OPEC extends production cuts 9 months, oil prices tumble; US refining returns to near record levels…

well, the OPEC meeting that everyone had been waiting for came and went this week, and as it turned out, it was just a big non event….OPEC agreed to maintain their production cuts at the same level they’ve been at since the first of the year for another 9 months, Libya and Nigeria will continue to be allowed to produce whatever they can, Russia and a few other non-OPEC oil producers who were in the original pact will maintain their levels of production cuts but no new producing nations will join them, and the next OPEC meeting to check on their progress will be held November 30th…oil traders were clearly expecting something more, since oil prices dropped nearly 5% in the first few hours after the Thursday announcement, although prices did recover some on Friday…rather than explain how oil prices moved up to and after the meeting, we’ll just include a graph of their hourly changes over the last three days of this week, so you can all see for yourselves..

May 27 2017 hourly oil prices

the above graph is a screenshot of the interactive oil price graph at Trading Economics, an online platform that provides economic forecasts, historical data, and trading recommendations…each bar on the above graph represents oil prices for one hour of oil trading between late May 23rd and May 26th, wherein green bars represent the hours when the price of oil went up, and red bars represent the hours when the price of oil went down…for green bars, the hour’s starting oil price is at the bottom of the bar and the price at the end of the hour is at the top of the bar, while in red or down hours, the starting price is at the top of the bar and the price at the end of the hour is at the bottom of the bar…this type of graph is called a candlestick because the range of oil prices outside of the opening and closing price for any given period is indicated by a thin ‘wick’ above or below the “candlestick” part of the graph…so above we can see that oil prices were driven almost as high as $52 a barrel on Wednesday and again early on Thursday morning before the OPEC deal was announced, but then started falling when it became apparent that nothing new would come out the meeting…once the meeting ended with the official press release, oil prices dropped more than 4%, as oil traders who had been betting on a better deal liquidated their positions, and oil closed Thursday at $48.90 a barrel…once that post-deal selling frenzy was over, buyers moved back in on Friday, pushing oil higher to close the week at $49.80 a barrel

note that oil prices being quoted this week are for July delivery….trading of the June contract, which we were quoting last week, expired on Monday at $50.73 a barrel, up 40 cents from last Friday’s close of $50.33…the July contract closed last week at $50.67 a barrel, so this week’s closing price represents a modest drop of 1.7% for the week, even though oil prices saw a drop of nearly 8% from their Thursday morning high to their Friday morning low…although July oil is down from its Thursday high of $52.00, it’s still up from a low of $44.13 a barrel hit just three weeks earlier…

let’s again look at why oil traders don’t have much confidence in the efficacy of this latest OPEC deal to have much of an impact on global oil supplies….we’ll start with a graph of OPEC oil production over the past dozen years..

May 27 2017 OPEC crude production thru April

the graph above was taken from the ‘OPEC April Production Data” post at the Peak Oil Barrel blog and it shows total oil production, in thousands of barrels per day, for the 13 members of OPEC, for the period from January 2005 to April 2017, with the data sourced from the May OPEC Oil Market Report which we covered two weeks ago…while we can see that OPEC production during March and April, the two furthest right data points on the graph, was down quite a bit from their record production in November 2016, it’s still not much changed from what they were producing between June 2015 and May of 2016, and moreover, is actually still much higher than what they produced during the three years before that, which is the period that produced the glut of oil the world is still trying to deal with…

next we’ll look at the table of global oil demand forecasts from that May OPEC Oil Market Report of two weeks ago, and project what might happen to oil supplies if OPEC oil production remains unchanged from current levels, as they have now pledged they will do…

April 2017 global oil demand estimate via OPEC copy

to review the above, this table comes from page 37 of the May OPEC Monthly Oil Market Report of two weeks ago, and it shows oil demand in millions of barrels per day for 2016 in the first column, and OPEC’s forecast for oil demand by region and globally over each quarter of 2017 over the rest of the table…on the “Total world” line, starting with the third column, we’ve circled in blue the figures we’re interested in, which is their estimate for global oil demand for the 2nd, 3rd and 4th quarters of 2017… 

OPEC’s estimate for the 2nd quarter of this year is that all oil consuming areas of the globe will be using 95.33 million barrels of oil per day, roughly 1.3% more than they used during the same period of 2016….during April, OPEC produced 31.73 million barrels of oil per day, 33.1% of April’s global oil production of 95.81 million barrels per day… based on their demand projection, that means that even though OPEC’s production for the month was their lowest in a year, there continued to be a surplus of around 480,000 barrels per day in global oil production in April, largely because global oil output was still 0.83 million barrels per day higher than it was in April of 2016…holding these global figures constant, we can figure that a similar surplus of oil will be produced during May and June…

for the third quarter, OPEC estimates that all oil consuming areas of the globe will be using 97.27 million barrels of oil per day, as it will be summer in much of the northern hemisphere, and many oil consuming nations, including members of OPEC burn oil or oil products to produce electricity for air conditioning….so the question for OPEC in the third quarter is will they hold their production steady at or near April’s level and thus forego a sizable percentage of their exports, and hence their revenue, as they consume oil domestically for cooling…for instance, heading into last summer, the Saudis increased their oil production by 400 thousand barrels per day; the year before that, their summertime production increase was even greater…if OPEC members can hold their production near 31.73 million barrels of oil per day, and other non-OPEC producers don’t increase theirs, then it’s possible they can reduce the global oil glut at a rate of nearly 1.46 million barrels per day during the third quarter…but if they step up their production to cover their air conditioning needs, or other non-OPEC countries increase theirs, that reduction will be diminished, and the rebalancing they intend will be defeated…

next, in the 4th quarter, OPEC estimates that all oil consuming areas of the globe will be using 97.47 million barrels of oil per day….that oil demand would rise further in the 4th quarter seemed illogical to me, but looking at the details for 2016 in the oil demand chapter of their report, they show that 4th quarter increases of oil consumption in Africa, India, China and the Pacific more than offset the fall decreases in North American, European and the Middle Eastern oil use…so if that holds in the 4th quarter of 2017, and they maintain their production cuts through then, they can reduce the global glut at a rate of 1.66 million barrels of oil per day…that, of course, assumes the rest of the world’s oil production remains stagnant as well..

OPEC also intends to extend their production cuts through the 1st quarter of next year, which is not shown in the projection above…but note in purple that we’ve circled the global demand growth percentage change in the far right column…if growth continues at that 1.33% pace, then we can expect oil demand for the 1st quarter of 2018 to rise to roughly 96.71 million barrels of oil per day…thus, if OPEC can hold the line until then, and no other producers fill the gap, they can also be reducing global oil supplies by roughly 900 thousand barrels per day during the first three months of 2018…

so, it appears that OPEC and the Russians have thought this through, and although they wont be reducing oil supplies at quite the 2.5 million barrels per day pace that oil supplies were increasing by through much of the two years proceeding their production cut agreement, they can be taking large chunks out of the glut if other parties not part of the agreement don’t increase their oil output at the same time…however, remember that in April, the baseline for our figures above, Libya was producing 550 thousand barrels per day, and that as we noted two weeks ago, by May they had increased their output to 800,000 barrels per day…before the fall of Muammar Gaddafi, Libya had been consistently been producing 1.6 million barrels of oil per day, so if they can get back half of what they’ve since lost, they could easily add as much as 600,000 barrels per day to OPEC’s output, and effectively cut the OPEC production cuts in half…

outside of OPEC, US oil production is seen as the biggest threat to their ability to control oil supplies…according to the unofficial weekly US oil production data, US oil production has increased by 550,000 barrels per day during the first 20 weeks of this year…since additional oil rigs have been added every week but one during that period and since the backlog of unfracked wells has been increasing at a rate equivalent to 20% of new producing wells, it seems clear that US oil production will continue to increase at close to the same pace it has been rising year to date, so the US could probably add another 800,000 barrels of oil per day to their output by the end of the year…in addition, both Canada, the 6th largest oil exporter globally, and Brazil, the 10th largest, are also increasing their output and pose an additional threat to OPEC’s ability to reduce global supplies…furthermore, the U.K. and Norway are also producing more oil this year, and have to be considered when looking at whether OPEC’s cuts will be effective or not…so in addition to the output from OPEC, oil output from these countries will have to be watched over the next 9 months, to see if OPEC’s production cuts can realize the rebalancing of supply and demand they purport to achieve…

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 19th, indicated that our refining of crude oil rose to near record levels, while our imports and exports of oil both decreased, and that oil needed to be withdrawn from US storage for the 7th week in a row….our imports of crude oil fell by an average of 296,000 barrels per day to an average of 8,294,000 barrels per day during the week, while at the same time our exports of crude oil fell by 461,000 barrels per day to an average of 625,000 barrels per day, which meant that our effective imports netted out to 7,669,000 barrels per day during the week, 165,000 barrels per day more than during the prior week…at the same time, our field production of crude oil rose by 15,000 barrels per day to an average of 9,320,000 barrels per day, which means that our daily supply of oil from net imports and from wells totaled an average of 16,989,000 barrels per day during the cited week…

during the same period, refineries reportedly used 17,281,000 barrels of crude per day, 159,000 barrels per day more than they used during the prior week, while 690,000 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, oilfield production, and from storage was 398,000 more barrels per day than what refineries reported they used…to account for that discrepancy, the EIA inserted a (-398,000) 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 fell to an average of 8,192,000 barrels per day, still 8.1% above the imports of the same four-week period last year…the 690,000 barrel per day decrease in our total crude inventories came about on a 633,000 barrel per day withdrawal from our commercial stocks of crude oil and a 57,000 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 15,000 barrel per day crude oil production increase resulted from a 20,000 barrel per day increase in oil output from wells in the lower 48 states, which was partially offset by a 5,000 barrels per day decrease in oil output from Alaska…the 9,320,000 barrels of crude per day that we produced during the week ending May 19th was up by 6.3% from the 8,770,000 barrels per day we were producing at the end of 2016, and also up by 6.3% from the 8,767,000 barrel per day output during the during week ending May 13th a year ago, while it was still 3.0% below the June 5th 2015 record oil production of 9,610,000 barrels per day…

US oil refineries were operating at 93.5% of their capacity in using those 17,122,000 barrels of crude per day, which was up from 93.4% of capacity the prior week, but down from the year’s high of 94.1% four weeks earlier…the 17,281,000 barrels of crude per day that refineries took in during the week ending May 19th almost a new record, however, just 4,000 barrels a day less than the 17,285,000 barrels of crude per day that US refineries used during the week ending April 21st….oil refined this week was also 6.2% more than the 16,279,000 barrels of crude per day.that were being processed during week ending May 20th, 2016, when refineries were operating at 89.6\7% of capacity, and roughly 14% above the 10 year average of 15.2  million barrels of crude per day for the 3rd week in May ….

with the near record level of refining, gasoline production from our refineries increased by 223,000 barrels per day to 10,243,000 barrels per day during the week ending May 19th, the highest gasoline production ever this early in the year…gasoline production for the week was thus 3.8% higher than the 9,866,000 barrels of gasoline that were being produced daily during the comparable week a year ago….at the same time, refineries’ production of distillate fuels (diesel fuel and heat oil) increased by 155,000 barrels per day to 5,197,000 barrels per day, which was just shy of an all time record and 11.5% more than the 4,661,000 barrels per day of distillates that were being produced during the week ending May 20th last year…..

even with the seasonal record level of gasoline production, our end of the week gasoline inventories decreased by 787,000 barrels to 239,882,000 barrels by May 19th, mostly because our domestic consumption of gasoline rose by 252,000 barrels per day to 9,704,000 barrels per day…in addition, our gasoline exports rose by 81,000 barrels per day to 589,000 barrels per day, while our imports of gasoline rose by 29,000 barrels per day to 725,000 barrels per day at the same time…but even with the seasonal decrease in our gasoline supplies, they are still less than 0.1% lower than the 240,111,000 barrels that we had stored on May 20th a year ago, but 8.7% higher than the 220,627,000 barrels of gasoline we had stored on May 22nd of 2015, and 13.4% more than the 211,575,000 barrels of gasoline we had stored on May 23rd of 2014…

likewise, even with the increase in distillates production, our supplies of distillate fuels fell by 485,000 barrels to 146,339,000 barrels during the week ending May 19th, somewhat less than the 1,944,000 barrel drop the prior week…that was because our exports of distillates fell by 258,000 barrels per day to 1,008,000 barrels per day, while our imports of distillates fell by 60,000 barrels per day to 101,000 barrels per day…at the same time, the amount of distillates supplied to US markets rose by 144,000 barrels per day to 4,359,000 barrels per day…even though our distillate supplies are still 3.0% below the 150,878,000 barrels that we had stored on May 20th, 2016, when a glut of heat oil persisted after last year’s warm El Nino winter, they remain 13.6% higher than the distillate inventories of 128,839,000 barrels that we had stored on May 22nd of 2015, following a more normal winter…

finally, the ongoing record level of oil refining meant that our commercial inventories of crude oil saw a withdrawal for the seventh week in a row, as they decreased by 4,432,000 barrels to 516,340,000 barrels as of May 19th….but even though our crude oil supplies are down by 19.2 million barrels over the past 7 weeks, we still finished the week with 7.8% more crude oil in storage than the 479,012,000 barrels we had stored at the beginning of this year, and 2.1% more crude oil in storage than the 505,571,000 barrels of oil in storage on May 20th of 2016…compared to equivalent dates in prior years, we ended the week with 15.7% more crude than the 446,412,000 barrels in of oil in storage on May 22nd of 2015, and 42.9% more crude than the 361,382,000 barrels of oil we had in storage on May 23rd of 2014…

This Week’s Rig Counts

US drilling activity increased for the 19th week in a row and for the 29th time in the past 30 weeks during the week ending May 26th, even as oil rigs saw their smallest weekly rise of the year….Baker Hughes reported that the total count of active rotary rigs running in the US increased by 7 rigs to 908 rigs in the week ending Friday, which was 504 more rigs than the 404 rigs that were deployed as of the May 27th report in 2016, and the most drilling rigs we’ve had running since April 24th, 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 just 2 rigs to 722 rigs this week, which was still well more than double the 316 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 5 rigs to 185 rigs this week, which was also more than double the 87 natural gas rigs that were drilling a year ago, but way down from the recent natural gas rig high of 1,606 rigs that were deployed on August 29th, 2008…in addition, a single rig considered unclassified remained active, same as last week and as a year ago…

offshore drilling remained unchanged with 23 rigs still this week, all of those in the Gulf of Mexico, down from a total of 24 offshore rigs a year ago…the number of rigs that were set up to drill horizontally increased by 7 to 766 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 27th of last year, while it was still down from the record of 1372 horizontal rigs that were deployed on November 21st of 2014….in addition, a net of one vertical rig was added this week, increasing the vertical rig count to 77 rigs, which was up from the 46 vertical rigs that were deployed during the same week a year ago…on the other hand, the directional rig count was down by 1 rig to 65 rigs this week, which was still up from the 44 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 26th, the second column shows the change in the number of working rigs between last week’s count (May 19th) and this week’s (May 26th) count, the third column shows last week’s May 19th 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 27th of May, 2016…       

May 26 2017 rig count summary

a few fairly obvious surprises this week…first, that this week’s increase in drilling was led by a 5 rig increase in Colorado, which up until this week had been relatively stable this year – the 29 rigs they had active a week ago was the same number of rigs they had active during the first week of the year, although it had varied a bit in the interim…another surprise is that Texas saw its first pullback in drilling in 19 weeks; over that 19 week period, Texas drilling had increased by 123 rigs, so they’re not exactly missing the one that was shut down this week…lastly, the increase in drilling for natural gas topped new oil rigs for the first time since January 13th, when oil rigs were down by 7 rigs during a week that natural gas rigs increased by one…gas rigs were added in the Arkoma Woodford of Oklahoma, where one oil rig was shut down while a gas directed rig started up, and in the Eagle Ford of south Texas, where oil rigs still outnumber gas rigs 77 to 9…meanwhile, 3 of the 5 gas rigs that we added this week were in other unnamed basins, as we can clearly see there was no change in activity in the Utica or the Marcellus…also note that other than the changes in the major producing states noted above, Alabama saw one rig removed this week and now have 3 rigs still active, still an increase from a year ago, when there were no rigs active in the state…

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