oil rigs at a 2016 high, distillates use at a 23 month high, a 6 year high drawdown of natural gas, etc

oil prices were generally higher this week on half of normal trading volume, as many traders apparently took an early holiday vacation…after closing last week at $51.90 a barrel, the contract for US oil for January delivery rose 22 cents on Monday to settle at $52.12 a barrel, while the more-active February contract rose 11 cents to $53.06 a barrel, as news of the assassination of the Russian ambassador to Turkey brought out fears of political instability in the Middle East…with trading in the January oil contract expiring on Tuesday at $52.23 a barrel, the February contract rose 24 cents, or 0.5%, to $53.30 a barrel, on forecasts of a large draw in U.S. crude supplies that would give credence to the belief that the oil glut was ending, and a bigger than expected inventory draw as reported by the American Petroleum Institute…however, oil prices fell 1.5% on Wednesday when the EIA reported that US crude inventories had actually increased, and ultimately closed down 81 cents at $52.49 a barrel…crude prices resumed their upward march on Thursday on strong U.S. economic data, a pause in the U.S. dollar rally, and optimism that crude producers would abide by an agreement to limit output, and closed up 46 cents at $52.95 a barrel…prices then drifted a bit higher on light trading, not even reacting to the 3rd consecutive double digit jump in the oil rig count, and closed the week at $53.02 a barrel, a price quote not comparable to last week’s because it’s now referencing a different contract month…

it might be worth it to take a closer look at the oil futures market, since we’ve just been through a week when the reference month for the widely quoted “price of oil” changed, and the price of oil jumped nearly a dollar a barrel as a result…over the past two years, we’ve often mentioned in passing that future contract prices for oil were higher than were current prices, whether we were referencing contango trading, which had made it profitable to buy and store oil, or whether we were talking about the economics of completing wells at a given price…but while we’ve linked to pages of those futures price quotes, i don’t think we’ve never shown them, and i wouldn’t expect that most of you would have had the time to follow all the links that i’ve used in these mailings…so today we’ll just copy part of a page showing quotes for the first handful of oil futures quotes, and explain what it shows…

December 24 2016 oil futures

the above table, which shows oil futures prices for the next 14 months, comes from barchart.com, who calls themselves a “provider of market data solutions for individuals and businesses”…technically, each line on that table shows Friday’s trading in a contract to deliver West Texas Intermediate grade (WTI) oil to (or to buy WTI oil from) the depot at Cushing Oklahoma for one month in the future, as noted in the blue parenthesis in the first column… the contracts are further identifiable by the 5 digit ticker symbol, wherein CL is the symbol for WTI light crude oil (the US benchmark oil), the next letter is a symbol for the month (ie, G=February, H=March, etc), and the last two digits are the year…the 2nd column has Friday’s closing price for each of those contracts, and the 3rd column has the change in price from Thursday to Friday for each contract…note that this is just a small part of the list; the page i took this from includes monthly oil futures quotes going out to 2022, and then quotes for December and June through the year 2025..

the “price of oil” that’s given in the media (and which we quote) is always for the current front month, which in this week’s case was for January on Monday and Tuesday, and for February thereafter…you’ll see there’s also a cash price listed, CLY00 at $52.98 a barrel, but note that there’s a zero in the volume column, because no one bought oil for cash on Friday, which we’d expect to be the case on most days, and that’s why that cash price is never quoted…in an over-simplification of the practice, oil refineries will contract for their oil needs based on these futures prices many months or years in the future, just as oil well drillers will contract to sell their future production at some future date based on these prices, and thus whatever price changes occur between now and that time in the future will thus not affect them, because they’ve got their selling price locked in…thus though Friday’s quoted price of oil was $53.02 a barrel, a hypothetical fracker who may been planning to start drilling after the first of the year might not be able to schedule a fracking crew until April, and thus might contract to sell his expected initial output in May, at prices of $55.24 a barrel…of course, the reality is more complex, as a driller in the Bakken who must ship by rail may receive a well head price that is a set steep discount from WTI, and may engage in much more complicated hedging strategies than simple selling oil futures contracts for given months, but the underlying pricing principle is the same…it’s also important to remember what we showed last January; that it’s not the oil users or the oil producers who set the price, it’s the oil traders in New York,.because daily oil trading for just one oil contract in New York has been running well more than 100 times the amount of oil produced in the entire US daily, and because daily oil trading for just one contract in New York electronically swaps more than twice the quantity of oil that exists anywhere above ground in the entire country, oil producers have no real say in what price they’ll receive for their oil, nor do refiners in what price they’ll ultimately pay.

* * * * *

we missed coverage of natural gas prices last week, so we’ll pick up on what happened to them over the past two weeks now…when we looked at natural gas prices two weeks ago, they had just run up almost $1 per mmBTU (million British thermal units) to $3.75 per mmBTU in a month’s time, as the the warmest Fall in US weather history was giving way to forecasts of a colder than normal La Nina winter…but no sooner than we sounded the alarm on that price spike, natural gas prices began to fall back, dropping 23.9 cents to $3.507 per mmBTU on Monday of last week, and then dropping lower for three out of the next four days to end last week at $3.415 per mmBTU…that collapse continued early this week, as natural gas prices fell to $3.392 per mmBTU on Monday, then to $3.263 per mmBTU on Tuesday, as increasingly milder weather forecasts continued to weigh on the market…but it appears someone got wind of the Thursday natural gas storage report on Wednesday, because nat gas prices spiked 18.1 cents, or 5.5% in the first hour of trading on rumors of an inventory draw in a range between 197 and 210 billion cubic feet, and went on to close up 27.9 cents at $3.542 per mmBTU…that natural gas storage report did indeed showed we had to pull 209 billion cubic feet of natural gas out of storage to meet our heating needs during the week ending December 16th, the biggest withdrawal for the week since 2010, which left us with 3,597 billion cubic feet of gas left, 5.9% less than a year earlier, a warm week which only required a 32 billion cubic feet withdraw…gas prices then went on to close $3.538 per mmBTU on Thursday and $3.662 per mmBTU on Friday, which you can see in the graph below..

December 24 2016 natural gas prices

again, this familiar graph shows the contract price over the last 3 months for a million British thermal units (mmBTU) of natural gas at or contracted to be delivered in January at the Louisiana interstate natural gas pipeline interconnection known as the Henry Hub, which is the benchmark location for setting natural gas prices across the US…as we made note of two weeks ago, January natural gas futures are invariably higher than for the other months, and if we navigate to the page of natural gas futures prices similar to the oil futures table above we find that May prices for natural gas are more than 20 cents lower than January’s, and most natural gas prices after April 2018 are below $3 per mmBTU, so it does a fracker no good to start drilling now on these temporary higher January prices, facing the inability to contract for sale at prices at these levels in the out months, and the likelihood that prices will be much lower in the future…

btw, you might have noted that i’ve been reluctant to ascribe a reason for most gas prices moves, simply because such large price moves for such small changes in expectations seem irrational to me…as RBN Energy explained the natural gas markets last week, “natural gas inventory—as reported by the EIA each week—is regarded as an ever-present bellwether for price direction in the natural gas market. Gas market participants and analysts train their eyes on weather forecasts—and the constant daily, or even intraday, revisions to the forecasts—along with natural gas flow data and other fundamental factors to see how they might change the storage picture..”

The Latest Oil Stats from the EIA

this week’s oil data for the week ending December 16th from the US Energy Information Administration indicated a big jump in our imports of crude and a modest increase in our refining, but not enough to use all those extra imports, leaving our supplies of crude oil somewhat higher than the prior week…our imports of crude oil rose by an average of 1,111,000 barrels per day to an average of 8,471,000 barrels per day during the week, while at the same time our exports of crude oil rose by an average of 72,000 barrels per day to an average of 557,000 barrels per day, which meant that our effective imports netted out to 7,914,000 barrels per day for the week…at the same time, our crude oil production fell by 10,000 barrels per day to an average of 8,786,000 barrels per day, which means the daily supply of oil from imports and wells totaled 16,700,000 barrels per day…refineries reportedly used 16,658,000 barrels of crude per day during the week, an increase of 184,000 barrels per day from the week ending the 9th…but at the same time, 322,000 barrels of oil per day were being added to storage facilities in the US, virtually reversing the 366,000 barrels of oil per day of stored oil that was used up in the prior week…

thus, this week’s EIA figures seem to indicate that we ended up with 280,000 more barrels of oil per day than were accounted for by our oil imports and production, and therefore the EIA inserted that 280,000 barrels per day into the weekly U.S. Petroleum Balance Sheet (line 13) to make it balance…the EIA footnote to that line 13 calls it “unaccounted for crude oil”, which is further described on page 61 in the glossary of the EIA’s weekly Petroleum Status Report as “the arithmetic difference between the calculated supply and the calculated disposition of crude oil.”…as you know, we’ve been calling that number the EIA’s weekly fudge factor…

from that same weekly Petroleum Status Report we find that the 4 week average of our oil imports rose to an average of 7.9 million barrels per day, now 0.9% higher than the same four-week period last year, which has also become somewhat meaningless as our weekly oil imports rise and fall on the order of a million barrels per day….our oil production for the week of the 16th was 4.3% lower less that the 9,179,000 barrels of crude we produced during the week ending December 18th of last year, and 8.6% below our record 9,610,000 barrels per day of oil production that we saw during the week ending June 5th 2015…

US refineries operated at 91.5% of capacity in using those 16,658,000 barrels of crude per day, up from 90.5% the prior week and up from 91.3% during the same week a year ago, as they also refined 190,000 more barrels of crude per day than they did during the same week last year…gasoline production from those refineries rose by 322,000 barrels per day to 10,150,000 barrels per day during the week ending December 16th, which was 8.6% more than the 9,346,000 barrels per day of gasoline produced during the week ending December 18th a year ago, but just 2.3% more than the 9,920,000 barrels per day of gasoline produced during the week ending December 19th 2014…at the same time, refineries’ output of distillate fuels (diesel fuel and heat oil) rose by 113,000 barrels per day to 5,122,000 barrels per day during the week ending December 16th, which was 3.7% higher than the 4,938,000 barrels per day that was being produced during the week ending December 18th last year, but 2.2% lower than the 5,236,000 barrels per day of distillates produced during the same week of 2014…     

even with the week’s increases in gasoline and distillates production, however, supplies of both reportedly dropped…our gasoline supplies fell by 1,309,000 barrels to 228,736,000 barrels as of December 16th, as our domestic consumption of gasoline increased by 395,000 barrels per day to 9,269,000 barrels per day, our gasoline imports fell by 177,000 barrels per day to 447,000 barrels per day, and our gasoline exports fell by 336,000 barrels per day from last week’s record high of 1,131,000  barrels per day…nonetheless, our gasoline inventories as of December 16th were still 3.7% higher than the 220,495,000 barrels of gasoline that we had stored on December 18th of last year, and 1.2% higher than the 226,097,000 barrels of gasoline we had stored on December 19th of 2014….at the same time, our distillate fuel inventories fell by 2,420,000 barrels to 155,935,000 barrels by December 16th, as with the sudden burst of arctic weather our consumption of distillates rose by 519,000 barrels per day to 4,549,000 barrels per day during the week ending December 16th , the most distillates we’ve used in any week since January 23rd, 2015….nonetheless, our distillate inventories remained 1.5% higher than the distillate inventories of 151,315,000 barrels of December 18th last year, and 24.0% above the distillate inventories of 123,847,000 barrels of December 12th, 2014…

finally, mostly due to the big jump in our oil imports, our inventories of crude oil rose by 2,563,000 barrels to 485,449,000 barrels by December 16th, still 5.2% below the April 29th record of 512,095,000 barrels…and we thus ended the week with 7.3% more crude oil in storage than the 452,477,000 barrels we had stored as of the same weekend a year earlier, and 36.8% more crude than the 354,733,000 barrels of oil we had in storage on December 19th of 2014…   

This Week’s Rig Count

drilling activity rose for the 13th time in the past 14 weeks during the week ending December 23rd, as ongoing higher prices for gas and oil underpinned increased fracking of completed wells….Baker Hughes reported that the total count of active rotary rigs running in the US rose by another 16 rigs to 653 rigs by this Friday, which was still down from the 700 rigs that were deployed as of the Wednesday December 23rd report last year, and down from the recent high of 1929 drilling rigs that were in use on November 21st of 2014… 

rigs drilling for oil increased by 13 rigs to 523 rigs during the week, which was the most oil drilling rigs that have been in use in any week this year, as oil drilling activity has only retreated once in the past 25  weeks…but oil drilling was still down from the 538 oil directed rigs that were working in the US on December 23rd last year, and down from the recent high of 1609 oil rigs that were drilling on October 10, 2014…at the same time, the count of drilling rigs targeting natural gas formations increased by 3 rigs to 129 rigs, which still left active gas rigs down from the 162 natural gas rigs that were in use a year ago, and down from the recent natural gas rig high of 1,606 natural rigs that were deployed on August 29th, 2008…one rig that was classified as miscellaneous also remained active, in contrast to a year ago, when no such miscellaneous rigs were deployed…

two offshore platforms began drilling in the Gulf of Mexico this week, both offshore from Louisiana, which brought the Gulf of Mexico rig count up to 24, same as a year ago…at the same time, another drilling operation began in the offshore waters of Alaska, which means the total US offshore count of 25 rigs has surpassed last year’s offshore count of 24…the number of working horizontal drilling rigs increased by 14 rigs to 526 rigs this week, which was still down from the 554 horizontal rigs that were in use in the US on December 23rd last year, and down from the record of 1372 horizontal rigs that were deployed on November 21st of 2014…at the same time, 4 directional drilling rigs were added, increasing the directional rig count to 58, which was down from the 60 directional rigs that were deployed during the same week last year…meanwhile, the vertical rig count fell by 2 rigs to 69 rigs as of December 23rd, which left the vertical rig count down from last December 23rd’s deployment of 86 vertical rigs…

as usual, 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 that shows those changes…the first table below shows weekly and year over year rig count changes for the major producing states, and the second table shows weekly and year over year 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 December 23rd, the second column shows the change in the number of working rigs between last week’s count (December 16th) and this week’s (December 23rd) count, the third column shows last week’s December 16th active rig count, the 4th column shows the change in the number of rigs running this Friday from the Wednesday before Christmas a year ago, and the 5th column shows the number of rigs that were drilling at the end of that reporting week a year ago, which in this case was for December 23rd of 2015…      

December 23 2016 rig count summary

there’s not much that’s particularly noteworthy in this week’s state or basin rig variances…once again, the increase of 4 rigs in the Permian was the most in the country, but that’s still down from the 12 rigs Permian drillers added last week or the 11 rigs they added the week before…the 262 rigs now working in the Permian is now almost double the 137 rigs that were drilling there during the last week of May, and the 125 rigs they’ve added over the ensuing 29 weeks thus accounts for nearly 60% of the 212 horizontal drilling rig increase that’s occurred nationally since then…Oklahoma topped he Texas addition this week by adding 6 rigs, with 2 of those targeting the Cana Woodford, and 1 in the Ardmore Woodford, the first rig working in that basin since September 23rd…i’ll assume you’ve all also noticed there was also a rig addition in the Utica; that means we now have 20 rigs running, up from 16 rigs a year ago, with one of those Utica rigs just across the state line in PA…changes not shown on the tables above include the addition of another rig in Indiana, where there are now 3 rigs running, up from none a year ago, Mississippi, where they shut down 1 rig and now have 2 rigs active, down from 5 rig a year ago, and Illinois, where their last active rig was shut down this week, while a year ago they had two…

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