US oil & gas drilling at a 2 year high, but April saw another big increase in uncompleted wells

oil prices moved up fairly steadily this week, finishing 5.2% higher, propelled mostly by the likelihood that OPEC and Russia will be extending their production cut agreement by up to 9 months…the initial rally began early in overseas markets on Monday, as US crude for June delivery rose $1.01 a barrel to $48.85 a barrel, after the energy ministers of Russia and Saudi Arabia issued a joint statement saying that the oil output cut needed to be extended until the end of March 2018…prices backed off their highs on Tuesday, however, after the American Petroleum Institute unexpectedly reported an increase in both crude oil and distillates supplies, with oil falling to $48.66 a barrel by the close, and then extending the drop to below $48 in after hours trading…the rally resumed on Wednesday after the EIA figures contradicted the API report and showed drawdowns of oil, gasoline and distillates inventories, with June crude adding 41 cents, or 0.8% for the day, to settle at a three week high of $49.07 a barrel …oil prices rose again on Thursday after other key producing countries suggested they would also adhere to the agreed to production cuts, with June oil closing at $49.35 a barrel….even with the OPEC supply cuts priced in, further OPEC comments ahead of their May 25th meeting drove oil past $50 on Friday, and despite the Baker Hughes report that U.S. drillers added oil rigs for an 18th week in a row, US crude oil rose another 98 cents to $50.33 a barrel, for the highest close since April 19th

The Latest US Oil Data from the EIA

this week’s US oil data from the US Energy Information Administration, covering details for the week ending May 12th, indicated that our refining of crude oil returned to near record levels, while our imports of oil increased to the highest rate in three months, but because of an accompanying increase in our oil exports, oil needed to be withdrawn from US storage for the 6th week in a row….our imports of crude oil rose by an average of 970,000 barrels per day to an average of 8,590,000 barrels per day during the week, while at the same time our exports of crude oil rose by 393,000 barrels per day to an average of 1,086,000 barrels per day, which meant that our effective imports netted out to 7,504,000 barrels per day during the week, 577,000 barrels per day more than during the prior week…at the same time, our field production of crude oil fell by 9,000 barrels per day to an average of 9,305,000 barrels per day, which means that our daily supply of oil, from net imports and from wells, totaled an average of 16,809,000 barrels per day during the cited week…

during the same period, refineries reportedly used 17,122,000 barrels of crude per day, 363,000 barrels per day more than they used during the prior week, while 354,000 barrels of oil per day were being pulled out of oil storage facilities in the US….thus, this week’s EIA oil figures seem to indicate that our total supply of oil from net imports, production and from storage was 41,000 more barrels per day than what refineries reported they used…to account for that discrepancy, the EIA inserted a (-41,000) barrel per day figure onto line 13 of the weekly U.S. Petroleum Balance Sheet to make the data for the supply of oil and the consumption of it balance out, which they label in their footnotes as “unaccounted for crude oil”

details from the weekly Petroleum Status Report show that the 4 week average of our oil imports rose to an average of 8,347,000 barrels per day, now 9.3% above the imports of the same four-week period last year…the 354,000 barrel per day decrease in our total crude inventories came about on a 250,000 barrel per day withdrawal from our commercial stocks of crude oil and a 104,000 barrel per day sale of oil from our Strategic Petroleum Reserve, part of an ongoing sale of 5 million barrels annually that was planned 19 months ago…this week’s 9,000 barrel per day crude oil production decrease resulted from a 21,000 barrel per day decrease in oil output from Alaska, which was only partially offset by a 12,000 barrels per day increase in oil output from wells in the lower 48 states…the 9,305,000 barrels of crude per day that we produced during the week ending May 12th was still up by 6.1% from the 8,770,000 barrels per day we were producing at the end of 2016, and up by 5.8% from the 8,791,000 barrel per day output during the during week ending May 13th a year ago, while it was still 3.2% below the June 5th 2015 record oil production of 9,610,000 barrels per day…

US oil refineries were operating at 93.4% of their capacity in using those 17,122,000 barrels of crude per day, which was up from 91.5% of capacity the prior week, but down from the year’s high of 94.1% three weeks earlier…the 17,122,000 barrels of crude per day that refineries used during the week ending May 12th was the third most in US history, 4.6% more than the 16,179,000 barrels of crude per day.that were being processed during week ending May 6th, 2016, when refineries were operating at 90.5% of capacity, and about 13% above the 10 year average for the 2nd week in May of 15.2  million barrels of crude per day….

even with the week’s increased refining, gasoline production from our refineries slipped by 32,000 barrels per day to 10,020,000 barrels per day during the week ending May 12th, still the third highest gasoline production this year…gasoline production for the week was also still fractionally higher than the 9,997,000 barrels of gasoline that were being produced daily during the comparable week a year ago….on the other hand, refineries’ production of distillate fuels (diesel fuel and heat oil) increased by 86,000 barrels per day to 5,042,000 barrels per day, which was 5.7% more than the 4,770,000 barrels per day of distillates that were being produced during the week ending May 13th last year…..

even with the ongoing elevated level of gasoline production, our gasoline inventories decreased by 413,000 barrels to 241,232,000 barrels as of May 13th, even as they are up by more than 4 million barrels from 5 weeks ago….gasoline supplies were reduced this week because our domestic consumption of gasoline rose by 44,000 barrels per day to 9,452,000 barrels per day while our imports of gasoline fell by 257,000 barrels per day to 696,000 barrels per day, even as our gasoline exports fell by 208,000 barrels per day to 508,000 barrels per day….since some market commentary seems to be reading the decrease in gasoline inventories as a bullish signal, we’ll include a graph here to put this week’s decrease in perspective..

May 17 2017 gasoline inventories for May 12

the above graph comes from a weekly emailed package of oil graphs from John Kemp, senior energy analyst and columnist with Reuters…this graph shows US gasoline inventories in thousands of barrels by “day of the year” for the past ten years, with the past ten year range of our gasoline supplies on any given day of the year shown in the light blue shaded area, and the median of our refinery throughput, or the middle of the 10 year daily range, traced by the blue dashes over each day of the year…the graph also shows the number of barrels of gasoline we had stored for each week in 2016 traced weekly by a yellow line, with our 2017 year to date gasoline supplies represented in red…from this we can there is an obvious seasonality to gasoline supplies, as they’re built up during the winter when few are driving, then start to decline when refineries slow down for spring maintenance and blend readjustment…thus early May is at a time of year when gasoline supplies are typically falling, and in fact, typically falling at a greater pace than they are this year…as a result, this week’s gasoline supplies, by virtue of their smaller drop, popped up to a record level for the 132nd day of the year, which we can see by noting that the red graph has risen above last year’s record for the same date…so even with the decrease in our gasoline supplies, they are now 1.1% higher than the record 238,068,000 barrels that we had stored on May 13th a year ago, 7.5% higher than the 223,936,000 barrels of gasoline we had stored on May 15th of 2015, and 12.8% more than the 213,378,000 barrels of gasoline we had stored on May 16th of 2014…

even with the increase in distillates production, our supplies of distillate fuels fell by 1,944,000 barrels to 146,824,000 barrels during the week ending May 12th; contributing to the drop in distillates supplies was a 107,000 barrel per day increase to 1,266,000 barrels per day in our exports of distillates, and a 86,000 barrel per day increase to 4,215,000 barrels per day in the amount of distillates supplied to US markets, while our imports of distillates rose by 46,000 barrels per day to 161,000 barrels per day… even though our distillate supplies are still 3.5% below the 152,162,000 barrels that we had stored on May 13th, 2016, during the glut of heat oil that persisted after last year’s warm El Nino winter, they remain 15.0% higher than the distillate inventories of 127,724,000 barrels that we had stored on May 15th of 2015, following a more normal winter… 

finally, the elevated level of oil refining, even when combined with increases in both oil imports and oil exports, meant that our commercial inventories of crude oil decreased by 1,753,000 barrels to 520,772,000 barrels as of May 12th, the sixth weekly decrease in a row….but even though our crude supplies are down by nearly 15 million barrels over that 6 week span, we still finished the week with 8.7% more crude oil in storage than the 479,012,000 barrels we had stored on December 30th, and 2.2% more crude oil in storage than the 509,797,000 barrels of oil in storage on May 13th of 2016…compared to equivalent dates in prior years, we ended the week with 15.9% more crude than the 449,214,000 barrels in of oil in storage on May 15th of 2015, and 44.8% more crude than the 359,725,000 barrels of oil we had in storage on May 16th of 2014…

This Week’s Rig Counts

US drilling activity increased for the 28th time in the past 29 weeks during the week ending May 19th, as total active rigs hit a 2 year high….Baker Hughes reported that the total count of active rotary rigs running in the US increased by 16 rigs to 901 rigs in the week ending Friday, which was 497 more rigs than the 404 rigs that were deployed as of the May 20th report in 2016, and the most drilling rigs we’ve had running since May 1st, 2015, while it was still far from the recent high of 1929 drilling rigs that were in use on November 21st of 2014….

the number of rigs drilling for oil increased by 8 rigs to 720 rigs this week, which was more than double the 318 oil directed rigs that were in use a year ago, and the most oil rigs that were in use since April 17th 2015, while it was still down by more than half 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 also rose by 8 rigs to 180 rigs this week, which was more than double the 85 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…

three more of the idled offshore drilling platforms in the Gulf of Mexico offshore from Louisiana were started back up this week, which bought the the Gulf of Mexico active count back up to 23 rigs, the same number that were working in the Gulf of Mexico a year earlier….however, the rig that had been drilling offshore from Alaska was shut down this week, so our total offshore count is also at 23 rigs, down from a total of 24 offshore rigs a year ago…

the number of rigs that were set up to drill horizontally increased by 17 to 759 horizontal rigs this week, which was the most horizontal rigs in use since April 10th of 2015, and up from the the 314 horizontal rigs that were in use in the US on May 20th of last year, but still down from the record of 1372 horizontal rigs that were deployed on November 21st of 2014….however, a net of one vertical rig was pulled out this week, reducing the vertical rig count down to 76 rigs, which was still up from the 48 vertical rigs that were deployed during the same week a year ago…meanwhile, the directional rig count was unchanged at 66 rigs this week, which was still up from the 42 directional rigs that were deployed during the same week last year…

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 May 19th, the second column shows the change in the number of working rigs between last week’s count (May 12th) and this week’s (May 19th) count, the third column shows last week’s May 12th active rig count, the 4th column shows the change between the number of rigs running on 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 the 20th of May, 2016…        

May 19 2017 rig count summary

as you can see, the increases in drilling were fairly widespread, although Texas, where all or part of 5 of the basins listed are located, did see an increase of 8 rigs, half the total for the week…the only basin to see a slowdown was the Denver-Julesberg Niobrara chalk of the Rockies front range, where two rigs were shut down, accounting for the decrease in Colorado by the same number…part of the 8 rig increase in natural gas directed rigs is fairly obvious, with a 2 rig increase in the Marcellus in Pennsylvania, and a rig increase in both the Utica of Ohio and the Haynesville of Louisiana…discerning the disposition of the other gas wells is more difficult, however, because we first find that the Arkoma Woodford, usually seen as a gas basin, actually saw a net decrease of 2 gas wells, as two oil rigs were started in the basin as two gas rigs were shut down…the “other basins” column does show an increase of 5 natural gas rigs, but that still leaves us one gas rig short…turns out that is also in the Haynesville, where one oil rig was shut down as two gas rigs were added…of the states not shown among the largest producers above, Alabama saw one rig added this week; they now have 4 rigs working the state, up from none a year ago…on the other hand, the only rig drilling in Michigan was shut down this week; it had just started work just two weeks ago, in the first drilling in Michigan in nearly 4 years..

DUC well report for April

Monday of this past week saw the release of the EIA’s Drilling Productivity Report for May, which includes the EIA’s April data for drilled but uncompleted oil and gas wells in the 7 most productive US shale basins…once again, this report showed a large increase in uncompleted wells nationally, largely as a result of dozens of newly drilled but uncompleted wells (DUCs) in the two Texas oil basins, the Permian basin of west Texas and the Eagle Ford in the south…. for all 7 basins covered, the total count of DUC wells rose from 5,534 in March to 5,721 wells in April, the sixth consecutive monthly increase in uncompleted wells….what appears to be happening is that as horizontal drilling has rapidly expanded over the past 9 months, more than doubling over that period, a shortage of competent fracking crews has developed, such that in the most active areas, independent U.S. drillers underspent their budgets by as much as $2.5 billion collectively, largely because they couldn’t find enough fracking crews to handle all the planned work…active crews are even being hired away from jobs they’re already working on to take offers of higher paying frack jobs elsewhere…since the oil field layoffs started in early 2015, most frackers had gone nearly two years with just skeleton fracking crews still working in most basins around of the country, and many of those who had had been working in the oil fields before the bust have since found work elsewhere…fracking has also gotten much more complex over that period, with 50 stage fracks explosively driving several hundred pounds of proppant per foot of lateral not uncommon, so putting together a fracking crew even vaguely familiar with the latest techniques has become that much harder…

a total of 941 wells were drilled in the 7 basins covered by this report in April, but only 754 wells were completed, thus accounting for the 187 DUC well increase for the month….like in most recent months, most of the April DUC increases were oil wells; the Permian basin, which includes the Wolfcamp and several other shale plays in that broad basin, saw its total count of uncompleted wells rise by 126, from 1,869 in March to 1995 in April, as 446 new Permian wells were drilled but only 320 wells in the region were fracked…at the same time, DUC wells in the Eagle Ford of south Texas rose by 32, from 1283 in March to 1,315 in April, as 167 wells were drilled in the Eagle Ford in April but only 136 were completed….in addition, DUC wells in the Haynesville of Louisiana increased by 17 wells to 191, as 46 wells were drilled but just 29 were fracked, and DUCs in the Bakken of North Dakota increased by 12 to 821, as 84 wells were drilled but just 72 wells were fracked….in addition, the Niobrara chalk of the Rockies front range saw a 4 DUC well increase to 644, and the Marcellus DUC count rose by 2 to 664 uncompleted wells…on the other hand, Ohio’s Utica shale showed a decrease of 6 uncompleted wells and thus had only 87 DUCs remaining at the end of April, as 18 wells were drilled in the Utica during the month while 24 were completed…for the month, DUCS in the 4 oil basins tracked by in this report (ie the Bakken, Niobrara, Permian, and Eagle Ford) increased by 174 to 4,792 wells, while the DUC count in the natural gas regions (the Marcellus, Utica, and the Haynesville) increased by 13 to 929 wells, although as the report notes, once into production, more than half the wells drilled nationally will produce both oil and gas…

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