record high oil exports, record high refining, leads to largest drop in US oil supplies this year…

oil prices were down more than 4% this week, largely on reports that OPEC oil production increased in May, which was in turn mostly due to increased oil production from Libya and Nigeria, who are exempt from the cartel’s agreed to production cuts….after falling last week to $49.80 a barrel on disappointment over OPECs latest agreement, US crude oil for July delivery traded down 19 cents to $49.61 per barrel on Monday, even as US markets were closed for the holiday, as traders focused on further increases in U.S. drilling activity…with US markets open on Tuesday, oil prices slid to as low as $49.03 early on news that Libyan producers had solved a technical problem and expected to return production to 800,000 bpd, but moved back up in the afternoon to close at $49.66 a barrel…oil prices then tumbled to as low as $47.73 on Wednesday after reports that OPEC compliance dropped to 92% in May from 96% in April, and again pared losses late in the day to close at $48.32 a barrel…oil prices then jumped nearly $1 on Thursday after the EIA reported that US oil supplies were down for the 8th month in a row, dropping by the most since December, but retreated just as fast to close at $48.36 a barrel, a gain of just 4 cents on the day…oil prices came under continued pressure Friday, on concerns that President Trump’s decision to abandon the Paris climate pact would spark more crude drilling in the US, with WTI crude futures for July falling $1.07, or 2.2 percent, to $47.29 per barrel by 8:48 a.m., again only to recover late in the day and end the week at $47.66, a loss of 70 cents or 1.4% on the day and 4.3% for the week..

meanwhile,  prices for natural gas were down every day this week, losing more than 9% over the period, and ending below $3 per mmBTU for the first time since February…after closing last week at $3.310 per mmBTU, natural gas prices for July fell 16.5 cents on Tuesday, on forecasts for cooler than normal June temperatures for most of the Eastern US, which would reduce the expected electric generation spike for air conditioning…natural gas prices then fell 7.4 cents on Wednesday and 6.3 cents on Thursday, as the EIA reported a larger than expected increase in natural gas inventories….prices then fell another nine-tenths of a cent on Friday to close the week at $2.999 per mmBTU, well below the break even price for most drillers in our area…we’ll include a graph of recent natural gas prices so you can see what this week’s price trajectory looks like:

June 3 2017 natural gas prices

the above graph shows the daily closing contract price over the last 6 months for a million British thermal units (mmBTU) of natural gas at or contracted to be delivered in July 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 you can see, July natural gas prices had been holding in the $3.25 to $3.50 per mmBTU range over most of the period, and now have taken a dive on the fear that a cool summer might reduce consumption…as we’ve observed before, natural gas prices in this range are below what the frackers need to break even, as natural gas drilling activity has been on a long downtrend from the 1,606 natural rigs that were deployed on August 29th, 2008, only increasing briefly in late 2009 and early 2010 and again in 2014 in the months after natural gas prices briefly rose above $4.00 per mmBTU…although currently up from just 82 rigs on June 3rd, 2016, today’s natural gas drilling remains well below the level seen over the prior 25 years

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 26th, showed that both our refining of crude oil and our exports of it both hit all time highs, while our imports of oil fell at the same time, and as a result the amount of oil that needed to be withdrawn from US storage during the week was the highest since December…our imports of crude oil fell by an average of 309,000 barrels per day to an average of 7,985,000 barrels per day during the week, while at the same time our exports of crude oil rose by 678,000 barrels per day to a record high average of 1,303,000 barrels per day, which meant that our effective imports netted out to 6,682,000 barrels per day during the week, 987,000 barrels per day less than during the prior week…at the same time, our field production of crude oil rose by 22,000 barrels per day to an average of 9,342,000 barrels per day, which means that our daily supply of oil from net imports and from wells totaled an average of 16,024,000 barrels per day during the cited week…

during the same period, refineries reportedly used a record 17,510,000 barrels of crude per day, 229,000 barrels per day more than they used during the prior week, while 1,058,000 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 428,000 less barrels per day than what refineries reported they used…to account for that discrepancy, the EIA inserted a +428,000 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 8,122,000 barrels per day, 6.6% above the imports of the same four-week period last year…the 1,058,000 barrel per day decrease in our total crude inventories came about on a 918,000 barrel per day withdrawal from our commercial stocks of crude oil and a 140,000 barrel per day sale of oil from our Strategic Petroleum Reserve, part of an ongoing sale of 5 million barrels annually that was part of a Federal budget deal 19 months ago….this week’s 22,000 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, and a 2,000 barrels per day increase in oil output from Alaska…the 9,342,000 barrels of crude per day that we produced during the week ending May 19th was up by 6.5% from the 8,770,000 barrels per day we were producing at the end of 2016, and up by 6.9% from the 8,735,000 barrel per day output during the during the same week a year ago, while it was still 2.8% below the June 5th 2015 record oil production of 9,610,000 barrels per day….since the week did see a new record high set for US oil exports, topping the record of 1,211,000 barrels per day set during the week ending February 17th, we’ll include a graph of what that looks like, so you can see how US oil exports have exploded in the year and a half since the oil export ban was lifted:

June 1 2017 crude exports for May 26

notice that since the beginning of the year, our oil exports have jumped up and down from week to week, in a range between 550,000 barrels per day and the past week’s 1,303,000 barrels per day…that’s largely a function of the timing of tanker loadings and departures…with the largest oil tankers able to carry as much as 2 million barrels of oil at once, the departure of two such large tankers in one week is enough to cause a 570,000 barrel per day increase from a week when no such tanker leave port..

US oil refineries were operating at 95.0% of their capacity in using 17,510,000 barrels of crude per day, which was up from 93.5% of capacity the prior week, and the highest refinery utilization rate since August 2015….since we also set a new record for the amount of oil refined in any one week, breaking the record set just 5 weeks ago, we’ll again include a graph here of what that looks like, as compared to our recent refining history…

June 1 2017 refinery throughput for May 26

the above graph comes from a weekly emailed package of oil graphs from John Kemp, senior energy analyst and columnist with Reuters…the graph shows US refinery throughput in thousands of barrels per day by “day of the year” for the past ten years, with the past ten year range of our refinery throughput for any given date 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 oil refined for each week in 2016 traced weekly by a yellow line, with our year to date oil refining for 2017 represented in red…thus we can see that for most all of 2016 and through most of 2017, US oil refining was either at seasonal record highs or near the top of the average range…we can also see there is normally a seasonal swing for oil refining, with demand for their products typically highest in the summer and again around the holidays; hence the record levels of refining we’ve been seeing this spring are out of season and completely “off the chart” compared to any US refining activity we’ve seen previously….the 17,510,000 barrels of crude per day refined during the week ending May 26th beat the previous record of 17,285,000 barrels per day set during the week ending April 21st, 2017 by 1.3%; it was also 8.0% more than the 16,206,000 barrels per day that were being refined during the week ending May 27 of 2016, when refineries were running at 89.8% of capacity, and more than 14% above the 10 year average for the 4th week in May of 15.3 million barrels of crude per day…..

with the record level of refining, gasoline production from our refineries increased by 187,000 barrels per day to 10,430,000 barrels per day during the week ending May 26th, the highest gasoline production ever this early in the year, and just short of the all time record of 10,456,000 barrels per day of gasoline production during the first week of November last year….gasoline production for the week was thus 5.2% higher than the 9,916,000 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 29,000 barrels per day to 5,226,000 barrels per day, the most distillates ever produced in a week in the Spring and 9.9% more than the 4,757,000 barrels per day of distillates that were being produced during the week ending May 27th last year….. 

however, even with the seasonal record level of gasoline production, our end of the week gasoline inventories decreased by 2,858,000 barrels to 237,024,000 barrels by May 26th, because our domestic consumption of gasoline rose by 118,000 barrels per day to 9,822,000 barrels per day and because our gasoline exports rose by 52,000 barrels per day to 641,000 barrels per day, while our imports of gasoline fell by 22,000 barrels per day to 703,000 barrels per day at the same time…but even with the week’s big decrease in our gasoline supplies, gasoline inventories are currently less than 1% below the 238,619,000 barrels that we had stored on May 27th a year ago, but still 7.6% higher than the 220,293,000 barrels of gasoline we had stored on May 29th of 2015, and 11.9% more than the 211,785,000 barrels of gasoline we had stored on May 30th of 2014…

meanwhile, with the seasonal high in distillates production, our supplies of distillate fuels rose by 394,000 barrels to 146,733,000 barrels during the week ending May 26th, after falling the last four weeks in a row….that increase was mostly because the amount of distillates supplied to US markets fell by 334,000 barrels per day to 4,025,000 barrels per day, while our exports of distillates rose by 242,000 barrels per day to 1,250,000 barrels per day, and our imports of distillates rose by 4,000 barrels per day to 105,000 barrels per day at the same time…even though our distillate supplies are still 1.9% below the 149,623,000 barrels that we had stored on May 27th, 2016, when a glut of heat oil persisted after last year’s warm El Nino winter, they’re now 10.6% higher than the distillate inventories of 132,612,000 barrels that we had stored on May 29th of 2015, following a more normal winter…

finally, our record level of oil refining, combined with our record level of oil exports, meant that our commercial inventories of crude oil saw their largest withdrawal of oil since December, as our oil supplies fell by 6,428,000 barrels to 509,912,000 barrels as of May 26th….but even though our crude oil supplies are down by more than 25.6 million barrels over the past 8 weeks, we still finished the week with 6.5% more crude oil in storage than the 479,012,000 barrels we had stored at the beginning of this year, and 1.1% more crude oil in storage than the 504,205,000 barrels of oil in storage on May 20th of 2016…compared to equivalent dates in prior years, we ended the week with 14.7% more crude than the 444,464,000 barrels in of oil in storage on May 29th of 2015, and 42.5% more crude than the 357,951,000 barrels of oil we had in storage on May 30th of 2014… 

This Week’s Rig Counts

US drilling activity increased for the 20th week in a row and for the 30th time in the past 31 weeks during the week ending June 2nd, even as the size of the weekly increases has tapered off over the past month….Baker Hughes reported that the total count of active rotary rigs running in the US increased by 8 rigs to 916 rigs in the week ending Friday, which was 508 more rigs than the 408 rigs that were deployed as of the June 3rd report in 2016, and the most drilling rigs we’ve had running since April 24th, 2015, even though 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 11 rigs to 733 rigs this week, which was up by 408 rigs over the past year, 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 fell by 3 rigs to 182 rigs this week, which was still a hundred more rigs than the 82 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 at 23 rigs still this week, with all of those in the Gulf of Mexico, which was up from 20 Gulf of Mexico rigs and up from a total of 21 offshore rigs a year ago…the number of working rigs that were set up to drill horizontally increased by 5 rigs to 771 horizontal rigs this week, which was the most horizontal rigs in use since April 2nd of 2015, and up from the the 319 horizontal rigs that were in use in the US on June 3rd 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 3 directional rigs were added this week, increasing the directional rig count to 68 rigs, which was up from the 44 directional rigs that were deployed during the same week a year ago…at the same time, the vertical rig count was unchanged at 77 rigs this week, which was still up from the 45 vertical 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 June 2nd, the second column shows the change in the number of working rigs between last week’s count (May 26th) and this week’s (June 2nd) count, the third column shows last week’s May 26th 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 3rd of June, 2016…       

June 2 2017 rig count summary

again, there wasn’t much change in drilling activity for most states and in the major basins, save for in Texas, where 5 rigs were added this week…and that’s pretty much been the story for the past year; of the 508 additional rigs that have started drilling since June 3rd 2016, 287 of them have been in Texas, with 222 of them in the Permian basin of the far western part of the state and 57 rigs in the Eagle Ford in the south…elsewhere, this week’s three rig increase in Oklahoma likely includes the new rig in the Mississippian shale on the Kansas border, and two rigs in basins not named in Baker Hughes summaries…there has been quite a bit more activity in those “other basins” of late; maybe it’s time for Baker Hughes to initiate coverage of some of those newer basins, and drop those where activity has stagnated, such as the Fayetteville of Arkansas, which had only seen one rig change in the past year and a half…of the states not listed above, Illinois saw a rig added this week, and they now have 3 rigs active, that’s up from the single rig that was working in Illinois a year ago…in addition, Florida added a rig, because one of the offshore platforms that had been working in the Gulf in Louisiana waters was moved to offshore of Florida this week, still in the Gulf….that’s the first drilling offshore from Florida since January 2015, and except for drilling for three weeks on land a month ago, the only Florida drilling activity in the past year…

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