natural gas prices up 49% in largest quarterly rise in 11 years, a record for June crude oil refining, et al

oil prices bounced around like a yo-yo this past week, still overreacting to every piece of news, without establishing a clear trend…you’ll recall that US oil prices had crashed 6% on the prior Friday to close that week at $47.64 a barrel, after the British vote to exit the European Union…the related global market panic continued on Monday and took oil down to below $46 a barrel by mid-afternoon before prices steadied and closed at $46.33 a barrel, down another 1.5% for the day…prices drifted on Tuesday morning, then jumped back up to close at $47.85 a barrel after the American Petroleum Institute reported a large 3.88 million barrel oil inventory drawdown….when that drawdown was confirmed by the EIA data release on Wednesday, oil spiked to $50 before closing at 49.88 a barrel, an increase of 9% over two days…but oil prices couldn’t hold that level after reports of a Nigerian ceasefire agreement with the Niger Delta Avengers and record OPEC oil output showed Nigerian production was coming back, and fell back more than 3% to close Thursday at $48.33 a barrel…then, after going nowhere most of Friday on no news and light pre-holiday trading, oil prices jumped nearly 50 cents in 6 minutes just before the end of trading to close at $48.99 a barrel, up more than 2.8% for the week…

meanwhile, contract prices for natural gas have been rising steadily, seeing little interruption from the global market panic that affected oil…it appears that the last time we looked at natural gas prices, they had just hit a 17 year low of of $1.696 per mmBTU (million British thermal units) on February 25th, as the warm El Nino winter had reduced demand and left end of winter supplies well above normal…while natgas prices recovered to over $2.00 per mmBTU shortly thereafter, that price was still well below what even drillers in the best fields needed to break even, and natural gas drilling rig activity continued to set new lows most every week…gas prices stayed in a range roughly between $2.10 and $2.30 per mmBTU most of the spring until a little over a month ago, when traders realized that the forecast for a hotter than normal summer would increase demand for electric power, and thereby for natural gas, which had just recently replaced coal as the top fuel for US electric generation…since that time at the end of May, natural gas prices have seen a steady increase, propelled alternately by heat waves and forecasts of heat waves, and a lower than expected seasonal inventory build up, as prices ended the 2nd quarter at $2.924 per mmBTU, up 96.5 cents, or 49%, the largest quarterly percentage gain since 2005…gas prices then rose another 6.3 cents on Friday, the first day of the 3rd quarter, to close the week at $2.987 per mmBTU, the highest front month contract price in 13 months…with that synopsis, we’ll take a quick look at a few natural gas price charts…

July 1 2016 natural gas prices

the above graph shows the August contract price for a million British thermal units (mmBTU) of natural gas at or contracted to be delivered to the Louisiana interstate natural gas pipeline interconnection known as the Henry Hub, which has become the benchmark for setting natural gas prices across the US…trading in contracts for delivery in July expired on June 26th and were priced slightly lower, as were each contract before that, but this graph gives us a good sense of the price trajectory…we can see from the chart above that even August contract prices never got much above 2.40 per mmBTU until June, and that they’ve risen by more than a third in just the past 6 weeks…these prices are still near historical lows, however, as we can see on the next long term graph from the EIA

July 1 2016 natural gas price history

above, we have a 20 year graph of natural gas spot prices, or the prices natural gas sold at when not under contract, for each week over the period, which comes from an EIA data page which lists all those prices over that span…here you can see that our recent February low prices were unmatched by any over the years going back to 1999, and that even this recent spike of gas prices to nearly $3 per mmBTU is still below those of any recent period except for the late winter crash of 2012, which like this year, saw temperatures much above normal…as a result of prices which have stayed below $3 per mmBTU for 13 months, natural gas drilling has repeatedly hit new lows almost every week this year, and is now nearly 60% below the already depressed level of a year ago…

The Latest Oil Stats from the EIA

this week’s oil data for the week ending June 24th from the US Energy Information Administration indicated a larger than normal drop in our production of crude oil, a return to normal levels of oil imports after last week’s 42 month high, another large seasonal increase in oil refining, and thus a decrease in crude oil inventories accompanied by an increase in gasoline inventories… however, the crude oil fudge factor included on the weekly U.S. Petroleum Balance Sheet (line 13) was + 537,000 barrels per day, which means that 537,000 more barrels per day showed up in our final consumption and inventory figures than were accounted for by our production or import figures, meaning one or several of this week’s metrics were incorrect by that amount, errors which are typically due to miscues in reporting or gathering that data…

according to the EIA, our field production of crude oil fell by 55,000 barrels per day, from an average of 8,677,000 barrels per day during the week ending June 17th to an average of 8,622,000 barrels per day during the week ending June 24th, the largest one week drop since April 29th …that was also our lowest oil output since the 1st week of September 2014 and 10.1% lower than the 9,595,000 barrels we produced during the week ending June 26th of 2015… similarly, it was also 10.3% lower than the record 9,610,000 barrel per day oil production that we saw during the week ending June 5th of 2015…our oil production has now been down 20 out of the last 22 weeks and is now 597,000 barrels per day lower than we what were producing at the beginning of this year… 

at the same time, the EIA reported that our imports of crude oil fell by 884,000 barrels per day to an average of 7,555,000 barrels per day during the week ending June 24th, down from the 42 month high of 8,439,000 barrels of crude per day we were importing during the week ending June 17th….this week’s imports were still 0.6% more than the 7,513,000 barrels of oil per day we imported during the week ending June 26th a year ago, but as you can see by this week’s change oil imports are quite volatile week to week, so the EIA’s weekly Petroleum Status Report (62 pp pdf) reports imports as a 4 week moving average…that summary showed that the 4 week average of our imports slipped back to the 7.8 million barrel per day level, which was 12.0% higher than the same four-week period last year…  

meanwhile, U.S. refineries’ crude oil usage rose by another 190,000 barrels per day, from the average of 16,505,000 barrels of per day barrels they processed during the week ending June 17th, to an average of 16,695,000 barrels of crude per day in this week’s report…that was as the US refinery utilization rate rose to 93.0% during the week, from  91.3% of capacity the prior week, which was still down from a refinery utilization rate of 95.0% during the equivalent week last year…this week’s crude usage is now 1.0% higher than the 16,531,000 barrels per day US refineries used during the week ending June 26th last year, and also higher than the same week in any prior week in June in the 34 recent years of EIA data, so it also appears that we have a seasonal record for crude refining…

even with more oil being refined, however, US refineries production of gasoline fell by 330,000 barrels per day from the record high of 10,289,000 barrels per day we produced during the week ending June 17th…the 9,959,000 barrels of gasoline produced during the week ending June 24th was also 0.9% less than the 10,046,000 barrels of gasoline per day we were producing during the same week last year…however, our refinery output of distillate fuels (diesel fuel and heat oil) rose during this period, climbing by 65,000 barrels per day to 5,021,000 barrels per day during the week ending June 24th…that was also 6,000 barrels per day more than our distillates production of 5,015,000 barrels per day during the week ending June 26th of last year, even though our distillates inventories are much more excessive today…        

however, even with the large decrease in gasoline production, our end of the week gasoline inventories still rose by 1,367,000 barrels to 238,998,000 barrels on June 24th, the 3rd weekly increase in the last four weeks …the increase in gasoline supplies was slightly enhanced by a 28,000 barrel per day increase to 904,000 barrels per day in our gasoline imports, and came with a drop of 106,000 barrels per day in gasoline supplied to US markets, which fell to 9,709,000 barrels per day, which was also a fraction lower than the 9,731,000 barrel per day of gasoline consumption during the week ending June 26th last year…as a result of this addition to stores, the week’s gasoline inventories were 10.3% higher than the 216,737,000 barrels of gasoline that we had stored on June 26th last year, and 11.8% higher than the 213,742,000 barrels of gasoline we had stored on June 27th of 2014, and thus our gasoline supplies are categorized by the EIA as “well above the upper limit of the average range” for this time of year.. 

at the same time and despite the higher production, however, our distillate fuel inventories fell 1,801,000 barrels to end the week at 150,513,000 barrels, as distillates were withdrawn from storage in the Midwest and on Gulf coast and added to storage elsewhere…but since our distillate inventories have been so much above normal since the warm winter reduced US heat oil consumption, our distillate inventories as of June 24th were still 10.8% higher than the 135,820,000 barrels of distillates we had stored at the same weekend last year, and 23.8% higher than our distillates supplies as of June 27th 2014, and thus they’re also characterized as “well above the upper limit of the average range” for this time of year…   

finally, with record refining, lower field production of crude and the large drop in imports, our withdrawal of oil from our stocks of crude in storage was a higher than normal 4,053,000 barrels for the week, leaving our oil inventories at 526,573,000 barrels as of June 24th…but that was still 13.1% higher than the 465,379,000 barrels of oil we had stored as of June 26th, 2015, and 36.8% higher than the 384,9350,000 barrels of oil we had stored on June 27th of 2014….with our oil inventories thus continuing to be that much higher than the seasonal records we set most every week in 2015, it goes without saying that our crude oil supplies are also  “well above the upper limit of the average range” for this time of year…”  

This Week’s Rig Counts

US drilling activity increased for the 4th week week out of the past 5 during the week ending July 1st, after the industry had gone the prior 41 weeks without seeing a net increase in total active rigs…..Baker Hughes reported that the total count of active rotary rigs running in the US increased by 10 rigs to 431 rigs as of July 1st, which was down by exactly half from the 862 rigs that were deployed as of the July 3rd report last year, and down from the recent high of 1929 rigs that were in use the week before the OPEC meeting on Thanksgiving 2014…the number of rigs drilling for oil this week rose by 11 rigs to 341, which was still down from the 640 oil directed rigs that were in use a year earlier, and down from the recent high of 1609 oil rigs that were drilling on October 10, 2014, while the count of drilling rigs targeting natural gas formations fell by a single rig to 89 this week, which was down from the 219  natural gas rigs that were drilling a year ago, and down from the recent high of 1,606 rigs that were drilling for natural gas that we saw on August 29th, 2008…there was also still one rig running this week that was classified as miscellaneous, unchanged from last week but up from no miscellaneous rigs in use the same week a year ago…. 

since we looked at rising natural gas prices this week, we’ll also include one of the few graphs i know of that shows the long term deployments of both oil and gas directed drilling rigs…the graph below comes from a weekly pdf booklet of petroleum graphs produced by Yardeni Research, a provider of independent investment and economics research, run by Dr Ed Yardeni…it shows the Baker Hughes rig count from the beginning of 1991 up to and including the week ending June 24th, having not yet updated for Friday’s report as of this writing on Saturday evening…as indicated, the total US rig count is shown in red, our weekly oil rig count is shown in violet, and our weekly natural gas rig count is shown in green…note that prior to 2015, the previous low for natural gas rigs was the 242 rigs that were deployed on March 27th of 1992, and except for 1992, gas rigs had not dropped below 250 until March 20th, 2015, and they’ve been down steadily since, to this week’s 89 rigs…on a couple of occasions, i’ve tried looking back through Baker Hughes’ North America Rotary Rig Count Archives, and i’ve never found a week in that history when the natural gas rig count was below 200, but since those exist as static pdf files only, apparently copied from monthly printed sheets, manually scanning the entire lot has proven to be more than i was willing to undertake in the interest of exact data…

July 1 2016 oil and gas rig counts

the past week saw two more drilling platforms that had been drilling in the Gulf of Mexico offshore of Louisiana taken out of service; that cut the Gulf of Mexico active rig count down to 18 rigs, which was down from 29 a year ago, and reduced the total offshore count down to 19, as there still is an offshore platform working off the Cook Inlet in Alaska….at the same time, there was also a rig added on an inland lake in southern Louisiana, which brought the inland waters rig count back up to 4, which was down from the 5 rigs that were deployed drilling on inland waters at the end of the same week last year…

the number of working horizontal drilling rigs increased for the 4th time in 5 weeks, after dropping weekly since November, as horizontal rigs rose by 7 to 332 rigs this week, which still was down from the 657 horizontal rigs that were in use on July 3rd of last year, and down from the record of 1372 horizontal rigs that were deployed on November 21st of 2014…at the same time, 8 vertical rigs were added, bringing the vertical rig count up to 61, which was down from the 108 vertical rigs that were in use at the end of the same week a year earlier…meanwhile, the directional rig count fell by 5 rigs to 38 rigs, which was also down from the 97 directional rigs that were drilling in the US during the same week last year…    

for the details on which states and which shale basins saw changes in drilling activity this past week, we’re again going to include a screenshot of that part of the rig count summary from Baker Hughes, which shows those changes…the first table below shows weekly and annual rig count changes by state, and the second table shows weekly and annual rig count changes for the major geological oil and gas basins…in both tables, the first column shows the active rig count as of July 1st, the second column shows the change in the number of working rigs from the prior week, the third column shows last weeks rig count, the 4th column shows the change in the number of rigs running from the same week a year ago, and the 5th column shows the number of rigs that were drilling at the end of that week a year ago, which in this case was July 3rd of 2015: 

July 1 2016 rig count summary

from this we can again see that Texas continues to add rigs, adding 4 in the Permian basin, as Texas additions have accounted for the lion’s share of the increased rig count over the past 5 weeks…Oklahoma also added 4 rigs this week, after pulling 4 out last week, but at 54 rigs they’re still 5 below the 59 rig they had deployed on June 5th…outside of Texas, North Dakota is the other state that’s seen a large increase, as they’ve gone from 22 rigs to 26 over the past 5 weeks..also note that Nebraska, which had gone without drilling since the week ending May 20th, added a single rig this past week, which is not included on the list of major producing states above…

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