oil prices rally 8.6%; US crude supplies fall below those of a year earlier for first time since 2014

oil prices rose every day this past week, in what ended up with the biggest weekly price increase so far this year…the rally started with news on Monday that OPEC had reached an agreement that Saudi Arabia, the Emirates and Kuwait would further cut oil exports, and that previously exempt Nigeria would agree to cap their oil production at 1.8 million barrels a day, with US crude for September delivery increasing 57 cents to $48.60 a barrel on the day….WTI September futures then rose $1.55 or 3.3 percent on Tuesday, to finish at $47.89 a barrel, the highest close for that benchmark since early June, after the Saudis further committed to a million barrel per day export reduction and Anadarko Petroleum said it would cut its 2017 outlays by $300 million because of depressed oil prices, in the first sign that U.S. oil producers might be cutting back on new well drilling…oil prices then approached eight-week highs on Wednesday,  rising 86 cents or 1.8 percent to $48.75 a barrel, after the EIA reported that U.S. crude, gasoline, and distillate inventories all fell in the prior week, with our oil supplies dropping below their year earlier level for the first time since 2014…the buying momentum spurred by the inventory declines carried into Thursday, as US light, sweet crude prices rose another 29 cents, or 0.6%, to $49.04 a barrel, the first close over $49 a barrel since May 30th…with a relatively small increase in oil rigs reported on Friday, traders remained focused on the OPEC crude oil export cuts and the larger than expected inventory draws and pushed oil prices up another 67 cents, or 1.4 percent, to $49.71 on Friday, capping an 8.6% increase for the week, the largest weekly gain this year

with the headlines all noting that “largest price gain this year” for this week, we’ll include a chart of oil prices over the past 6 months for some perspective…

July 29 2017 oil prices

the above graph is a screenshot of the live interactive oil price graph at Daily FX, an online platform that provides trading news, charts, indicators and analysis of the markets…each bar on the above graph represents oil prices for one day of oil trading between February 1st and July 28th, wherein green bars represent the days when the price of oil went up, and red bars represent the days when the price of oil went down…for green bars, the starting oil price at the beginning of the day is at the bottom of the bar and the price at the end of the day is at the top of the bar, while on red or down days, the starting price is at the top of the bar and the price at the end of the day is at the bottom of the bar…at the far right, we can see the five green bars that represent this week’s price rally; but note that this week’s rally started from last Friday’s 8 day low, so more than a third of this week’s increase was just recovering what was lost last week…also note that this week’s close is still nearly $2 a barrel below the May high, which itself was $2 a barrel below the April high…furthermore, we had an extended 4 month period ending in March where oil rarely saw prices below $52 a barrel…so we’re still a way from reaching those levels, or anything that looks like a permanent change to the downward trend that we’ve been in since then…

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 July 21st, showed a small increase in US oil imports, a big increase in our oil exports, and a substantial increase the amount of oil used by US refineries, which thus meant that more oil was again withdrawn from our commercial stocks of crude oil to meet those needs…our imports of crude oil rose by an average of 48,000 barrels per day to an average of 8,044,000 barrels per day during the week, while at the same time our exports of crude oil rose by 302,000 barrels per day to an average of 1,030,000 barrels per day, which meant that our effective imports netted out to 7,014,000 barrels per day during the week, 254,000 barrels per day less than during the prior week…at the same time, our field production of crude oil fell by 19,000 barrels per day to an average of 9,410,000 barrels per day, which means that our daily supply of oil from net imports and from wells totaled an average of 16,424,000 barrels per day during the cited week…

during the same week, refineries used 17,285,000 barrels of crude per day, 166,000 barrels per day more than they used during the prior week, while at the same time 1,030,000 barrels of oil per day were being pulled out of oil storage facilities in the US (coincidentally the same amount of oil as we exported)….thus, this week’s crude oil figures from the EIA seem to indicate that our total supply of oil from net imports, from oilfield production, and from storage was 169,000 more barrels per day than what refineries reported they used during the week…to account for that discrepancy, the EIA needed to insert a (-169,000) 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 (pdf) show that the 4 week average of our oil imports inched up to an average of 7,848,000 barrels per day, which was still 4.2% below the imports of the same four-week period last year…the 1,030,000 barrel per day decrease in our total crude inventories was all withdrawn from our commercial stocks of crude oil, as oil stored in our Strategic Petroleum Reserve was unchanged….this week’s 19,000 barrel per day decrease in our crude oil production resulted from a 54,000 barrels per day drop in oil output from Alaska, which was only partially offset by a 35,000 barrel per day increase in oil output from wells in the lower 48 states…the 9,410,000 barrels of crude per day that were produced by US wells during the week ending July 21st was 7.5% more than the 8,770,000 barrels per day we were producing at the end of 2016, and 10.5% more than the 8,515000 barrel per day of oil output during the during the same week a year ago, while it was still 2.1% below the June 5th 2015 record US oil production of 9,610,000 barrels per day…

US oil refineries were operating at 94.3% of their capacity in using those 17,285,000 barrels of crude per day, which was up from 94.0% of capacity the prior week, and above normal for this or any time of year…the amount of oil refined this week was also above the seasonal norm, as it was 4.2% more than the 16,586,000 barrels of crude per day.that were being processed during week ending July 22nd, 2016, when refineries were operating at 92.4% of capacity, and roughly 9% above the 10 year average of 15.8 million barrels of crude refined per day for the third week of July….

with the increase in refining, gasoline production from our refineries increased by 297,000 barrels per day to 10,393,000 barrels per day during the week ending July 21st, which was the third highest weekly gasoline production on record; it was also 3.2% higher than the 10,068,000 barrels of gasoline that were being produced daily during the comparable week a year ago….at the same time, our refineries’ production of distillate fuels (diesel fuel and heat oil) also rose by 186,000 barrels per day to 5,131,000 barrels per day, which was 4.3% more than the 4,918,000 barrels per day of distillates that were being produced during the week ending July 22nd last year….

even with the increase in our gasoline production, our end of the week supply of gasoline decreased by 1,015,000 barrels to 230,196,000 barrels by July 21st, the 6th drop in gasoline inventories in a row….a 229,000 barrels per day increase to 9,821,000 barrels per day in our domestic consumption of gasoline was responsible for the drop in supplies, which occurred despite a 132,000 barrel per day increase to 723,000 barrels per day in our imports of gasoline… meanwhile, our gasoline exports increased by 22,000 barrels per day to 595,000 barrels per day at the same time, partially offsetting the increase in gasoline imports….with the week’s decrease in our gasoline supplies, our gasoline inventories are now 4.7% below last year’s seasonal high of  241,452,000 barrels for this week of the year, but are still 6.6% higher than the 215,922,000 barrels of gasoline we had stored on July 24th of 2015, and roughly 6.5% above the 10 year average of gasoline supplies for this week of the year… 

likewise, even with the increase in our distillates production, our supplies of distillate fuels fell by 1,852,000 barrels to 149,564,000 barrels over the week ending July 21st, the 4th drop in five weeks….a factor in this week’s decrease in distillates supplies was a 108,000 barrel per day increase to 1,150,000 barrels per day in our exports of distillates…in addition, the amount of distillates supplied to US markets, a proxy for our consumption. rose by 42,000 barrels per day to 4,376,000 barrels per day, while our imports of distillates rose by 4,000 barrels per day to 130,000 barrels per day….with this week’s decrease, our distillate inventories are nearly 1.6% lower than the 152,003,000 barrels that we had stored on July 22nd, 2016, but they remain 38% higher than the distillate inventories of 144,103,000 barrels that we had stored on July 24th of 2015, and roughly 10.7% above the 10 year average for distillates stocks for this time of July

finally, with the increase in oil exports and the pickup in oil refining, our stored supplies of oil decreased for the 14th time in the past 16 weeks, as our commercial crude oil inventories fell by 7,208,000 barrels to 483,415,000 barrels as of July 21st, leaving us with the least oil we’ve had in storage anytime this year.. furthermore, our oil supplies dropped below their year ago level for the first time since 2014, as July 21st’s oil inventories were 1.4% below the 490,501,000 barrels of oil we had stored on July 22nd of 2016…with that, we have another graph that will attempt to put this into perspective…

July 26 2017 crude supply as of July 21

the above graph comes from a weekly emailed package of oil graphs from John Kemp, senior energy analyst and columnist with Reuters, which i’ve attempted to embellish with a bit of additional information…John’s graph shows US commercial oil 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 level of our oil supplies, or the middle of the 10 year daily range, traced by the blue dashes over each day of the year…the original graph also shows the number of barrels of oil we had stored for each week in 2016 traced weekly by a yellow line, with our 2017 oil supplies represented in red for the year to date ..to that i’ve added a green line which very approximately represents our 2015 oil inventories in thousands of barrels for each day of that year, a violet line which similarly represents our 2014 oil inventories in thousands of barrels for each day of that year, and a brown line which represents our 2013 oil inventories in thousands of barrels for each day of that year…note that the lines that i’ve included were drawn by hand by dragging a mouse over the graph using the Microsoft Paint utility, and thus are far less than exact; they’re only meant to show the trend in our oil supplies over that period…

and the trend that they show is that oil inventories stayed in a narrow range fairly close to the 10 year mean throughout 2013 and 2014, 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 green 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 roughly 80 to 100 million barrels above the previous norms over the rest of that year…that large year over year difference continued into early 2016, represented by Mr Kemp’s yellow 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 note that the red graph representing 2017 has been above the 2016 level, which previously had represented a record for each “day of the year” throughout the year, up until this week..so although our oil supplies as of July 21st may have just slipped below those of the same week in 2016, they are still 13.0% higher than the 427,633,000 barrels in of oil that we had in storage on July 24th of 2015, 44.0% higher than the 335,631,000 barrels of oil we had in storage on July 25th of 2014, and 43.7% higher than the 10 year average of oil supplies for this time of year …  

N.B. take a good look at those graphs for 2013, 2014, and 2015 while you’re here; they’re probably the last you’ll ever see me try to draw by hand…   

This Week’s Rig Count

US drilling activity increased for only the 2nd time in 5 weeks during the week ending July 28th, following 23 consecutive weeks of increases earlier this year….Baker Hughes reported that the total count of active rotary rigs running in the US rose by 8 rigs to 958 rigs in the week ending Friday, which was 495 more rigs than the 463 rigs that were deployed as of the July 29th report in 2016, and the most drilling rigs we’ve had running since April 10th, 2015, even though it was still less than half of 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 2 rigs to 766 rigs this week, which was up by 392 oil rigs over the past year, and the most oil rigs that were in use since April 2nd 2015, while it was still far 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 increased by 6 rigs to 192 rigs this week, which was 108 more rigs than the 86 natural gas rigs that were drilling a year ago, but way down from the recent high of 1,606 natural gas rigs that were deployed on August 29th, 2008…

there was no change in the Gulf of Mexico rig count this week, where drilling continues from 23 platforms, up from the 19 rigs working in the Gulf a year ago…however, a new platform started drilling offshore from Alaska this week, so the total US offshore rig count increased to 24 rigs, up from a total of 19 offshore a year ago, because it was this week a year ago that the rig deployed in the Cook Inlet offshore from Alaska was shut down..

active horizontal drilling rigs increased by 7 to 810 rigs this week, up by 392 from the 374 horizontal rigs that were in use in the US on July 29th of last year and the most horizontal rigs in use since March 27th of 2015, while the horizontal count is still down from the record of 1372 horizontal rigs that were deployed on November 21st of 2014….in addition, the directional rig count was up by 2 rigs to 77 directional rigs this week, which was also up from the 48 directional rigs that were deployed during the same week last year…meanwhile, the vertical rig count was down by 1 rig to 71 rigs this week, which was still up from the 61 vertical 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 July 28th, the second column shows the change in the number of working rigs between last week’s count (July 21st) and this week’s (July 28th) count, the third column shows last week’s July 21st 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 29th of July, 2016…

July 28 2017 rig count summary

notice that although the Permian basin saw the largest increase with 5 new drilling rigs, the rig count in Texas was still down by one…that’s because 4 of the new Permian rigs were set up on the New Mexico side of the border, which is why New Mexico saw the most rigs added of any state this week…the other large increase was in the Cana Woodford of central Oklahoma, where 4 rigs were added, and since the Mississippian shale increase was also in Oklahoma, at least two rigs were pulled out of the state in areas not targeting the major shale deposits…the reason for the Texas drilling decrease was a 6 rig reduction in Texas Oil District 2, a small wedge in the southeast part of the state that includes part of the Eagle Ford trend…otherwise, Texas rig increases were seen in District 1 in the south central part of the state, District 3, centered around Houston, District 8, in the heart of the Permian, and in District 9, which would be in the Barnett shale underlying Dallas-Ft Worth…since there was no change in Texas District 10, that means the rig that was added in the Granite Wash was on the Oklahoma side of the panhandle border…meanwhile, rigs targeting natural gas were added in Ohio’s Utica shale, in the Marcellus in West Virginia, the Barnett in Texas and 3 rigs in ‘other’ basins that are not named in Baker Hughes summary data…also note that of the states not included in the major producing states table above, Mississippi saw two rigs pulled out this week, and now have just one rig remaining; that’s also a decrease from the same week a year ago, when 3 rigs were working in the state..

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