US rig count at a 17 month high, oil supplies at another record, et al

US oil prices ended the week 81 cents lower than last week’s final quote, but price quotes for Friday of this week really shouldn’t be compared to those of last week, because each references a different contract month…i’ll explain that oil pricing quirk again, because the change-over of the quoted contract month sometimes even throws me when i’m not watching for it, as it did this week…

at any give time, contracts to buy or sell oil for the coming month and for dozens of months in the future are being traded on the New York Mercantile Exchange (NYMEX), the Chicago Mercantile Exchange (CME), and several other exchanges; for instance, here’s a list of contracts for US light oil currently being traded on the CME; you’ll see they quote different prices for the same kind of oil, by month, all the way out to December 2025…however, the media and most industry publications will only quote the price of oil for the “front month” contract, or the open contract for the month closest to the current date that’s still being traded…when trading in a given front month contract stops trading, several business days before the 1st of that month, the following month’s contract becomes the front month contract, and its price is then quoted in the media as the price of oil, usually without much of an indication that the ‘price of oil’ being quoted is for delivery in a different month than the price that was quoted by the same source 24 hours earlier…at the same time, those sites that display oil price charts will switch the chart of oil prices for the month that expired with a chart of prices for the new front month, and the price history of the new current month shown by those new charts is usually slightly skewed from the prices that had been shown on that same graph over the prior month…

and that change is what happened to oil prices this week….after closing last week at $48.78 a barrel, US WTI oil contracts for April delivery again headed lower on Monday after the prior week’s strong drilling & production data, closing down 56 cents at $48.22 a barrel…at the same time, the WTI oil contract for May delivery, also being actively traded, fell 40 cents from the prior week’s close of $49.31 a barrel to close Monday at $48.91….however, that trading and those prices for May were not reported anywhere, except for on trading related websites…oil prices for April fell another 88 cents on Tuesday, closing at $47.34 a barrel, the lowest price since the November OPEC deal, as traders anticipated the release of data showing a large increase in US oil inventories…since that was the last day of trading for April oil, a few sites covering the price of oil for that day also reported that the more actively traded May contract was also down 67 cents, or 1.4%, to $48.24 a barrel….then on Wednesday, with the April oil contract no longer being traded, many of the same media sites that had reported oil prices down 88 cents to $47.34 a barrel on Tuesday, reported oil down 20 cents to $48.04 on Wednesday, barely making note of the change in the contract month…with the May contract now being quoted as the price of oil, oil then fell 34 more cents on Thursday, closing at $47.70 a barrel, even as many media reports called it the 3rd oil price decrease in a row, even though prices for each separate contract had deceased every day this week…oil pries then rose a bit on Friday, closing the week at $47.97 a barrel, as oil traders positioned themselves for any possible bullish outcome of the coming OPEC meeting in Kuwait on Sunday to review the current level of compliance to the agreed to cuts…with the mid-week contract expiration, some sites properly explained that May oil prices were down $1.34 or 2.7% for the week, while others reported the 81 cent difference between last Friday’s April oil and this Friday’s May oil..

in most articles on oil prices, the contract month that is being quoted is further complicated by the wide difference in expiration dates between the US benchmark oil price, West Texas Intermediate, usually just written as WTI, and the widely quoted international price for North Sea Brent oil…contracts for WTI expire on the 4th US business day prior to the 25th calendar day of the month preceding the contract month, whereas contracts for Brent oil expire on the last business day of the second month preceding the relevant contract month; in other words, the April Brent contract expired on February 28th, and the price for the May contract has been the quoted price of Brent oil throughout March…so for most of each month, articles citing the price of the two benchmark oils are not only quoting different oil types, but also different settlement months…May Brent oil closed this week at $50.80 a barrel, down from $51.76 a barrel the prior Friday…

this week’s natural gas prices, however, were still referencing the price for natural gas to be delivered in April, and will be until March 29th, as trading in natural gas contracts don’t expire until 3 business days before the contract month…those prices were generally up this week, rising 4 out of 5 days, and ending at $3.076 per mmBTU, after closing the prior week at $2.948 per mmBTU…still, as we’ve noted before, prices at these levels are still low enough to discourage the exploitation industry from starting new drilling projects; leaving them just maintaining what they already have going, and only starting up new rigs when prices approach $4…a chart that came in one of the mailings from John Kemp at Reuters goes a long way towards explaining what has kept natural gas prices at these depressed levels over most of the last two years…

March 23 2017 heating demand as of March 17

the above graph comes from one of the emailed package of graphs from John Kemp, senior energy analyst and columnist with Reuters (see my footnote below) and it shows the cumulative population-weighted heating degree days for the 2016-17 heating season in red, the same metric for the 2015-16 heating season in yellow, and historical average for the same metric as a white dashed graph…heating degree days are the sum of the average number of degrees below a certain temperature at which it has been determined that buildings need to be heated..,for example, if 65 °F is determined to be the temperature wherein one needs heating, a day with an average temperature of 45 °F would add 20 degree days to the total, while a day with an average temperature of 30 °F would add 35 degree days to the cumulative total…heating degree days are calculated for many areas of the US, and are used by utilities to estimate demand for their output, and are used locally to schedule deliveries of heat oil…this graph shows the result when one takes that heating degree days metric each for area of the US and weighs it based on the population of those areas…ie, if for instance, New York City with a population of 8 million has 25 heating degree days of demand on a given date, it will count for 1000 times more in the total than a county of 8,000 in Wyoming where the measure of their heating demand was 55 degree days on that date…therefore, what this graph shows us is the relative demand for heating for the whole country, from the period beginning in July of each year, a time when there’s no demand for heating… so what we see here is that the US heating needs this season remain very close to those of the record warm 2016 heating season, when cumulative heating degree days were 17% below the average…that translates into 17% lower demand for natural gas heat, and 17% lower demand for heat oil…that reduced demand is the reason that natural gas prices have stayed below $3.00 per mmBTU for most of the last two years, and why drilling for natural gas dropped to an all time low last year, and has barely recovered, which you’ll see in the next graph…

March 25 2017 rig count history to march 17

above, we have a graph of the rig count history from 1991 until last week (ie, this week’s rig count is not yet included)…this graph comes from a weekly pdf booklet of petroleum graphs produced by Yardeni Research, a provider of investment and economics research, run by Dr Ed Yardeni, and it shows the oil rig count over that 26 year history in violet, the natural gas rig count over that span in green, and then shows the total rig count, which would also occasionally include a miscellaneous rig or two, in red…you can see that natural gas drilling hit its most recent peak in 2010-2011, when natural gas prices were consistently over $4 per mmBTU, while the drilling peak prior to that, in 2008, saw natural gas prices spike to near $14 per mmBTU….since 2011, however, there was only one period in 2014 that saw natural gas prices top $4 per mmBTU, and if you look close, you can see that natural gas drilling briefly picked up at that time…otherwise, natural gas drilling has been in a long term decline since that 2011 peak of 992 rigs, sliding all the way down to 81 rigs in both the first and last week of August 2016…while they’ve increased since then, note that they’re still far below the 240 to 525 rig range that natural gas drillers were deploying even as far back as the early 90s..

The Latest Oil Stats from the EIA

the oil data for the week ending March 17th from the US Energy Information Administration showed a big jump in our imports of crude oil, resulting in another large surplus of crude for the 10th week out of the past 11, pushing our supplies of oil to yet another an all time high, even as our refineries ramped up production to a more seasonal pace…our imports of crude oil increased by an average of 902,000 barrels per day to an average of 8,307,000 barrels per day during the week, while at the same time our exports of crude oil fell by 167,000 barrels per day to an average of 550,000 barrels per day, which meant that our effective imports netted out to 7,757,000 barrels per day during the week, 1,069,000 barrels per day more than the prior week…at the same time, our crude oil production rose by 20,000 barrels per day to an average of 9,129,000 barrels per day, which means that our daily supply of oil, from net imports and from wells, totaled an average of 16,886,000 barrels per day during the cited week…

during the same week, refineries reportedly used 15,801,000 barrels of crude per day, 329,000 barrels per day more than they used during the prior week, while at the same time, 618,000 barrels of oil per day were being added to oil storage facilities in the US….thus, this week’s EIA oil figures would seem to indicate that we used or stored 469,000 less barrels of oil per day than were supplied 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 -469,000 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 rose to an average of 7,863,000 barrels per day, still 3.0% below that of the same four-week period last year…at the same time, the 4 week average of our oil exports fell to 721,000 barrels per day, still 86.4% higher than the same 4 weeks a year earlier, as our overseas exports of our surplus light oil were barely underway in early 2016…the 608,000 barrel per day increase in our crude inventories included a 708,000 barrel per day increase in our commercially available crude supplies, which was partially offset by an 89,000 barrel per day sale of oil from our Strategic Petroleum Reserve, part of an ongoing sale of 5 million barrels annually that was planned 18 months ago…meanwhile, this week’s 20,000 barrel per day oil production increase was all from the lower 48 states, as oil output from Alaska was unchanged from last week…the 9,109,000 barrels of crude per day that we produced during the week ending March 17th was the most we’ve produced since the week ending February 12th last year, and was more than 1.0% more than the 9,038,000 barrels per day produced during the week ending March 18th, 2016, while it was still 5.0% below the June 5th 2015 record oil production of 9,610,000 barrels per day…

US refineries were operating at 87.4% of their capacity in using those 15,801,000 barrels of crude per day, up from 85.1% of capacity the prior week, but still down from the year high of 93.6% of capacity in the first week of January, when they were processing 17,107,000 barrels of crude per day….their processing of crude oil is now on a par with the 15,820,000 barrels of crude that were being refined during the week ending March 18th, 2016, when refineries were operating at 88.4% of capacity….with the week’s refinery pickup, gasoline production from our refineries rose by 231,000 barrels per day to 15,820,000 barrels per day during the week ending March 17th, which was 0.9% more than the 9,683,000 barrels per day of gasoline that were being produced during the week ending March 18th a year ago…in addition, refineries’ production of distillate fuels (diesel fuel and heat oil) was also up, rising by 139,000 barrels per day to 4,829,000 barrels per day, which was also up by 1.8% from the 4,742,000 barrels per day of distillates that were being produced during the week ending March 18th last year…

even with the increase in our gasoline production, the EIA reported that our gasoline inventories shrunk by 2,811,000 barrels to 243,468,000 barrels as of March 17th, after they had dropped by more than 9.5 million barrels over the prior 2 weeks….that was despite the fact that our domestic consumption of gasoline fell by 54,000 barrels per day to 9,200,000 barrels per day and remains 3.0% off the year ago pace, and was because our imports of gasoline fell by 247,000 barrels per day to 325,000 barrels per day as our gasoline exports rose by 57,000 barrels per day to 592,000 barrels per day…while our gasoline supplies are now down by nearly 15.6 million barrels from the record high set 5 weeks ago, they’re only down 0.7% from last year’s March 18th high of 245,074,000 barrels, and are still 4.3% above the 233,386,000 barrels of gasoline we had stored on March 20th of 2015… 

our supplies of distillate fuels also fell this week, decreasing by 1,190,000 barrels to 155,393,000 barrels by March 17th, even as the amount of distillates supplied to US markets, a proxy for our consumption, decreased by 397,000 barrels per day to 4,012,000 barrels per day, and as our imports of distillates rose by 48,000 barrels per day to 127,000 barrels per day, because our exports of distillates rose by 253,000 barrels per day to 1,217,000 barrels per day at the same time….while our distillate inventories are now 4.2% below the bloated distillate inventories of 162,260,000 barrels that we had stored on March 18th 2016, at the end of the warm El Nino winter of last year, they are still 23.5% higher than the distillate inventories of 125,849,000 barrels that we had stored on March 20th of 2015…  

finally, with the big jump in our net oil imports considerably more than the increase in refinery demand, our commercial inventories of crude oil increased for the 10th time in 11 weeks, increasing by 4,954,000 barrels to a record high 533,110,000 barrels by March 17th…at the same time, 628,000 barrels of oil from our Strategic Petroleum Reserve was sold, which left inventories in the SPR at 693,383,000 barrels, a quantity not considered available for commercial use….thus for current commercial purposes, we finished the week ending March with 11.3% more crude oil in storage than the 479,012,000 barrels we had stored at the end of 2016, 6.3% more crude oil in storage than what was then a record 501,517,000 barrels of oil in storage on March 18th of 2016, 23.1% more crude than what was also then a record 433,217,000 barrels in storage on March 20th of 2015 and 52.0% more crude than the 350,802,000 barrels of oil we had in storage on March 21st of 2014…

This Week’s Rig Count

US drilling activity increased for the 20th time in 21 weeks during the week ending March 24th, and we also had the 8th double digit rig increase in the past 10 weeks….Baker Hughes reported that the total count of active rotary rigs running in the US increased by 20 rigs to 809 rigs in the week ending on this Friday, which was 345 more rigs than the 476 rigs that were deployed as of the March 25th report in 2016 and the most since Oct 2nd, 2015, but still far from the recent high of 1929 drilling rigs that were in use on November 21st of 2014 (see graph above)…

the count of rigs drilling for oil increased by 21 rigs to 652 rigs this week, which was up from the 372 oil directed rigs that were in use a year ago, and more that double the 316 rigs working on May 27th 2016, but still 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 fell by 2 rigs to 155 rigs this week, which was still up from the 92 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…in addition, another rig that was classified as miscellaneous was added this week, and we now have two of those, in contrast to a year ago, when there were no such miscellaneous rigs at work…  

a drilling platform that had been working offshore from Louisiana in the Gulf of Mexico was shut down this week, which reduced the current Gulf of Mexico count to 18 rigs, down from the 27 rigs that were drilling in the Gulf during the same week of 2016…that was also down from a total of 28 rigs working offshore of the US a year ago, when there was also a rig working offshore from California, in addition to the 27 rigs that were drilling in the Gulf of Mexico at the time…in addition, one of the rigs that had been set up to drill through an inland lake in Louisiana was also shut down, leaving the inland waters rig count at 4, the same as it was a year ago..

active horizontal drilling rigs increased by 15 rigs to 673 rigs this week, which is well more than double the May 27th 2016 total of 314 working horizontal rigs…that’s also up by 314 horizontal rigs from the 359 horizontal rigs that were in use in the US on March 25th 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 total of 8 vertical rigs were added this week, bringing the vertical rig count up to 78 rigs, which was also up from the 53 vertical rigs that were deployed during the same week a year ago…meanwhile, the directional rig count was down by 3 rigs to 58 rigs, which was still up from the 52 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 pdf 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 24th, the second column shows the change in the number of working rigs between last week’s count (March 17th) and this week’s (March 24th) count, the third column shows last week’s March 17th 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 25th of March, 2016…          

March 24 2017 rig count summary

as you can see, the Permian basin of western Texas & southeastern New Mexico saw the largest drilling increase again, after a few weeks where not much changed in that basin…increases in the Eagle Ford of south Texas and the Barnett shale near Dallas also added to the Texas total, while the reasons for the 7 rig increase in Oklahoma aren’t so clear, since the two rig increase in the Cana Wordford are the only shale basin targeting rigs added in the state…i’d assume that the other new Oklahoma rigs were of the vertical drilling sort…also note the addition of two rigs in the Marcellus, one in Pennsylvania, and one in West Virginia, which came despite the 2 rig reduction in the natural gas rig count…gas rigs that were removed were not from a major basin, but were rather from a markdown of rigs from “other” areas, the names of which are not included in Baker Hughes summary data..

as noted, a graph that i included above was from an emailed package of graphs from John Kemp, a senior energy analyst and columnist with Reuters, who advises that his mailing list is open to anyone…you can ask for his daily digest by emailing john.kemp@tr.com or you can follow him on twitter, @ https://twitter.com/JKempEnergy where he seems to post much of what he otherwise emails…

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