seasonal natural gas levels lowest in 15 years; US oil output down first time in 24 weeks, biggest drop in horizontal rigs since October

oil prices were lower for the 5th week in a row, albeit with an asterisk, because as we noted last week, the quoted US price for September oil, which is the current front month contract, did see a 43 cent increase to $68.69 a barrel last week, while a $2.20 a barrel drop in price of oil was logged on the switch from quoting the August contract to quoting the September contract…that September oil price quote started this week with an increase of $1.44 , or 2.1%, to $70.13 a barrel on Monday, after Saudi Arabia suspended oil shipments through the critical Bab el-Mandeb Strait, due to a Houthi attack on a pair of their oil tankers in the Red Sea…but oil prices then reversed and fell $1.37 to $68.76 a barrel on Tuesday, closing out July with the largest monthly loss in 2 years, as concerns about Mideast oil supplies eased and oil traders shifted their focus to the upcoming weekly data on U.S. oil inventories…when that EIA inventory data showed a surprise jump in US crude supplies, oil prices fell another $1.10 on Wednesday before closing at $67.66 a barrel….while oil prices were lower again Thursday morning, they bounced off a six week low of $66.92 to rise to $68.96 a barrel by the close, a gain of $1.30 on the day, on a report that oil inventories were down at the Cushing, Oklahoma crude storage hub, the depot where WTI oil is priced at…however, prices could not hold that gain and fell 47 cents to $68.49 a barrel on Friday, after China retaliated against Trump’s latest tariff increase by levying their own 25% tariff on US LNG, raising concerns that they would also impose tariffs on US oil…oil prices thus ended the week 20 cents lower, down for the 5th consecutive week, although we’d note that some are considering last week’s price to have increased, and thus are reporting oil prices down for the 4th week in 5

natural gas prices, meanwhile, were a bit higher this week, but it took a seasonal record low for US natural gas supplies to get them there, as they were down 2.4 cents over the first three days of the past week before rising 5.8 cents after the natural gas storage report on Thursday and another 3.7 cents on Friday to end the week at $2.853 per mmBTU, still well below the price needed to break even on most new exploitation projects…this week’s EIA natural gas storage report for week ending July 27th indicated that natural gas in storage in the US rose by 35 billion cubic feet to 2,308 billion cubic feet during the cited week, which still left our gas supplies 688 billion cubic feet, or 23.0% below the 2,996 billion cubic feet that were in storage on July 28th of last year, and 565 billion cubic feet, or 19.7% below the five-year average of 2,873 billion cubic feet of natural gas that are typically in storage after the last full week of July, and at the lowest for this time of year since July 25th, 2003 (xls file)…median forecasts from a number analysts set expectations for 43 billion cubic feet to be added during the week ended July 27th, and again the actual 35 billion cubic feet increase was lower than anyone had expected, and also below the 43 billion cubic foot average of surplus natural gas that has typically been added to storage during the last full week of July over recent years…

since our natural gas supplies have now broken below the often cited five-year historical range for this time of year, we’ll include the graph from the storage report to show you what that looks like, and to explain what that implies…

August 2 2018 natural gas in storage as of July 27th

the above graph comes from this week’s Natural Gas Storage Report, and it shows the quantity of natural gas in storage in the lower 48 states over the period from July 2016 up to the week ending July 27th 2018 as a blue line, the average of natural gas in storage over the 5 years preceding the same dates shown as a heavy grey line, while the grey shaded background represents the range of the amount of natural gas in storage for any given time of year for the 5 years prior to the two years shown by the graph…thus the grey area also shows us the normal range of natural gas in storage as it fluctuates from season to season, with natural gas in storage underground normally building to a maximum by the end of October, falling through the winter, and usually bottoming out at the end of March, depending of course on the weather during any given year…so we can see that we started the 2017-18 heating season with our natural gas supplies a bit below normal, short of 3,800 billion cubic feet, and first fell to below the five-year historical range during the cold outbreak during the week ending January 5th, when we withdrew 359 billion cubic feet of natural gas from storage in one week to cut our supplies back to 2,767 billion cubic feet…however, since the rest of this past winter had not been as severe as the polar vortex year of 2014, our supplies quickly moved back above 2014 levels into that five year range, and have been there since, until this week…

we should also note that the blue line above shows that the quantity gas we had stored throughout the summer and fall of 2016 was at a record high for each week during the year, up until October, when US natural gas supplies topped 4 trillion cubic feet for the first time in history…our natural gas supplies then dropped from that record to nearly normal by the end of December, at which time we noted that shouldn’t have happened in a warmer than normal winter…by March of 2017, based on John Kemp’s data that showed heating demand was 17% below normal for the year, we were warning that we were not covering our natural gas needs from production, even while winter temperatures were above normal, and that something would have to give if we ever saw a colder than normal winter…four weeks ago, the reason for our falling supplies became clear; when the EIA reported that although US natural gas production has been increasing at a 10% rate annually, consumption of natural gas has been rising at an 11% rate, which means each week that continues we fall farther and farther behind…

right now, and for most of this year for that matter, the level of our natural gas supplies has been playing tag with the levels seen during the polar vortex year of 2014, when natural gas supplies were at seasonal record lows for 48 months straight; no other year in the five-year historical range or in the ten year range, for that matter, even comes close…we have to go back to the pre-fracking era year of 2003 to find a year when natural gas supplies were lower at this time of year than they are now….after the severely cold winter of 2014, US natural gas supplies fell to a low of 824 billion cubic feet at the end of March…that brought on higher natural gas prices – nearly twice what they are today, and a subsequent wave of increased production that rapidly lifted 2014 supplies 1,564 billion cubic feet higher at 2,388 billion cubic feet by the 1st of August…in contrast, after a cooler than normal winter, this year’s natural gas supplies were still at 1,354 at the end of March, and only have managed to increase by 954 billion cubic feet to 2308 billion cubic feet as of this week’s report..

as we pointed out two weeks ago, the EIA has already forecast a 10 year low for natural gas supplies going into this coming winter, forecasting that natural gas in storage would 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…however, to even start the winter at that low level, we’d now have to add an average of 83 billion cubic feet per week over the next 14 weeks, a target that looks increasingly unlikely with mid-summer additions so far averaging below 50 billion cubic feet per week over the past four weeks….even the wall street journal warned “don’t get complacent about natural gas’ this week, pointing out that if the rest of this summer and fall are like last year, then the starting level of storage for the upcoming heating season will be nearly identical to what it was in November 2013, before that polar vortex year, which “could set the natural gas market up for panicky winter buying“…however, if the natural gas isn’t there in storage before hand, no amount of panicky buying during the coldest days of winter can make it magically appear…

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 27th, showed that mostly because of a big drop in our oil exports, we had a surplus of oil to add to our commercial crude supplies for the fourteenth time in the past twenty-seven weeks… our imports of crude oil fell by an average of 21,000 barrels per day to an average of 7,749,000 barrels per day, after falling by an average of 1,296,000 barrels per day the prior week, while our exports of crude oil fell by an average of 1,373,000 barrels per day to an average of 1,310,000 barrels per day during the week, which meant that our effective trade in oil worked out to a net import average of 6,439,000 barrels of per day during the week ending July 27th, 1,352,000 more barrels per day than the net of our imports minus exports during the prior week…over the same period, field production of crude oil from US wells was reported to be 100,000 barrels per day lower at 10,900,000 barrels per day, which means that our daily supply of oil from our net imports and from wells totaled an average of 17,339,000 barrels per day during the reporting week… 

at the same time, US oil refineries were using 17,480,000 barrels of crude per day during the week ending July 27th, 195,000 barrels per day more than they used during the prior week, while during the same week 543,000 barrels of oil per day were reportedly being added to 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 and from oilfield production was 684,000 fewer barrels per day than what was added to storage plus what refineries reported they used during the week….to account for that disparity between the supply and the disposition of oil, the EIA needed to insert a (+684,000) 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”…with a difference between oil supply and its disposition as large as that, we have to consider the likelihood that one or more of this week’s EIA oil metrics is in error…. (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 8,004,000 barrels per day, now just 0.4% more than the 7,976,000 barrel per day average we were importing over the same four-week period last year….the 543,000 barrel per day increase in our total crude inventories was all added to 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 being down by 100,000 barrels per day to 10,900,000 barrels per day, because of a 68,000 barrel per day decrease in output from Alaska, on top of the 82,000 barrel per day decrease they experienced last week…that was enough to lower the national total, which is now being rounded to the nearest 100,000 barrels per day to more reflect the EIA’s inability to accurately model oil output from all the wells in the lower 48 states….US crude oil production for the week ending July 28th 2017 was reportedly at 9,430,000 barrels per day, so this week’s rounded oil production figure is roughly 15.6% above that of a year ago, and 29.3% 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 96.1% of their capacity in using 17,480,000 barrels of crude per day during the week ending July 28th, up from 93.8% of capacity the prior week, a refinery capacity utilization rate that is again above historical norms…the 17,480,000 barrels of oil that were refined this week were also at a seasonal high, now for the 9th week in a row, as compared to any previous 4th week of July…however, this week’s refinery throughput was only fractionally higher than the 17,408,000 barrels of crude per day that were being processed during the week ending July 28th 2017, when US refineries were operating at 95.4% of capacity….

with the increase in the amount of oil being refined this week, gasoline output from our refineries was also higher, increasing by 228,000 barrels per day to 10,483,000 barrels per day during the week ending July 27th, after our refineries’ gasoline output had decreased by 37,000 barrels per day during the week ending July 20th…as a result of that increase, our gasoline production during the week was 1.8% more than the 10,295,000 barrels of gasoline that were being produced daily during the week ending July 28th of last year…meanwhile, our refineries’ production of distillate fuels (diesel fuel and heat oil) rose by 2,000 barrels per day to 5,159,000 barrels per day, after falling by 285,000 barrels per day the prior two weeks…hence, this week’s distillates production was still 1.4% lower than the 5,232,000 barrels of distillates per day that were being produced during the week ending July 28th, 2017…

even with the increase in our gasoline production, our supply of gasoline in storage at the end of the week still fell by 2,536,000 barrels to 230,968,000 barrels by July 27th, the 14th decrease in 21 weeks, but just the 15th decrease in 38 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 32,000 barrels per day to a near record high of 9,878,000 barrels per day, after rising by 571,000 barrels per day the prior two weeks, and because our imports of gasoline fell by 92,000 barrels per day to 752,000 barrels per day, while our exports of gasoline fell by 156,000 barrels per day to 513,000 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 227,679,000 barrels, and roughly 6.5% above the 10 year average of our gasoline supplies for this time of the year…     

with our distillates production little changed this week, our supplies of distillate fuels increased by 2,983,000 barrels to 124,193,000 barrels during the week ending July 27th, the 7th increase in 10 weeks…our supplies increased mostly because the amount of distillates supplied to US markets, a proxy for our domestic consumption, fell by 556,000 barrels per day to 3,611,000 barrels per day, after increasing by 362,000 barrels per day over the prior 2 weeks, while our exports of distillates rose by 68,000 barrels per day to 1,279,000 barrels per day, and while our imports of distillates fell by 50,000 barrels per day to 157,000 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 inventory increase still leaves our distillates supplies 16.9% below the 149,414,000 barrels that we had stored on July 28th, 2017, and roughly 15.6% lower than the 10 year average of distillates stocks for this time of the year…     

finally, with our oil exports falling by nearly 1.4 million barrels per day, our commercial supplies of crude oil increased for the 15th time in 2018 and for the 21st time in the past year, rising by 3,803,000 barrels during the week, from 404,937,000 barrels on July 20th to 408,740,000 barrels on July 27th…however, with our crude oil inventories falling most of last year, our oil supplies as of July 27th were still 15.2% below the 481,888,000 barrels of oil we had stored on July 28th of 2017, 16.9% below the 491,914,000 barrels of oil that we had in storage on July 29th of 2016, and 3.4% below the 423,226,000 barrels of oil we had in storage on July 31st of 2015, when US supplies of oil had already risen above the nearly stable levels of under 400 million barrels we saw during the prior years…  

This Week’s Rig Count

US drilling activity decreased for the fifth time in eight weeks during the week ending August 3rd, following 11 consecutive weeks of increases, as the steady increases in drilling for oil we saw with higher oil prices during the first half of this year has now stalled with oil futures’ prices in deep backwardation….Baker Hughes reported that the total count of active rotary rigs running in the US decreased by 4 rigs to 1044 rigs over the week ending on Friday, which was still 90 more rigs than the 954 rigs that were in use as of the August 4th 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 fell by 2 rigs to 859 rigs this week, which was 94 more oil rigs than were running a year ago, while it was also 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 3 rigs to 183 rigs this week, which was also down by 6 rigs from the 189 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…however, a rig that was considered to be “miscellaneous” began drilling this week, and there are now two such “miscellaneous” rigs in use, in contrast to a year ago, when all rigs were specifically targeting either oil or gas..

one of the Gulf of Mexico drilling platforms that had been shut down in recent weeks was started back up this week, so there are now 16 rigs drilling in the Gulf of Mexico, same as the number that were drilling in the Gulf last year at this time…in addition, there is also a platform deployed offshore from Alaska this week, so the total national offshore count is now at 17 rigs, which is also the same as a year ago, when there was also a platform drilling in Alaska’s Cook Inlet…

the count of active horizontal drilling rigs was down by 10 rigs to at 922 horizontal rigs this week, which was the biggest drop in horizontal drilling since October 20 2017…however, that was still 105 more horizontal rigs than the 807 horizontal rigs that were in use in the US on August 4th of last year, while it was down from the record of 1372 horizontal rigs that were deployed on November 21st of 2014…on the other hand, the vertical rig count increased by 6 rigs to 62 vertical rigs this week, which was still down from the 73 vertical rigs that were in use during the same week of last year…meanwhile, the directional rig count was unchanged at 64 directional rigs this week, which was still down from the 74 directional rigs that were operating on August 4th 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 August 3rd, the second column shows the change in the number of working rigs between last week’s count (July 27th) and this week’s (August 3rd) count, the third column shows last week’s July 27th 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 4th of August, 2017…     

August 3 2018 rig count summary

as you can see, the 3 rig decrease in West Virginia accounts for this week’s natural gas rig losses by itself….however, since there was a gas rig startup in Pennsylvania, the Marcellus count was only down two rigs…the other natural gas rig that was shut down was in Ohio, which shows no change because that’s where the so called “miscellaneous” rig was started…both of the “miscellaneous rigs” are listed as being into the Utica shale, but the Utica can hardly be considered miscellaneous…therefore it seems likely that the miscellaneous drilling cited by Baker Hughes is the exploratory drilling by Cabot Oil and Gas, where they are drilling a number of test wells in Ashland, Holmes, Knox, Richland and Wayne counties….those wells are said to be targeting a formation 4000 feet below the Utica shale, possibly the Knox dolomite, although they might just be exploring for anything they think they can exploit…

meanwhile, while the horizontal rig count was down by 10 rigs, it isn’t evident where the losses were from Baker Hughes tables, which haven’t been updated to show the newest exploited basins in at least a decade…without drilling through the individual well logs in their pivot table, we can guess that 2 of them might have been pulled out of the San Juan basin in New Mexico, which has seen increased drilling of late, but that’s just an uneducated guess; other state counts offer no clue, because it’s likely that the decrease of horizontal rigs was masked by the simultaneous start-up of vertical drilling in some states, leaving the overall count unchanged…we would note that outside of the major producing states shown above, Alabama also saw another rig begin drilling this week, and now has two rigs deployed, same as a year ago…

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