DUC well numbers falling, natural gas prices at a 19 month high, 1 million bpd swing in oil fudge factor casts doubt on weekly data

as of this week, there’s been a new addition to the raft of reports that the EIA publishes monthly that will be worth our watching…commencing with the September Drilling Productivity Report (which was released on the 12th), the EIA will be including a supplement that will provide a monthly estimate of the number of drilled but uncompleted wells (DUCs) in the 7 regions that the Drilling Productivity Report covers, and they’ll be including a summary of that supplement under tab 3 on the anchor Drilling Productivity Report webpage….the addition of such data was a logical move, since a part of the Drilling Productivity Report has always cited oil and gas productivity per drilling rig data, which became pretty meaningless as drillers would drill wells but not frack them, thus showing no additional production after drilling…for this initial report, they estimate that there were 5,031 drilled but uncompleted (ie, unfracked) wells remaining in the 7 basins they cover (the Bakken, Niobrara, Permian, and Eagle Ford, Marcellus, Utica, and the Haynesville), down from 5,065 DUC wells in July…the Permian basin was the only region to see an increase in uncompleted wells, from 1310 DUC wells in July to 1348 in August, which fits what we already knew from the Baker Hughes rig count, wherein 70% of the rigs added over the past 19 weeks were in that basin…the Utica saw a nominal drop, from 132 DUC wells in July to 129 DUCS in August, while the Marcellus saw their uncompleted well inventory fall from 658 wells in July to 642 DUC wells in August…small graphs with the report indicate that oil basin DUCs (ie the Bakken, Niobrara, Permian, and Eagle Ford) rose from 2500 in late 2013 to over 4500 earlier this year, but declined by about 400 over the last five months…natural gas basin (Marcellus, Utica, and the Haynesville) DUCs, on the other hand, fell at a slow, irregular pace from near 1200 to near 1000 over the period, but have fallen more rapidly over the past several months to 914 as of the August report….that should not be a surprise, as the number of gas drilling rigs has dropped from over 1500 throughout 2008 to 374 rigs by the end of 2013, falling to set record lows for gas drilling most every week in early 2016, and hitting bottom at just 81 natural gas rigs nationally on both August 5th and August 26th…apparently, gas drillers have idled their rigs while they’ve been fracking their DUC inventory to maintain enough cash flow to pay interest on their debts…

speaking of natural gas, prices for October delivery of nat gas hit 19 month highs on two successive days of trading on the New York Mercantile Exchange this week, even though supplies remain 8.2% above normal for this time of year…you’ve probably noticed that it’s been warmer than normal for this time of year, not just in Ohio but across the nation…since natural gas overtook coal as the top fuel for thermal electric generation earlier this year, warmer than normal fall weather means that many  Americans, especially south of here, are using more air conditioning than normal for this time of year, and thus consuming more electric power and hence more natural gas than they normally would, at a time of year when most surplus natural gas would normally be heading into storage…after closing last week at $2.948 per mmBTU (million British thermal units), natural gas prices rose to $2.934 per mm-BTU on Monday, then jumped to $3.047 per mm-BTU on Tuesday and to $3.057 per mm-BTU on Wednesday, putting them up 5.8% over 5 days, before falling back to $2.990 per mm-BTU on Thursday and to $2.955 per mm-BTU on Friday, after the EIA’s Weekly Natural Gas Storage Report for week ending September 16th showed that 52 billion cubic feet of natural gas were added to storage in the US over that week, down from last year’s 105 billion cubic feet addition, and down from the 83 billion cubic feet average addition for this time of year, which apparently disappointed traders who were expecting a smaller addition….what apparently drove the rally were forecasts that September was on pace to be the hottest on record in the US, and the NOAA three month forecast for October through December, that indicated a likelihood of warmer than normal temperatures for 80% of the country, with much above normal temperatures in the Northeast and Southwest, while only the 6 states in the Southeast would see close to normal temperatures…since it’s been a few months since we last looked at a natural gas price chart, we’ll include one here today…

September 24 2016 natural gas prices

the above graph shows the October contract price over the last 6 months 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 is the benchmark for setting natural gas prices across the US…obviously, recent prices still remain below the $4 per mmBTU breakeven price that was often quoted before prices crashed, and since the count of rigs drilling for gas continued to has hit new lows almost weekly over the entirety of this period up until the end of August, we feel it’s safe to say that natural gas prices likely still remain below breakeven in all but the richest spots of the Utica and Marcellus today…still, as we noted, the older uncompleted wells are now being fracked faster than new wells are being drilled, so eventually some drilling will have to resume if the same level of natural gas supply is to be maintained…

US oil prices, meanwhile, which had fallen by 6.2% last week to $43.03 a barrel, rose every day this week until Friday, when they gave up almost $2 of their gains on a confluence of issues…up a bit to close at $43.30 on Monday, oil prices rose to $44.05 on Tuesday after the American Petroleum Institute reported a surprise inventory draw of 7.497 million barrels, when traders had been expecting a 3.25 million barrel addition to supplies…oil prices then fell again on Wednesday when the EIA weekly report confirmed a massive supply drawdown, and subsequently closed the day at $45.34 a barrel…the price rally continued on that sinking oil supply news on Thursday as price rose almost another dollar to close at $46.32 a barrel…however, on Friday prices were hit after a Saudi oil spokesman said that the oil producers meeting Algiers next week would not result in any formal decisions to freeze supply, and that any agreement would be deferred until the OPEC meeting in Vienna in November…the price drop got worse in the afternoon, after the Fed confirmed it intended to restrict bank involvement in markets for physical commodities such as oil, and with oil drilling on the increase again, oil prices went on to suffer their worst one-day loss since mid-July, but still managed to close the week a $44.48 a barrel, a 2% gain on the week overall…

The Latest Oil Stats from the EIA

the oil data for the week ending September 16th from the US Energy Information Administration showed an increase in our imports of oil to pre-Hermine levels, surprisingly large drops in our stockpiles of both crude and gasoline, and a seasonal pullback in the amount of oil used by domestic refineries….however, this week’s crude oil fudge factor that was needed to make the weekly U.S. Petroleum Balance Sheet (line 13) balance swung by more than a million barrels a day to -532,000 barrels per day, from last week’s +513,000 barrels per day, which means that 532,000 barrels of oil per day that we appeared to have produced or imported last week did not show up in the final oil consumption or inventory figures….needless to say, a million barrel per day swing in the balance sheet adjustment renders most of our week over week comparisons useless, but for the same week last year the adjustment was also an inordinately large negative -625,000 barrels per day, which means that at least our year over year comparisons will be subject to similar magnitudes of error…

with that in mind, then, we’ll note that the EIA reported that production of crude oil from US wells rose by 19,000 barrels per day to an average of 8,512,000 barrels per day during the week ending September 16th, as output of Alaskan oil rose by 6,000 barrels per day and production from the lower 48 states was 13,000 barrels per day higher, the third small increase in continental US production in a row….that still left the week’s domestic oil production 6.8% lower than the 9,136,000 barrels we produced during the week ending September 18th of last year, and 11.4% below the record 9,610,000 barrel per day oil production that we saw during the week ending June 5th last  year…though our oil production for the week ending September 16th was 707,000 barrels per day lower than what we were producing at the beginning of this year, its now up by 84,000 barrels per day since the beginning of July, so it appears our oil output is stabilizing at these levels as more DUC wells are brought into production…  

for the same week, the EIA also reported that our imports of crude oil rose by an average of 247,000 barrels per day to an average of 8,309,000 barrels per day, 15.4% more than the 7,176,000 barrels of oil per day we imported during the week ending September 18th a year ago…the 4 week average of our oil imports reported by the EIA’s weekly Petroleum Status Report (62 pp pdf), which includes both a 3 year high and the subsequent Hermine import bust, slipped to an average of 8.1 million barrels per day, still 9.1% higher than the same four-week period last year… but our exports of crude oil were up by an average of 170,000 barrels per day to an average of 588,000 barrels per day during the same week, partially mitigating the effect of this week’s import increase on supplies…

meanwhile, the amount of crude oil used by US refineries fell by an average of 143,000 barrels per day to an average of 16,587,000 barrels of crude per day during the week ending September 9th, as the US refinery utilization rate fell to 92.0% for that week, down from 92.9% of capacity the prior week, but up from the refinery utilization rate of 90.9% logged during the week ending September 18th last year…however, despite a 343.000 barrel per day drop in refining over two weeks, the amount of crude refined this week nationally was still 2.4% more than the 16,203,000 barrels of crude per day US refineries used during the week ending September 18th last year, and 2.3% more than the equivalent week in 2014, as refining for “the summer driving season” normally comes to a close with the passing of the labor day weekend …   

however, despite the apparent refinery slowdown, our refineries’ production of gasoline rose by 183,000 barrels per day to 10,083,000 barrels per day during the week ending September 16th, which was historically the highest US gasoline output in any week during the three months following Labor Day….that was thus 5.6% higher than our gasoline output of 9,545,000 barrels per day during the week ending September 18th last year, and 10.4% higher than the gasoline production of the equivalent week of 2014….at the same time, refinery output of distillate fuels (diesel fuel and heat oil) rose by 45,000 barrels per day to 4,978,000 barrels per day during the week ending September 16th, which still left our distillates production 2.1% less than the 5,083,000 barrels per day that was being produced during the same week last year, but 2.1% more than the 4,875,000 barrels per day of distillates production of the equivalent week of 2014…  

however, even with the increase in gasoline production, our gasoline inventories fell by 3,204,000 barrels to 225,156,000 barrels as of September 16th, as our domestic demand for gasoline unexpectedly rose by 244,000 barrels per day to 9,650,000 barrels per day and as our gasoline imports fell by 81,000 barrels per day to 569,000 barrels per day…still, this week’s gasoline inventories remained 2.9% higher than the 218,756,000 barrels of gasoline that we had stored on September 18th last year, and 7.1% higher than the 210,324,000 barrels of gasoline we had stored on September 19th of 2014, and still remain categorized by the EIA as “well above the upper limit of the average range” for this time of year….at the same time, our distillate fuel inventories rose by 2,238,000 barrels to 164,992,000 barrels by September 16th, following the prior week’s 4,619,000 barrel increase…that put our distillate inventories 8.6% above the distillate inventories of 151,875,000 barrels of September 18th last year, and 28.3% above the distillate fuel inventories of 128,595,000 barrels of September 19th, 2014…  

oddly, even with our crude oil imports higher and our refinery consumption of crude lower, we apparently needed to draw more oil out of storage to meet our need needs than last week, as our stocks of crude oil in storage fell by 6,200,000 barrels to 504,598,000 barrels….since our crude supplies have thus dropped by nearly 21.3 million barrels over the past three weeks, it would be a good time to pull out a longer term chart to see what that drop of supplies looks like from a historical prospective..

September 24 2016 crude oil supplies as of 9-16

the above graph 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 end of the week stocks of crude oil in millions of barrels for each week beginning with January 2012, up to and including this week’s report for September 16th, with graphs for each year color coded as indicated…here we can see how our oil inventories stayed in a narrow range between 2012 and 2014, represented by the mustard, green and blue bands, typically falling to 350 million barrels by the end of each summer and rising to around 390 million barrels by early spring….however, at the beginning of 2015, represented by the grape colored graph, our inventories of oil started rising each week till they reached 490 million barrels at the end of April 2015, and then stayed elevated in a range 80 to 100 million barrels above the previous norms…that continued into 2016, represented by the scarlet colored graph, and although the rate of increase tailed off early this year, our oil supplies had generally averaged about 15% above 2015’s elevated levels, and more than 40% above historical levels, since early April of this year…the big hit to 2016 inventories came two weeks ago, when the Gulf and Atlantic Coast storm disrupted imports, and now we’ve seen another 6.2 million barrel drop, complicated by the massive half million barrel per day difference between apparent supply and end use…nonetheless, we still ended this week with 12.2% more oil in storage than the 453,969,000 barrels we had stored as of the same weekend a year earlier, and 40.9% more oil than we had stored on September 19th of 2014….however, the markets generally react to the year over year change as reported weekly by the EIA, but as we can see from the above graph, last year’s supply of oil (and of most oil products) was already more than 20% above the historical norm…

This week’s rig count

US drilling activity increased during the week ending September 23rd, after falling the prior week, and has now been up 14 out of the last 17 weeks…Baker Hughes reported that the total count of active rotary rigs running in the US rose by 5 rigs to 511 rigs as of Friday, which was still down from the 838 rigs that were deployed as of the September 25th 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 rose by 2 rigs to 418 rigs this week, which was still down from the 641 oil directed rigs that were in use a year ago, and down from the recent high of 1609 oil rigs that were drilling on October 10, 2014…meanwhile, the count of drilling rigs targeting natural gas formations rose by 3 rigs to 92 rigs this week, which was also down from the 197 natural gas rigs that were drilling a year ago, and down from the recent natural gas rig high of 1,606 rigs that were deployed on August 29th, 2008…there also remained a single rig that was classified as miscellaneous, technically an increase from a year ago when there were no miscellaneous rigs at work…  

the number of working horizontal drilling rigs rebounded to an 8 rig increase this week after falling by 2 rigs last week, which brought the count of active horizontal rigs back up to 402 rigs, which was nonetheless still down from the 629 horizontal rigs that were in use on September 25th of last year, and down from the record of 1372 horizontal rigs that were deployed on November 21st of 2014…at the same time, the directional drilling rig count increased by 1 rig to 49 rigs, which was also down from the 86 directional rigs that were deployed during the same week last year…meanwhile, the vertical rig count fell by 4 rigs to 60 rigs this week, which was down from the 123 vertical rigs that were drilling in the US during the same week last year…there was also the removal of a rig that had been drilling through an inland lake in southern Louisiana, which cut the inland waters rig count back to 3 rigs, which was down from 5 rigs on inland waters a year earlier…

the details on this week’s changes in drilling activity by state and by shale basin are included in our screenshot below 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 for the major producing states, and the second table shows weekly and annual rig count changes for the major US geological oil and gas basins…in both tables, the first column shows the active rig count as of September 23rd, the second column shows the change in the number of working rigs between last week (September 16th) and this week (September 23rd), the third column shows last week’s September 16th active rig count, the 4th column shows the change in the number of rigs running this Friday from the equivalent Friday in September 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 week’s case was September 25th of 2015:       

Sepember 23 2016 rig count summary

again, we have another week where the table reveals there was not much changing going on anywhere in the country, although it’s not apparent from the above where the 8 horizontal drillers were added…the complete state table shows no additions outside of those listed here, so we’ll have to guess that one or several states with both conventional and shale exploitation taking place, such as Texas or Oklahoma, saw vertical rigs removed in one area while horizontal rigs were added in another…also note that the Permian basin, where most of the new drilling has been taking place over the last 4 months, saw a reduction in its rig count for only the 2nd time in the past 19 weeks…

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