per day level, just 2.1% above the same four-week period last year…   

meanwhile, US refineries, which had slowed processing by nearly a half a million barrels per day last week, picked up a bit this week, processing 16,104,000 barrels of oil per day during the week ending April 15th, 163,000 barrels per day more than the 15,941,000 barrels of oil per day they were using during the week ending April 8th….that was also up a bit from the 15,982,000 barrels of oil per day US refineries were using during the same week of 2015, even though the US refinery utilization rate only rose to 89.4%, up from 89.2% last week, which was still lower that the 91.2% refinery utilization rate of the same week last year….

with more oil being refined, our refinery production of gasoline rose by 170,000 barrels per day, averaging 9,738,000 barrels per day during the week ending April 15th, up from the average 9,568,000 barrels of gasoline per day produced during the week ending April 8th…oddly, though, that was still lower than the one week spurt to 9,763,000 barrels per day production we saw during the week ending April 17th of 2015, which set the record for gasoline output for any week in April…on the other hand, our refinery output of distillate fuels (diesel fuel and heat oil) fell by 72,000 barrels per day to 4,712,000 barrels per day during week ending the 15th, which was also 63,000 barrels per day, or 1.3% lower than our distillates production during the same week of 2015…    

even with the increased output of gasoline, our gasoline inventories fell for the second week in a row, slipping from 239,761,000 barrels on April 8th to 239,651,000 barrels on April 15th…however, this week’s gasoline supplies were still 6.2% higher than the 225,738,000 barrels of gasoline that we had stored on April 17th last year, which were at the time the highest for the third weekend in April since 1993…thus our gasoline stores are still categorized as “well above the upper limit of the average range” for this time of year…at the same time, our distillate fuel inventories also fell, as you might recall the cold snap that week, dropping by 3,554,000 barrels to end the week at 159,935,000 barrels, which oddly was widely reported as the impetus for a 3.8% jump in the price of crude oil…however, as we’ve pointed out all winter, distillate inventories also remained “well above the upper limit of the average range” for this time of year as of April 15th, still 23.7% greater than the 129,336,000 barrels of distillates we had stored as of April 17th last year..   

finally, largely on the 247,000 barrel per day increase in our imports, we had an additional 2,080,000 barrels of surplus oil supply this week, and hence our stocks of crude oil in storage, not counting what’s in the government’s Strategic Petroleum Reserve, rose once again to a new record of 538,611,000 barrels as of April 15th, up from the record 536,531,000 barrels of oil we had stored on April 8th…that was 10.4% higher than the then record of 489,002,000 barrels of oil we had stored as of April 17th, 2015, which at the time was the highest level of 2015, and 35.4% higher than the 397,659,000 barrels of oil we had stored on April 18th of 2014….we’ve now increased our inventories of crude oil by by nearly 56.3 million barrels since the beginning of this year, while setting new records for the amount oil we had in storage in the US in 9 out of the last 10 weeks… 

This Week’s Rig Count

and guess what else? for the 7th week in a row, we have another all-time record low for the number of active drilling rigs working in the USBaker Hughes reported that their total count of drilling rigs running in the US was down by another 9 rigs to 431 rigs as of April 22nd, which was also down from the 932 rigs that were working on April 24th of 2015, and down from the recent high of 1929 rigs that were deployed on November 21st of 2014… the count of rigs drilling for oil fell by 8 to a 6 year low of 343, which was down from 734 a year earlier, and down from the recent high of 1609 working oil rigs that we saw on October 10, 2014, while the count of drilling rigs targeting natural gas fell by 1 to a record low of 88, down from the 217 natural gas rigs that were drilling a year ago, and down from the recent natural gas rig high of 1,606 that was set on August 29th, 2008… 

two of the rigs that were shut down this week had been drilling in the Gulf of Mexico, reducing the Gulf rig count to 25 and the total offshore count to 26, with the other offshore platform working off the Cook Inlet in Alaska…that’s down from the 33 Gulf of Mexico platforms and 34 total offshore that were in use on April 24th of 2015…however, there was a new rig set up on an inland lake in southern Louisiana this week, which brings the inland waters rig count up to 4, up from the 3 rigs deployed drilling on inland waters last year at this time…

a net of 3 horizontal rigs were pulled out this week, leaving the count of rigs drilling horizontally at 332, which was down from the 720 horizontal rigs that were in use on April 24th of 2015, and down from the recent record of 1372 horizontal rigs that were drilling on November 21st of 2014…at the same time, 3 more directional rigs were also stacked, leaving 48 directional rigs still running, which was down from the 91 directional rigs that were in use at the end of the same week a year earlier…in addition, a net of 3 vertical rigs were also shut down, cutting the vertical rig count back to 51, which was down from the 121 vertical rigs that were in use nationally the same week last year… 

5 of the rigs that were shut down this week had been working the Permian basin of west Texas, which still has 136 rigs working there, down from the 246 rigs that were deployed in the Permian last year at this time, and down from the high of 568 rigs that were working the Permian on November 14, 2014….two rigs were also idled in the Eagle Ford of south Texas, which still has 40 rigs running, down from 115 a year ago and down from that basin’s peak of 259 rigs hit on May 25 of 2012…a rig also came out of the Cana Woodford of Oklahoma, which still has 29 rigs working it, down from 41 a year ago…and a single rig was also pulled from the Utica shale of Ohio, which has 11 working rigs remaining, down from the 26 rigs working the Utica a year ago at this time, and down from the Utica peak of 50 rigs last seen on December 26th of 2014….

with the reductions in the Permian and Eagle Ford, the state count tables thus indicated that Texas had the largest drilling rig decrease, as they saw a net of 7 rigs pulled out this week, leaving 187 rigs still working the state on April 22nd, which was down from the 393 rigs that were working in Texas on April 24rd last year…Louisiana, with the loss of 2 offshore rigs and the addition of a rig on an inland lake, was down by a net of 1 rig to 47 for the week, which was down from 74 rigs working there a year earlier…and lastly, Ohio also saw a single rig pulled out, leaving 11 still running in the state, which was down from the 25 rigs working Ohio last year at this time…

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