oil in deep backwardation; natural gas supplies 20% below normal, oil supplies at lowest in 41 months, record DUCs..

while US oil prices were down from last week’s final quote for the 4th week in a row, the current front month oil contract managed to eke out a small increase over this past week…as the expiring US crude contract for August ended last week down 55 cents at $70.46 a barrel, the new US crude contract for September became the quoted price of oil at $68.26 a barrel, a drop in price of more than $2 a barrel in just the change of the quoted contract month…from there US oil prices fell 37 cents to $67.89 a barrel on Monday, as oil traders ignored belligerent exchanges between Iran and the US and focused instead on oversupply risk, as Saudi Arabia and other large producers ramped up production…however, with Iran-US tensions continuing on Tuesday, oil prices rallied to rise 63 cents to $68.52 a barrel, encouraged by Chinese plans to boost government spending…US crude was then up another 78 cents to $69.30 a barrel on Wednesday, after the EIA reported that US oil supplies had fallen to their lowest level since February 2015…oil prices then rose for the third consecutive day on Thursday, after Saudi Arabia suspended oil shipments through the Bab al-Mandeb strait into the Red Sea following a Houthi attack on two of its oil tankers, thereby also threatening most shipping through the Suez Canal, with crude finishing up 31 cents at $69.61….however, oil prices gave up 92 cents to end the week at $68.69 a barrel on Friday, after Russia’s energy minister indicated that a coalition of producers could pump as much as a million barrels per day more crude than agreed by the end of the year…while the September US oil contract thus ended the week 43 cents high than last Friday, news services such as Reuters reported US oil prices down 2.4% for the week, comparing last Friday’s final quote for August oil to this Friday’s quote for September oil, a bit of an apples to oranges comparison…with that in mind, we should point out that the oil futures market remains in deep backwardation, with lower prices being quoted for each month going forward for at least the next five years…the best way to show you that is to just post of copy of the current futures quotes for oil prices over the next year:

July 28 2018 oil price backwardation

the above is the beginning of the table of light sweet crude futures prices on Globex, a 24 hour electronic trading system on the CME Group website, which is the company that owns and operates the NYMEX, the New York exchange where US oil is priced and traded, as well as commodity futures exchanges in Chicago and London…the part of the table we’ve captured here shows their Saturday afternoon quotes of oil futures prices over the next twelve months as indicated, with the contract month in the first column, and the last quoted price in the second column, with the other price and trading volume information over the rest of the table not really a concern for us today…what we want to point out is that prices for oil in the future are considerably lower than what it’s being quoted for today…for instance, the price of oil for delivery in September of this year is quoted above at $69.04 a barrel, while the price of oil for delivery in October is quoted at $67.98 a barrel, the price of oil for delivery in November is quoted at $67.58 a barrel, the price of oil for delivery in December is quoted at $67.23 a barrel, and so on until see get to the bottom of the table where we see that the price of oil for delivery in August of next is quoted at $64.74 a barrel, 6.2% lower than the price quoted for September…in fact, if you scroll farther down the entire oil futures price table (which we haven’t included here due to its length), you’d find that oil prices for delivery in August 2020 is quoted at $61.00 a barrel, oil prices for delivery in August 2021 is quoted at $59.43 a barrel,  oil prices for delivery in August 2022 is quoted at $57.22 a barrel, and oil prices for delivery in August 2023 is quoted at $56.26 a barrel…oil futures prices continue lower from there before steadying and rising slightly, but not by much; the lowest price quote seems to be $55.25 a barrel for November 2025, and the last quote on this table is for February 2027, at $55.58 a barrel

what this means is that oil traders believe that the current tightness in the supply of oil is temporary, and that there will be more supply in the future, which thus holds down the price they’re willing to commit to for future holdings…remember, as we showed over two years ago, daily oil trading for just one WTI oil contract in New York is typically than 100 times the amount of oil we produce daily over a week, and more than twice the quantity of oil that exists anywhere above ground in the entire country, so it is the oil traders in New York, London, and Chicago who set the price of oil, not the oil companies or those who use the oil…while backwardation such as seen here is an obvious disincentive to own or store oil, what these depressed futures prices mean for oilfield activity is also easy to understand; a major oil company that might be thinking of investing in additional drilling in an offshore field, for instance, isn’t going to make that decision based on the current price of oil, but rather the future price…likewise, the small exploitation company that may be drilling in North Dakota knows it can only contract to sell that oil at $65 next year, and less than that in the years after that, so those low prices influence the timing of their decision to frack that well…as we’ll see later, that has led to a continually larger backlog of uncompleted wells, which in turn has slowed drilling of new wells in the present…

while oil contracts for August had expired last week, natural gas contracts for August continued to trade this week, rising each day after falling 3.6 cents on Monday to end at $2.822 per mmBTU, a 6.5 cent increase for the week…while natural gas traders continue to watch the weather forecasts for signs of future consumption, their focus has increasingly turned to the precariously low mid-summer additions to inventories of natural gas in storage…this week’s EIA natural gas storage report for week ending July 20th indicated that natural gas in storage in the US rose by just 24 billion cubic feet to 2,273 billion cubic feet during the cited week, which left our gas supplies 705 billion cubic feet, or 23.7% below the 2,978 billion cubic feet that were in storage on July 21st of last year, and 557 billion cubic feet, or 19.7% below the five-year average of 2,830 billion cubic feet of natural gas that are typically in storage after the third week of July…the median estimate from a Bloomberg survey indicated analysts had expected 36 billion cubic feet to be added during the week ended July 20, with their range of estimates from 28 billion cubic feet to 52 billion cubic feet, so you can see the actual 24 billion cubic feet increase was lower than anyone had expected, and also quite a bit lower than the 46 billion cubic foot average of weekly surplus natural gas that has typically been added to storage during the third week of July over recent years…as we pointed out last week, the EIA is already forecasting a 10 year low for natural gas supplies going into this coming winter, expecting that natural gas in storage will only rise to 3470 billion cubic feet by October 31st, which would be 10% lower than the five-year average of 3835 billion cubic feet for that time of year, but to even meet that forecast, we’d have to average an addition of nearly 80 billion cubic feet per week over the next 15 weeks, a target that looks nearly impossible with mid-summer additions so far averaging just over 40 billion cubic feet per week over the past three weeks…while it’s unlikely that we’d actually run out of natural gas even in the coldest winter scenario, we could see spot shortages if the supplies of gas we have stored remain unevenly distributed…for instance, as of July 20th, Midwest natural gas supplies remained 23.6% below the 5 year average, and are less than half of the average normally stored in the region before winter…in a polar vortex cold weather outbreak, there’s be no easy way to quickly move surplus gas supplies stored on the east or west coast to the midsection of the country in an emergency, although it’s possible Canadian supplies could fill the gap, should they be fortunate enough to have an exportable surplus at the time…

The Latest US Oil Data from the EIA

this week’s US oil data from the US Energy Information Administration, covering the week ending July 20th, showed that due to a big jump in our oil exports, and an equally large drop in our oil imports, we had to withdraw oil from our commercial crude supplies for the thirteenth time in the past twenty-six weeks… our imports of crude oil fell by an average of 1,296,000 barrels per day to an average of 7,770,000 barrels per day, after rising by an average of 1,635,000 barrels per day the prior week, while our exports of crude oil rose by an average of 1,222,000 barrels per day to an average of 2,683,000 barrels per day during the week, which meant that our effective trade in oil worked out to a net import average of 5,087,000 barrels of per day during the week ending July 6th, 2,518,000 fewer barrels per day than the net of our imports minus exports during the prior week…at the same time, field production of crude oil from US wells was reported to be unchanged at 11,000,000 barrels per day, which means that our daily supply of oil from our net imports and from wells totaled an average of 16,087,000 barrels per day during the reporting week… 

at the same time, US oil refineries were using 17,285,000 barrels of crude per day during the week ending July 20th, 46,000 barrels per day more than they used during the prior week, while at the same time 878,000 barrels of oil per day were reportedly being pulled out of the oil that’s in storage in the US….hence, this week’s crude oil figures from the EIA appear to indicate that our total working supply of oil from net imports, from oilfield production, and from storage was 320,000 fewer barrels per day than what refineries reported they used during the week…..to account for that disparity, the EIA needed to insert a (+320,000) 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, essentially a fudge factor that is labeled in their footnotes as “unaccounted for crude oil”…since that unaccounted for crude figure swung by 852,000 barrel’s per day from last week’s (-532,000) figure, we have to caution that all of this report’s week over week oil data should be taken with a grain of salt…. (for more on how this weekly oil data is gathered, and the possible reasons for that “unaccounted for” oil, see this EIA explainer)… 

further details from the weekly Petroleum Status Report (pdf) show that the 4 week average of our oil imports fell to an average of 8,331,000 barrels per day, which was still 6.1% more than the 7,848,000 barrel per day average we were importing over the same four-week period last year….the 878,000 barrel per day decrease in our total crude inventories was all withdrawn from our commercially available stocks of crude oil, as the amount of oil in our Strategic Petroleum Reserve remained unchanged….this week’s crude oil production was reported as unchanged despite a 82,000 barrel per day decrease in output from Alaska, and a 100,000 barrel per day increase in oil from the lower 48 states, because the EIA has recently decided to round the lower 48 weekly oil production estimates to the nearest 100,000 barrels per day, to more closely reflect their inability to accurately model oil output from all the wells in the lower 48 states, and there was no change in the national rounded total…..US crude oil production for the week ending July 21st 2017 was reported at 9,410,000 barrels per day, so this week’s rounded oil production figure is roughly 16.9% above that of a year ago, and 30.5% more than the interim low of 8,428,000 barrels per day that US oil production fell to during the last week of June of 2016…

US oil refineries were operating at 93.8% of their capacity in using 17,285,000 barrels of crude per day during the week ending July 20th, down from 94.3% of capacity the prior week, but still a refinery capacity utilization rate in line with historical norms…the 17,285,000 barrels of oil that were refined this week were still at a seasonal high, now for the 8th week in a row, as compared to any previous 3rd week of July…however, this week’s refinery throughput was actually tied for that high with the 17,285,000 barrels of crude per day that were being processed during the week ending July 21st 2017, when US refineries were operating at 94.3% of capacity….

even with the uptick in the amount of oil being refined this week, gasoline output from our refineries was a bit lower, decreasing by 37,000 barrels per day to 10,255,000 barrels per day during the week ending July 20th, after our refineries’ gasoline output had decreased by 408,000 barrels per day from the record high set during the week ending July 6th…thus after falling by 445,000 barrels per day over two weeks, our gasoline production during the week was 1.3% less than the 10,393,000 barrels of gasoline that were being produced daily during the week ending July 21st of last year…meanwhile, our refineries’ production of distillate fuels (diesel fuel and heat oil) fell by 17,000 barrels per day to 5,157,000 barrels per day, after falling by 268,000 barrels per day the prior week…however, this week’s distillates production was still at a seasonal high for the third week of July, but just fractionally higher than the 5,131,000 barrels of distillates per day that were being produced during the week ending July 21st, 2017…

with our gasoline production running a bit lower than previous week, our supply of gasoline in storage at the end of the week fell by 2,328,000 barrels to 233,504,000 barrels by July 20th, the 13th decrease in 20 weeks, but just the 14th decrease in 37 weeks, as gasoline inventories, as usual, were being built up over the winter months….our supplies of gasoline also fell this week because the amount of gasoline supplied to US markets rose by 138,000 barrels per day to a seasonal high of 9,846,000 barrels per day, after rising by 433,000 barrels per day the prior week, while our imports of gasoline rose by 187,000 barrels per day to 844,000 barrels per day, and while our exports of gasoline fell by 65,000 barrels per day to 669,000 barrels per day….but even after this week’s decrease, our gasoline inventories were still 1.4% higher than last July 21st’s level of 230,196,000 barrels, and roughly 7.6% above the 10 year average of our gasoline supplies for this time of the year…     

meanwhile, with our distillates production also a bit lower, our supplies of distillate fuels decreased by 101,000 barrels to 121,210,000 barrels during the week ending July 13th, the 3rd small decrease in 9 weeks…that was as the amount of distillates supplied to US markets, a proxy for our domestic consumption, edged up by 26,000 barrels per day to 4,167,000 barrels per day, after increasing by 336,000 barrels per day the prior week, while our exports of distillates fell by 15,000 barrels per day to 1,211,000 barrels per day, after falling by 332,000 barrels per day over the prior two weeks, and while our imports of distillates rose by 67,000 barrels per day to 207,000 barrels per day…however, since last week’s distillate supplies were already at a 14 year low for this time of year, at a time of year when distillates supplies are usually increasing, this week’s small inventory draw means that this week’s distillates supplies have fallen below last weeks and are themselves a 14 year low for any week in mid-July, 19.0% below the 149,564,000 barrels that we had stored on July 21st, 2017, and roughly 17.1% lower than the 10 year average of distillates stocks for this time of the year…     

finally, with our oil imports falling by 1.3 million barrels per day while our oil exports rose to a near record pace, our commercial crude supplies fell for the 32nd time in the past year, decreasing by 6,147,000 barrels during the week, from 411,084,000 barrels on July 13th to a 41 month low of 404,937,000 barrels on July 20th …thus, with our crude oil inventories as of July 20th at their lowest level since February 20th 2015, our oil supplies were 16.2% below the 483,415,000 barrels of oil we had stored on July 21st of 2017, 17.4% below the 490,501,000 barrels of oil that we had in storage on July 22nd of 2016, and 5.3% below the 427,633,000 barrels of oil we had in storage on July 24th of 2015, when the US glut of oil had already risen above the nearly stable levels of under 400 million barrels during the prior years…   

This Week’s Rig Count

US drilling activity increased for the fourteenth time in the past eighteen weeks during the week ending July 20th, even as the steady increases in drilling for oil we saw with higher oil prices the first half of this year have slowed…Baker Hughes reported that the total count of active rotary rigs running in the US increased by 2 rigs to 1048 rigs over the week ending on Friday, which was also 90 more rigs than the 958 rigs that were in use as of the July 28th report of 2017, but was down from the shale era high of 1929 drilling rigs that were deployed on November 21st of 2014, the week before OPEC began their attempt to flood the global oil market…   

the count of rigs drilling for oil rose by 3 rigs to 861 rigs this week, which was 95 more oil rigs than were running a year ago, while it was still well below the recent high of 1609 rigs that were drilling for oil on October 10, 2014…at the same time, the number of drilling rigs targeting natural gas formations decreased by 1 rig to 186 rigs this week, which was also down by 6 rigs from the 192 natural gas rigs that were drilling a year ago, and way down from the modern high of 1,606 natural gas rigs that were deployed on August 29th, 2008…in addition, there continues to be a single drilling rig that was considered to be “miscellaneous” active this week, which shows as an increase from the zero such “miscellaneous” rigs in use a year ago….

two more of the platforms which had been operating in the Gulf of Mexico were shut down this week, leaving just 15 rigs still drilling in the Gulf, which was 8 fewer than the 23 platforms that were deployed in the Gulf of Mexico a year ago…at the same time, drilling began from a platform offshore from Alaska this week, so the total national offshore count is now at 16 rigs, also down from the 23 total offshore rigs that were deployed a year ago…meanwhile, three of the platforms that had been set up to drill through inland bodies of water in southern Louisiana were also shut down this week, and now there are just two such “inland waters” rigs operating, down from 3 “inland waters” rigs a year ago…

the count of active horizontal drilling rigs was unchanged at 922 horizontal rigs this week, which was still 112 more horizontal rigs than the 810 horizontal rigs that were in use in the US on July 28th of last year, but down from the record of 1372 horizontal rigs that were deployed on November 21st of 2014…meanwhile, the vertical rig count increased by 5 rigs to 62 vertical rigs this week, which was still down from the 71 vertical rigs that were in use during the same week of last year…on the other hand, the directional rig count decreased by 3 rigs to 64 directional rigs this week, which was also down from the 77 directional rigs that were operating on July 28th of 2017…

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 the 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 27th, the second column shows the change in the number of working rigs between last week’s count (July 20th) and this week’s (July 27th) count, the third column shows last week’s July 20th active rig count, the 4th column shows the change between the number of rigs running on Friday and those of the equivalent weekend report of 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 on Friday the 28th of July, 2017…        

July 27, 2018 rig count summary

as you can see, this week’s drilling increase was again driven by increased drilling in the Permian basin of western Texas, as it has been most weeks this year when there has been an increase; outside of the Permian, all other US drilling is down by 11 rigs from a year ago…however, looking at the Texas Oil and Gas District counts in Baker Hughes state data, there’s only an increase of two rigs in the districts that could conceivably considered in the Permian, so we’d have to speculate that there might also be an increase of two rigs in the Permian on the New Mexico side of the border, accompanied by a shutdown of another New Mexico rig elsewhere, possibly in the San Juan basin or other area that Baker Hughes does not enumerate…meanwhile, the Marcellus saw a three rig increase this week – two in Pennsylvania and one in West Virginia – despite the national natural gas rig count falling by one…in addition, the net minus one rig count for the Eagle Ford of south Texas also masks an increase of a natural gas rig, as Eagle Ford oil rigs fell from 72 to 70…in addition, the Ardmore Woodford of Oklahoma went from 2 oil rigs to one oil rig and one gas rig…so with all those increases, how did the natural gas rig count fall?  well, from the table, we know that there were gas rig shutdowns in the Utica shale of Ohio and the Haynesville of Louisiana…in addition, one of the natural gas rigs that had been operating in the Arkoma Woodford of Oklahoma was switched to drilling for oil, the first oil drilling in that basin since September 1st of last year…furthermore, there was also a three gas rig decrease in other basins or regions of the country not tracked separately by Baker Hughes…since there’s no obvious other possibility, we’d speculate that the three ‘inland waters’ that were shut down in southern Louisiana this week had been seeking natural gas, thus accounting for the downward tick in the national gas rig total…

DUC well report for June

due to time constraints, i neglected to cover the release last week of the EIA’s Drilling Productivity Report for July, which includes the EIA’s June data for drilled but uncompleted oil and gas wells in the 7 most productive shale regions…for the 21st consecutive month, this report again showed an increase in uncompleted wells nationally in June, as both new well drilling and well completions were down from a month earlier…like most previous months, this month’s increase was largely due to a big increase of newly drilled but uncompleted wells (DUCs) in the Permian basin of west Texas, with an additional sizable increase of uncompleted wells in the Eagle Ford of south Texas also contributing…for all 7 sedimentary regions covered by this report, the total count of DUC wells increased by 193, from 7,750 wells in May 7,943 to wells in June, the twenty-first consecutive monthly increase in uncompleted wells nationally, and hence again the highest number of such unfracked wells in the history of this report….that was as 1,436 wells were drilled in the 7 regions that this report covers (representing 87% of all U.S. onshore drilling operations) during June, down from 1,451  in May, while 1,243 wells were completed and brought into production by fracking, a decrease of one completion over the prior month…hence, at the June completion rate, the 7,943 drilled but uncompleted wells left at the end of the month represent a 6.4 month backlog of wells that have been drilled but not yet fracked…

as has been the case for most of the past two years, the June DUC well increases were predominantly oil wells, with most of those in the Permian basin…the Permian saw its total count of uncompleted wells rise by 164, from 3,204 DUC wells in May to 3,368 DUCs in June, as 599 new wells were drilled into the Permian but only 435 wells in the region were fracked…at the same time, DUC wells in the Eagle Ford of south Texas rose by 42, from 1,495 DUC wells in May to 1,537 DUCs in June, as 212 wells were drilled in the Eagle Ford during June, while 170 Eagle Ford wells were completed…over the same period, the number of DUC wells in the Bakken of North Dakota increased by 19 to 769, as 129 wells were drilled into the Bakken while 110 Bakken wells were fracked…meanwhile, DUC wells in the Anadarko region centered around Oklahoma rose by 13, from 895 DUC wells in May to 908 DUCs in June, as 172 wells were drilled in the Anadarko region in June while 159 drilled wells in the basin were completed…in addition, the natural gas producing Haynesville shale of the northern Louisiana-Texas border region saw their uncompleted well inventory increase by 2 to 182, as 52 wells were drilled into the Haynesville during June, while 50 Haynesville wells were fracked during the same period…on the other hand, the drilled but uncompleted well count in the Niobrara chalk of the Rockies front range decreased by 42 to 431, as just 147 Niobrara wells were being drilled while 189 Niobrara wells were being fracked…similarly, the drilled but uncompleted well count in the Appalachian region, which includes the Utica shale, fell by 5 wells, from 753 DUCs in May to 748 DUCs in June, as 128 wells were drilled into the Marcellus and Utica shales, while 123 of the already drilled wells in the region were fracked….thus, for the month of June, DUCs in the 5 oil basins tracked by in this report (ie., Anadarko, Bakken, Niobrara, Permian, and Eagle Ford) increased by 196 wells to 7,013 wells, while the uncompleted well count in the natural gas regions (the Marcellus, Utica, and the Haynesville) decreased by a net of 3 wells to 930 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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