oil majors see earnings crash, gasoline supplies at another seasonal record, crude supplies up first time this summer

oil prices fell every day this week until Friday, at which time they steadied and recovered half of Thursdays loss, but still ended down 5.9% for the week, and down nearly 15% for July, the largest one month drop in a year…after falling to close at $44.19 a barrel last week largely on worries about the gasoline glut, oil opened lower and fell more than a dollar to close Monday at $43.13 a barrel, after the CEO of Vitol, one of the world’s largest physical traders of oil, said he expected the oil glut to last two more years…oil then fell to close at a three month low of $42.92 a barrel on Tuesday as hedge funds began unloading their record speculative position in oil….prices were then driven another dollar lower on Wednesday after the weekly EIA report indicated not only another surprise increase in gasoline supplies, but also the first weekly increase in domestic-crude inventories in 10 weeks…oil prices then fell another 54 cents in the first hour of trading on Thursday, and drifted lower from there to close at $41.14 a barrel…oil then steadied Friday morning and rose in the afternoon to close the week at  $41.60 a barrel, apparently relieved that the Baker Hughes rig count showed a negligible increase in new drilling

Oil Majors Report Second Quarter Results

this week saw the first batch of 2nd quarter reports to shareholders from the major international oil companies, which for the most part showed much poorer earnings than a year ago, and which were generally worse than analysts had expected…recall that when we looked at these reports in earlier quarters, it was the small independent drillers that were piling up the big losses and going bankrupt, while the vertically integrated oil majors, which were also seeing losses in the exploration and exploitation segments of their business, were saved by profits from their refining operations that in some cases more than doubled, as they benefited from some the widest margins on refined products in history…now, with the glut of gasoline and all other refined products, prices for those products have fallen as well, and refining margins shrank even as oil prices rose during the April through June period…hence, the oil majors are not only seeing reduced profits or losses in their oil field operations, but they’re also barely making anything on the refining side of their business as well…

for BP, that resulted in their third straight quarterly loss, as the British oil giant reported on Tuesday that it posted a $2.25 billion net loss in the second quarter of 2016, which also included some inventory writedowns and additional charges related to the Deepwater Horizon; their earning from operations fell 45% to $720 million, down from $1.3 billion in the same quarter a year earlier, as profit margins at its refineries were at their lowest levels since 2010…reporting two days later, BP rival Royal Dutch Shell reported their profits plunged more than 70% to $1.05 billion, down from $3.76 billion in second-quarter 2015; they reported that their earnings were impacted by the decline of oil, gas, and LNG prices; a depreciation step-up from the BG acquisition; and weaker refining conditions, as revenues of $58,415 million were below the consensus estimate of $65,464 million.

also on Thursday, ConocoPhillips reported larger-than-expected loss of $1.1 billion on 2nd quarter revenue of $5.58 billion as revenues fell 36% from a year earlier to $5.58 billion, against analysts revenue expectations of $6.62 billion…then on Friday, ExxonMobil reported its profits crashed 59% to a 17 year low of just $1.7 billion as exploration and drilling profits plunged by 82%…also on Friday, Chevron surprised analysts by posting a loss of 1.5 billion for the second quarter, compared with earnings of $571 million in second-quarter 2015, as it reported $2.8 billion in impairments and non-cash charges, as revenues from its exploration and exploitation businesses were expected to be insufficient to cover costs…

The Latest Oil Stats from the EIA

as we mentioned, this week’s release of oil data for the week ending July 22nd from the US Energy Information Administration showed unseasonably large increases in our stored supply of both crude oil and gasoline; that was largely due to a big jump in oil imports and the mix of products coming out of refineries, because oil consumption by refineries dropped to below seasonal levels…at the same time, this week’s crude oil fudge factor included to make the weekly U.S. Petroleum Balance Sheet (line 13) balance was +550,000 barrels per day, which meant that 550,000 more barrels per day showed up in our final consumption and inventory figures this week than were accounted for by our production or import figures, meaning one or several of this week’s metrics were off by that amount, errors which are typically due to shortfalls in reporting or gathering that data…that’s the 5th week in a row that we’ve seen a large positive adjustment, and as a result this year’s cumulative daily average of that weekly statistical adjustment is now up to a positive 36,000 barrels per day…during much of this this year, that adjustment had been negative, meaning much of what we had appeared to have produced or imported did not show up in the final consumption or inventory figures….that statistical aberration has now completely reversed..

our field production of crude oil rose for the 3rd week in a row, as oil output from US wells rose by 21,000 barrels per day to an average of 8,515,000 barrels per day during the week ending July 15th, entirely on a 33,000 barrel per day increase in production from Alaska…but oil production from the lower 48 states was down just 12,000 barrels per day, a slowing in the rate of decline…but even with production up 3 weeks in a row, our oil output still remained 704,000 barrels per day below the pace we saw at the beginning of this year, which was also 9.5% lower than the 9,413,000 barrels we produced during the week ending July 24th of 2015, and 11.4% lower than the record 9,610,000 barrel per day oil production that we saw during the week ending June 5th last year… 

at the same time, the EIA reported that our imports of crude oil rose by an average of 303,000 barrels per day to an average of 8,437,000 barrels per day during the week ending July 22nd, just 2,000 barrels per day shy of the 42 week high for oil imports we saw during the week ending June 17th….this week’s imports were nearly 900,000  barrels per day, or 11.8% more than the 7,545,000 barrels of oil per day we were importing during the week ending July 24th a year ago, while the 4 week average of our imports reported by the EIA’s weekly Petroleum Status Report (62 pp pdf) rose to an average of 8.2 million barrels per day, 8.7% above the same four-week period last year…

meanwhile, crude oil usage by US refineries dropped by 277,000 barrels per day to an average of 16,586,000 barrels of crude per day in this week’s report…that was as the US refinery utilization rate fell to 92.4% for the week ending July 22nd, down from 93.2% of capacity the prior week and down from the refinery utilization rate of 95.1% logged during the week ending July 24th last year…crude oil refining fell by 95,000 barrels per day on the east coast, and was now at a level 12% below a year ago, indicating that the New York area products glut is having an impact on refinery operations there…nationally, crude oil refined this week was just over 1.0% less than the 16,762,000 barrels per day US refineries used during the week ending July 24th last year, and on a par with the equivalent week in 2014… 

even with the drop in oil being refined, however, US refineries production of gasoline still inched up by 18,000 barrels per day to 10,068,000 barrels per day during week ending July 22nd, as east coast refineries still managed to produce an average of 3,316,000 barrels of gasoline per day, 67,000 barrels per day more than the prior week and 4.2% more than a year earlier….that increase meant that this week’s gasoline production was 4.0% greater than the 9,681,000 barrels per day of gasoline produced during the equivalent week a year ago, despite the refinery slowdown….however, refinery output of distillate fuels (diesel fuel and heat oil) did drop during this week, falling by 86,000 barrels per day to 4,918,000 barrels per day during the week ending July 22nd…that left our distillates output 3.5% below the distillates production of 5,096,000 barrels per day during the week ending June 24th of last year……          

with the incremental increase in gasoline production, our gasoline inventories rose again, increasing by 452,000 barrels to 241,452,000 barrels as of July 22nd, the 5th increase in the past 6 weeks, at a time of year when our gasoline supplies are usually being used up…in fact, since July 15th had seen the highest summertime level for gasoline supplies in the EIA’s weekly records, July 22nd just topped that record by 452,000 barrels, and that happened even as the amount of gasoline supplied to US markets rose by 12,000 barrels per day to a near record of 9,797,000 barrels per day itself…to see what this buildup of gasoline supplies looks like historically, we’ll include another one of the EIA’s weekly 5 year graphs:

July 29 2016 gasoline inventory for July 22

in the graph above, which was sourced from page 12 of the EIA’s weekly Petroleum Status Report (62 pp pdf), the blue line shows the recent track of US gasoline inventories over the period from December 2014 to July 22nd,, 2016, while the grey shaded area represents the range of US gasoline inventories as reported weekly by the EIA over the prior 5 years for any given time of year, thus showing us the normal range of US gasoline inventories as they fluctuate from season to season, normally falling during the driving season every summer and rising in winter…note that gasoline inventories first rose out of that prior trend in January of this year, and by February had set a new record high…then, instead of falling rapidly during the spring as it had in prior years, this year gasoline inventories remained elevated throughout the spring, and once they started rising 6 weeks ago, it didn’t take much for them to hit a record for this time of year…gasoline inventories thus ended this week 11.8% higher than the 215,922,000 barrels of gasoline that we had stored on July 24th last year, and also 10.6% higher than the 218,236,000 barrels of gasoline we had stored on July 25th of 2014… thus our gasoline supplies remain categorized by the EIA as “well above the upper limit of the average range” for this time of year..   

meanwhile, our distillate fuel inventories fell by 780,000 barrels to 152,003,000 barrels on July 22nd, which left them still well above the distillate inventories of 148,939,000 on the 1st of July…since our distillate inventories have continued to run far above the normal level since our warm winter reduced US heat oil consumption, our distillate inventories as of July 22nd were still 5.5% higher than the 148,939,000 barrels of distillates we had stored as of July 24th last year, and 20.0% higher than our distillates supplies as of July 25th 2014, and thus they are still characterized as “above the upper limit of the average range” for this time of year…     

finally, as our refineries failed to keep pace with our increased level of imports, we found ourselves with 1,671,000 more barrels of oil than we needed this week, which was subsequently added to our stocks of crude in storage, and hence our crude oil inventories rose to 521,133,000 barrels as of July 22nd, the first increase in oil stocks in 10 weeks….that meant we ended up with 13.4% more oil in storage than the 459,682,000 barrels we had as of the same weekend a year earlier, and 41.9% more oil than we had stored on July 25th of 2014….since our oil supplies first topped 500 million early this year, and first topped 400 million in January of 2015, it goes without saying that our crude oil supplies also remain “well above the upper limit of the average range” for this time of year…”    

This week’s rig counts

even though it was just by one more rig, US drilling activity increased for the 8th week out of the past 9 weeks during the week ending July 29th, even as oil prices fell….Baker Hughes reported that the total count of active rotary rigs running in the US rose by 1 to 463 rigs as of Friday, which was still down from the 874 rigs that were deployed as of the July 31st report last year, and down from the recent high of 1929 rigs that were in use on November 21st of 2014…the number of rigs drilling for oil this week rose by 3 rigs to 374, which was still down from the 664 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 two rigs to 86 this week, which was also down from the 209 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 on August 29th, 2008…there were also three rigs drilling this week that were classified as miscellaneous, unchanged from last week but up from the single miscellaneous rig that was drilling the same week a year ago….  

even with the negligible overall increase, another rig was added offshore from Texas in the Gulf of Mexico, which brought the Gulf of Mexico active rig count back up to 19 rigs, which was still down from 34 Gulf of Mexico rigs a year ago…however, the offshore platform that had been working off the Cook Inlet in Alaska was shut down, which left the total offshore count unchanged at 19, which was also down from 34 offshore a year earlier…at the same time, there was a single new rig that started drilling through an inland lake in southern Louisiana, which brought the inland waters rig count up to 4, which was still 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 fell for the 2nd time in 9 weeks, as the count of active horizontal rigs dropped by 3 rigs to 354 rigs, which also was down from the 664 horizontal rigs that were in use on July 31st of last year, and down from the record of 1372 horizontal rigs that were deployed on November 21st of 2014…at the same time, 4 more directional rigs were added, bringing the directional rig count back up to 48, which was still down from the 84 directional rigs that were in use at the end of the same week a year earlier…meanwhile, the vertical rig count was unchanged at 61 rigs this week, which was down from the 126 vertical 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’ll again 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 29th, the second column shows the change in the number of working rigs over the last week, the third column shows last week’s July 22nd rig count, the 4th column shows the change in the number of rigs running from the equivalent week in July 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 31st of 2015:  

July 29 2016 rig count summary

here we can see that the change in the overall rig count that the press characterized as ‘negligible’ masks quite a bit of activity across the nation…for instance, even though the Texas rig count was down by 3 rigs to 214, drilling in the Permian basin in the western part of the state still increased by 4 active rigs, as 3 rigs were idled that had been working in the Barnett shale near Dallas, and another 2 rigs in the Eagle Ford of south Texas were also shut down…also note that Ohio saw its rig count rise by 1 rig to 13 with the addition of another rig in the Utica, while the Marcellus dropped a rig by virtue of pulling 2 rigs from West Virginia and adding 1 rig in Pennsylvania…also note that Mississippi, which is not included among major producing states above, saw the addition of a rig this week, bringing the state count up to 3 rigs….Mississippi also had 3 rigs deployed on July 31st of 2015….

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