oil price breaks as crude supplies hit another record, OPEC drilling increases again…

oil prices finally broke out of their narrow range this week, with US prices ending the week 9.1% lower than a week ago, as they fell every day this week, with the biggest drop precipitated by reports of a much larger than expected addition to our already record high supplies of crude oil…after closing the prior week down 66 cents at $53.33 a barrel, oil prices continued to weaken early this week, falling to $53.20 a barrel on Monday and to $53.14 a barrel on Tuesday, as traders remained concerned that Russia had failed to cut their production as promised in February…however, after the market closed on Tuesday, the American Petroleum Institute reported a massive 11.6 million barrel increase in US commercial oil inventories, against trader’s expectations of a 1.4 million barrel increase, and oil prices began to slide in off market trading…the bottom then fell out of oil prices on Wednesday, when the EIA reported a still excessive 8.2 million barrel increase in US oil supplies, accompanied by a large surge in US oil production, and WTI contracts for April went on to drop $2.86, or 5.4%, to close at $50.28 a barrel…weakness from that crash persisted the rest of the week, as oil prices then fell another dollar to close at $49.28 a barrel on Thursday, steadied and rose back to near $50 a barrel on Friday morning, only to crash back to close at the day’s low of $48.49 a barrel on Friday afternoon, after Baker Hughes reported anther double digit increase in active drilling rigs…since this was the largest price move since the OPEC cuts were initiated in November, we’ll include a graph below of what it looked like…

March 10 2017 oil prices

this graph shows the daily closing prices per barrel of oil over the past 3 months for the April contract for the US benchmark oil, West Texas Intermediate (WTI), as stored or to be delivered to the Cushing Oklahoma storage depot…after oil prices jumped 14% on the OPEC production cut deal in the last week of November, oil prices then stayed in a narrow range above $52 a barrel for the next three months, with the range becoming even narrower over the last 8 weeks…over that span, with oil prices over $50 a barrel for the first time since early 2015, drilling for oil in the US has increased by nearly 30%, from the 477 rigs that were drilling on December 2nd to the 617 rigs that were working this week…over the year before that, drilling for oil generally held steady or increased slowly after peridos when oil prices were in the $45 to $50 a barrel range, while oil drilling generally slowed after periods when oil price quotes were in the low $40s or below…so we believe that this price break to below $50 a barrel will give drillers and frackers reason to pause, and even should drilling continue to expand from here, it will do so at a much slower and more irregular pace than we’ve seen over the past 3 months..

moreover, it seems certain that oil prices at these levels make it extremely unlikely that Transcanada can continue to pursue the Keystone XL pipeline, simply because oil sands expansion is out of the question at these price levels…because they have to burn one barrel of oil to extract three, the breakeven cost for extracting oil from Canada’s tar sands is much higher than most other places around the world; most figures i’ve seen indicate they need $50 US oil prices just to operate the extraction facilities now in existence, without any expansion…Keystone was originally proposed at a time when oil prices were twice what they are now., but 64 of the tar sands projects that were on the drawing board when oil prices first started falling have since been cancelled, with many of of the oil companies involved taking large losses, so the oil that was to fill the Keystone will no longer be there if the pipeline were to be completed…about a year ago, IHS estimated that a new greenfield oil sands mine (without an upgrader) required a WTI price between $85 to $95 per barrel on average to breakeven…a month ago, petrogeologist and oil analyst Art Berman at oilprice.com also showed that it would take at least $85 oil prices for 10 years to develop enough new oil sand projects to fill the Keystone XL…furthermore, there are already two massive Canadian tar sands pipeline projects already approved, which would ship any new dilbit production to the west coast and to the east…the major oil companies see the writing on the wall; just this week, Shell decided to divest nearly all of its Canadian oil sands interests in exchange for $7.25 billion, and Marathon announced an agreement to sell its Canadian subsidiary, including their interest in the Athabasca Oil Sands, and use the proceeds to buy Permian basin assets in Texas…all the deep pocketed major oil companies are getting out of the oil sands, and the small companies left with an interest there do not have the capital wherewithal to expand…

The Latest Oil Stats from the EIA

this week’s oil data for the week ending March 3rd from the US Energy Information Administration indicated that our imports of crude oil rose back to near this years average, while our refinery activity fell further below the seasonal norm, resulting in a large surplus of crude for the 9th week in a row, pushing our supplies of oil to yet another an all time high…our imports of crude oil rose by an average of 561,000 barrels per day to an average of 8,150,000 barrels per day during the week, while at the same time our exports of crude oil rose by 179,000 barrels per day to an average of 897,000 barrels per day, which meant that our effective imports netted out to 7,253,000 barrels per day for the week, 385,000 barrels per day more than last week…at the same time, our crude oil production rose by 56,000 barrels per day to an average of 9,088,000 barrels per day, which means that our daily supply of oil, from net imports and from wells, totaled an average of 16,341,000 barrels per day during the week…

meanwhile, refineries reportedly used 15,492,000 barrels of crude per day during the week, 172,000 barrels per day less than during the prior week, while at the same time, 1,137,000 barrels of oil per day were being added to oil storage facilities in the US…thus, this week’s EIA oil figures seem to indicate that we used or stored 288,000 more barrels of oil per day than were accounted for by our net oil imports and oil well production…therefore, in order to make the weekly U.S. Petroleum Balance Sheet balance out, the EIA inserted a phantom +288,000 barrel per day number onto line 13 of the petroleum balance sheet, which the footnote tells us represents “unaccounted for crude oil”…that “unaccounted for crude oil” is further described 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.”, which means they got that balance sheet number by backing into it, using the same arithmetic we just used in explaining it.....

the weekly Petroleum Status Report also tells us that the 4 week average of our oil imports anomalously fell to an average of 7.879 million barrels per day, now 1.7% below that of the same four-week period last year…meanwhile, the 4 week average of our oil exports rose to 964,000 barrels per day, which was 145.2% higher than the same 4 weeks a year earlier, as the discount on American light sweet crude has made it attractive to foreign buyers…meanwhile, this week’s 56,000 barrel per day oil production increase included a 46,000 barrel per day increase in oil production in the lower 48 states and a 10,000 barrel per day increase in output from Alaska…the 9,088,000 barrels of crude per day that we produced during the week ending March 3rd was the highest since the week ending February 19th last year, just barely topping last March 4th’s total of 9,078,000 barrels per day, while it was still 5.4% below the June 5th 2015 record oil production of 9,610,000 barrels per day… 

US refineries were operating at 85.9% of their capacity in using those 15,492,000 barrels of crude per day, down from 86.0% of capacity the prior week, and down from the year high of 93.6% of capacity eight weeks earlier, when they were processing 17,107,000 barrels of crude per day….their processing of crude oil is also down by 2.6% from the 15,911,000 barrels of crude that were being refined during the week ending March 4th, 2016, when refineries were operating at 89.1% of capacity….but even with the refinery slowdown, gasoline production from our refineries rose by 388,000 barrels per day to 9,844,000 barrels per day during the week ending March 4th, which turns out to be 2.8% more than the 9,580,000 barrels per day of gasoline that were being produced during the week ending March 4th a year ago…moreover, refineries’ production of distillate fuels (diesel fuel and heat oil) was also higher, rising by 18,000 barrels per day to 4,773,000 barrels per day, which was also a bit more than the 4,744,000 barrels per day of distillates that were being produced during the week ending March 4th last year… 

however, even with the increase in our gasoline production, the EIA reported that our gasoline inventories fell by 6,555,000 barrels to 249,334,000 barrels as of March 3rd, for the largest drop in our gasoline supplies since April 2011….factors contributing to that big drop in our gasoline supplies were a 582,000 barrel per day increase to a near normal 9,268,000 barrels per day of domestic consumption of gasoline, and a 215,000 barrel per day drop in our gasoline imports to 242,000 barrels per day, which was the least gasoline we imported in any week since the first week of January 1999…for a historical comparison of this week’s drop in gasoline supplies, we have a small graph below taken from a stack of graphs at Zero Hedge…

March 8 2017 gasoline inventories as of March 3

the above graph comes from a set of graphs in an article at Zero Hedge about this week’s EIA report…it shows the weekly change in gasoline supplies over the last six and a half years, with increases in gasoline supplies indicated by a green bar above the zero line, and decreases in our gasoline supplies indicated by a red bar below the zero line, with the size of each bar indicating the magnitude of the change…Zero Hedge also includes a dark red dashed line from this week’s drop back to the last time there was a drop of this magnitude, which was for the week ending April 8th, 20011, when our gasoline supplies dropped by exactly 7 million barrels in just one week…

now, this week’s drop in gasoline supplies is hardly a crisis, because as you might recall just 3 weeks ago our gasoline supplies were at an all time high, beating the record set in the same week of 2016…notice the above graph also shows a series of green bars in early 2017, when our gasoline supplies were on the rise…thus, despite this week’s big drop, out gasoline supplies are still up by nearly 28.4 million barrels since the first week of November, only down slightly from the March record high of 250,463,000 barrels of gasoline that we had stored on March 4th of last year, and are still 3.9% above the 239,873,000 barrels of gasoline we had stored on March 6th of 2015… 

our supplies of distillate fuels also fell this week, decreasing by 2,676,000 barrels to 161,532,000 barrels by March 3rd, as the amount of distillates supplied to US markets, a proxy for our consumption, increased by 278,000 barrels per day to 4,091,000 barrels per day, and as our exports of distillates rose by 46,000 barrels per day to a 24 week high of 1,330,000 barrels per day….while our distillate inventories have now slipped 0.6% below the distillate inventories of 162,478,000 barrels that we had on March 4th at the end of the warm winter of last year, they are still 28.7% higher than the distillate inventories of 125,503,000 barrels of March 6th, 2015…  

finally, with our net oil imports higher and our refinery demand lower, we had an even larger surplus of crude oil remaining, and hence our inventories of crude oil rose for the 9th week in a row to yet another record, increasing by 8,209,000 barrels to 528,393,000 barrels by March 3rd…thus we ended the week with 10.3% more crude oil in storage than the 479,012,000 barrels we ended 2016 with, which we can see in the bar graph below..

March 8 2017 crude inventories to March 3 by year

the above graph comes from an emailed package of graphs from John Kemp, senior energy analyst and columnist with Reuters (see my footnote below) and it shows in bar graph fashion the amount of oil added to US crude inventories between December 31st and the first weekend in March for each of the past 11 years…while surplus crude is normally added to storage during the winter months, when refineries are runnng slower, it’s quite obvious that the surpluses have been much larger than average (shown by the red dash) over the past three years…what that has resulted in in terms of increasing supply is then shown in the next graph we’ll include below…

March 11 2017 crude oil inventory as of March 3rd

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 supply of crude oil in millions of barrels for each week beginning with January 2013, up to and including this week’s report for March 3rd, with graphs for each year color coded as indicated…here we can see how our oil inventories stayed in a narrow range during 2013 and 2014 (and during the years before then, for that matter), represented by the mustard and green bands, typically falling to below 330 million barrels by the end of each summer and then rising to nearly 370 million barrels by early spring….however, at the beginning of 2015, represented by the blue colored graph, our inventories of oil started rising each week till they topped 450 million barrels at the end of April 2015, and then stayed elevated in a range 80 to 100 million barrels above the previous norms over the rest of that year…that continued into 2016, represented by the grape colored graph, and although the rate of increase tailed off from the previous year, our 2016 oil supplies still generally averaged about 15% above 2015’s elevated levels, and more than 40% above historical levels…now we see in the scarlet colored graph, representing the first nine weeks of 2017, that our oil supplies are now again rising at an faster rate from the records set in 2016…as a result, we now have 7.7% more crude oil in storage than the then record 490,843,000 barrels we had stored on March 4th of 2016, 27.2% more crude than the 415,425,000 barrels of oil we had in storage on March 6th of 2015 and 56.2% more crude than the 338,333,000 barrels of oil we had in storage on March 7th of 2014…

This Week’s Rig Count

US drilling activity increased for the 18th time in 19 weeks during the week ending March 10th, as we saw the 6th double digit rig increase in the past 8 weeks….Baker Hughes reported that the total count of active rotary rigs running in the US increased by 12 rigs to 768 rigs in the week ending on this Friday, which was 288 more rigs than the 480 rigs that were deployed as of the March 11th report in 2016, but still far from the recent high of 1929 drilling rigs that were in use on November 21st of 2014…

the count of rigs drilling for oil rose by 8 rigs to 617 rigs this week, which was up from the 386 oil directed rigs that were in use a year ago, but down from the recent high of 1609 rigs that were drilling for oil on October 10, 2014…at the same time, the count of drilling rigs targeting natural gas formations rose by 5 rigs to 146 rigs this week, which was up from the 94 natural gas rigs that were drilling a year ago, but down from the recent natural gas rig high of 1,606 rigs that were deployed on August 29th, 2008…the rig that was classified as miscellaneous that has been running for several months was finally shut down this week, and thus there are now no such miscellaneous rigs at work…   

two more drilling platforms were added to those working in the Gulf of Mexico this week, both offshore from Louisiana, which brought the Gulf of Mexico count up to 20 rigs, still down from the 26 rigs that were drilling in the Gulf during the same week of 2016…that also brought the total US offshore count for the week up to 20 rigs, all in the Gulf of Mexico, down from a total of 27 offshore rigs a year ago, when there was also a rig working offshore from California, in addition to the 26 rigs in the Gulf of Mexico…also this week, a rig was also set up to drill through an inland lake in Louisiana, where there are now 5 such inland lakes rigs active, up from the 3 that were drilling on inland waters a year ago…

the number of horizontal drilling rigs working in the US increased by 6 rigs to 639 rigs this week, which is now up by 264 horizontal rigs from the 375 horizontal rigs that were in use in the US on March 11th of last year, but still down from the record of 1372 horizontal rigs that were deployed on November 21st of 2014…at the same time, a net total of 6 vertical rigs were added this week, bringing the vertical rig count up to 68, which was also up from the 55 vertical rigs that were deployed during the same week a year ago…meanwhile, the directional rig count was unchanged at 61 rigs, which was also up from the 50 directional rigs that were deployed during the same week last year….

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 March 10th, the second column shows the change in the number of working rigs between last week’s count (March 3rd) and this week’s (March 10th) count, the third column shows last week’s March 3rd active rig count, the 4th column shows the change between the number of rigs running this Friday and the equivalent Friday 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 week’s case was for the 11th of March, 2016…         

March 10 2017 rig count summary

the first thing we have to note is that this week’s increase came without an increase in drilling in Texas, who did not see an increase for the first time since September…the states with the largest increases this week included Louisiana, with the two new rigs in the Gulf, the one on an inland lake, and two in the Haynesville, and Colorado and Oklahoma, who each added three rigs…Oklahoma’s increase does not appear to be of horizontal drilling outfits, since none of the shale basins in that state show a gain. whereas the 4 rig increase in the Denver-Julesburg Niobrara could account for the Colorado or the Wyoming increases….note that the Utica in Ohio added two rigs this week and now has 22 rigs active, double the 11 rigs that were active a year ago….also note that of the states not listed above, Mississippi also added a rig and now has 4 rigs active, up from 2 rigs a year ago, while Nevada saw its only rig, which had been working in the state since July, shut down…

International Rig Counts for February

Baker Hughes also released the international rig counts for February on Tuesday of this past week, which unlike the weekly North American count, is an average of the number of rigs that were running in each country during the month, rather than the total of those rig drilling at month end….Baker Hughes reported that an average of 2,027 rigs were drilling for oil and natural gas around the globe in February, which was up from the 1,918 rigs that were drilling around the globe in January, and up from the 1,761 rigs that were working globally in February of last year….increased North American drilling again accounted for most of the global increase, as the average US rig count rose from 683 rigs in January to 744 rigs in February, which was also up from the average of 532 rigs that were working in the US in February a year ago, while the average Canadian rig count rose from 302  rigs in January to 342 rigs in February, which was also up from the 211 Canadian rigs that were deployed in February a year earlier….outside of Northern America, the International rig count rose by 8 rigs to 941 rigs in February, which was still down from 1,018 rigs a year ago, as increases in drilling in Europe and Latin America more than offset small decreases in Asia and Africa..

the count of rigs deployed in the Middle East was unchanged at 382 rigs in February, after their drilling activity had increased by 6 rigs in January, which still left them down from 404 rigs a year earlier…OPEC member Kuwait, whose compliance with the cartel’s agreed to cuts has been on par so far, activated 7 additional rigs in February, and thus had 59 rigs deployed, up from 43 rigs a year earlier…the Qataris, also an OPEC member, also added a rig in February and thus had 11 rigs working, up from the 6 that were drilling new wells a year ago…Bahrain, an island country in the Gulf who is not an OPEC member, also added a rig and now have 2 drilling, in contrast to a year ago, when they had no activity….on the other hand, the Saudis idled 4 of their rigs during the month, and now have 120 rigs active, which is down from the 128 rigs they had working a year ago..still,  Saudi Arabia’s rig count had averaged near 125 rigs weekly since early 2015, up from their average of around 105 rigs in 2014, so they’ve not yet pulled back to the level of drilling they were doing before OPEC started the price war…Egypt, who is not an OPEC member, shut down 2 of their rigs in February, leaving them 23 rigs still active, down from 35 rigs a year earlier…in addition, OPEC members Iraq and Abu Dhabi of the United Arab Emirates, and Israel each shut down 1 rig for the month…for Iraq, that left 40 rigs still active, down from 49 rigs a year earlier, for Abu Dhabi, that left 47 rigs down from 48 a year earlier, andthat  left Israel with no drilling activity, down from 1 active rig a year ago..

meanwhile, the Latin American region saw their active drilling rig numbers increase by a net of 3 rigs to 179 rigs, down from 237 rigs in February of last year, and down from 321 rigs as recently as September of 2015, as the region idled 92 rigs over the first 6 months of 2016…OPEC member Venezuela added 3 rigs and thus had 54 rigs active for the month, which was down from the 69 rigs they had deployed a year earlier…in Argentina, where they had shut down 11 rigs in December and another 7 rigs in January, added two back in February and thus had 54 rigs working, down from 65 a year earlier and down from over the over 100 active rigs Argentina saw through most of 2015…Columbia, also not a cartel member, also added two rigs in February, bringing their active total up to 22 rigs, up from 7 rigs a year earlier….in addition, OPEC member Ecuador added 1 rig rig and thus had 7 rigs active, up from 4 rigs a year earlier…Latin American countries reducing their rig count included Brazil, who was down 2 rigs to 14 rigs, and down from 35 rigs a year ago, and Bolivia, Peru, Guyana, minor producers who each shut down 1 rig…

drilling activity in the Asia-Pacific region slipped by a net of 2 rigs to 196 rigs in February, which was still up from the 182 rigs working ove the region a year earlier…the Chinese shut down 2 more offshore rigs, after they had shut down 5 offshore rigs in January and 3 offshore rigs in December, leaving them with 18 rigs working offshore, down from the 25 offshore rigs they were running last February…India shut down 1 rig but still had 115 rigs active, up from 99 rigs a year earlier….and Vietnam also shut down 1 rig, leaving 3 rigs active, the same as they had a year ago…meanwhile, Thailand added one rig and thus had 13 rigs active, which was still down from 16 rigs a year earlier, and Bangladesh also started drilling with a single rig, in the first drilling in Bangladesh since the end of 2014…

on the other hand, drilling activity picked up in Europe, rising by 9 rigs to 107 rigs rigs, which was was the same number of rigs working in Europe a year ago at this time, as their offshore drilling activity rose from 31 rigs to 38 rigs, also up from the 36 rigs offshore of Europe a year ago…Noway added 4 platforms offshore to bring their total to 16 rigs, all offshore, down from 18 rigs offshore a year ago…the UK also added 3 offshore, increasing their offshore count to 11 rigs, up from 7 rigs offshore last February….Sakhalin Island, off the east coast of Russia but inexplicably included in the European totals, added 2 rigs offshore and 3 on land, bringing their total deployment to 12 rigs, up from 6 rigs a year ago…Romania added 2 land based rigs and shut down 1 offshore, and thus have 7 onshore rigs active, same as a year ago…in addition, Poland added 2 land based rigs and thus had 10 active, up from 7 rigs a year ago, and Greece started up a rig offshore, their first activity since last July…meanwhile, Turkey shut down 3 rigs, leaving them with 29 rigs still working, same as a year ago, Italy shut down one offshore platform, leaving 4 rigs on land still active, the Dutch shut down an offshore rig, leaving them with 2 offshore, and France, Hungary and Iceland each cut back from 2 rigs to one, as none of them ran more than 2 rigs over the recent year…

lastly, the African continent excluding Egypt saw a net decrease of 2 rigs to 77 rigs in February, which was also down from the 88 rigs working in Africa last year at this time…OPEC member Angola shut down 2 rigs, and now has 3 rigs active, also down from the 8 rigs they had active a year earlier..OPEC member Algeria shut down 1 rig, leaving 50 rigs still working in Algeria, down from the 52 rigs they had a year ago…Tunisia shut down 1 of the two rigs they had active, which is still more than a year ago when they had no rigs active…on the other hand, OPEC member Nigeria, who is exempt from the organization’s production cuts for the time being, added 1 rig and now have 7 rigs working, which was still down from the 9 rigs they had deployed a year ago, and Senegal started up a single rig in their first drilling activity since May of last year…finally, note that Iranian, Russian, and Chinese rig counts are not included in this Baker Hughes international data, although we did note that China’s offshore area, with an average of 18 rigs active in February, were included in the Asian totals here…  

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as noted above, one of the graphs that i included above was from an emailed package of graphs from John Kemp, a senior energy analyst and columnist with Reuters…he advises that his mailing list is open to anyone, quoting him: “SIGN UP to receive a free daily digest of best in energy news + my research notes by emailing john.kemp@tr.com”    i’ve been receiving a daily mailing of links & graphics, copies of his columns as published, and a weekly pdf of graphs… so if anyone is interested in receiving the same, just write to John Kemp as noted above…alternatively you can also follow him on twitter, @ https://twitter.com/JKempEnergy where he seems to post much of what he otherwise mails….

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