another sub par natural gas build, US oil production back at record high, refinery utilization rate highest in 17 years

oil prices rose this week for the first time in eight weeks, even as the front month contract shifted to October oil midweek, which was, at the time, priced $1.51 a barrel less than the expiring September contractafter falling $1.72 or 2.6% to $65.91 a barrel last week on concerns about falling global demand, US light sweet crude for September delivery rose 52 cents to $66.43 a barrel on Monday as trade war worries eased and oil traders turned to concerns about the impact of U.S. sanctions on Iranthe Iran sanctions rally then picked up steam on Tuesday, with September oil logging a fourth straight gain before expiring 92 cents higher at $67.35 a barrel, while at the same time oil for October delivery became the quoted contract and rose 42 cents to close Tuesday at $65.84 a barrelOctober oil contract prices then jumped $2.02, or more than 3% from that level on Wednesday to a 2 week high of $67.86 a barrel, after the weekly EIA report indicated that U.S. crude supplies fell much more than traders had anticipated…oil prices then steadied on Thursday, as trade talks between the US and China collapsed, offsetting the impact of lower crude inventories, with October US crude ending 3 cents lower at $67.83 a barrel…the rally resumed on Friday, however, amid reports that Iranian tanker loading were already down by 700,000 barrels per day during the first half of August, 3 months before the sanctions were to kick in, as U.S. crude went on to finish the day 89 cents or 1.3% higher at $68.72 a barrel…thus for the week, the widely quoted price of oil rose $2.81 a barrel, or more than 4%, after seven consecutive weekly declines, while the contract for October oil ended $3.51 a barrel or 5.4% higher, having closed the prior week at $65.21 barrel..

meanwhile, prices for natural gas for September delivery continued in the same narrow price range they’ve been in since Spring, even as the seasonal storage deficit has become critical…after ending last week at $2.946 per mmBTU, natural gas prices rose to as high as $2.993 per mmBTU in early trading Wednesday, before sliding to a 4.7 cent loss on Friday and ending the week at $2.917 per mmBTU….this week’s EIA natural gas storage report for week ending August 17th indicated that natural gas in storage in the US rose by 48 billion cubic feet to 2,435 billion cubic feet during the cited week, which still left our gas supplies 684 billion cubic feet, or 21.9% below the 3,119 billion cubic feet that were in storage on August 18th of last year, and 599 billion cubic feet, or 19.7% below the five-year average of 3,034 billion cubic feet of natural gas that are typically in storage heading into the third weekend of August….the 48 billion cubic feet increase in natural gas supplies was close to the expectations of most market participant surveys and thus had little impact on natural gas prices, but it was still below the 52 billion cubic foot average of natural gas that has typically been added to storage during the second full week of August in recent years, thus making for the 7th consecutive below average inventory build…with that in mind, we’ll again take a look at the graph from the natural gas storage report to see the effect of this string of below average additions..

August 25 2018 natural gas supplies as of August 17th

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 August 2016 up to the week ending August 17th 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 spring heating requirements for any given year…what we want to point out on that graph this week is the divergence between the 5 year average amount of natural gas in storage for any given date of the year, which is shown as a dark grey graph, and that of current supplies of natural gas, shown in blue…notice that the blue line 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, and then dropped to near normal going into 2017, despite a much milder than normal winter…nonetheless, we can see that our natural gas supplies stayed above the average level through most of 2017, and didn’t fall to below normal until the 2017-2018 heating season began…notice that since then, however, the gap separating the grey “normal” line and the blue current supply line has gotten increasingly wider, up until this summer, when the blue line representing current supplies has failed to keep up with the normal level of increase for 7 weeks straight….hence, instead of rebuilding our natural gas supplies back to a normal level before winter, each week we have been getting progressively farther away from what we should have stored before the heating season begins at the beginning of November…

The Latest US Oil Data from the EIA

this week’s US oil data from the US Energy Information Administration, covering the week ending August 17th, indicated that because of a large drop in our oil imports, we had to withdraw oil from our commercial crude supplies to meet the needs of our refineries for the fifteenth time in the past thirty weeks… our imports  of crude oil fell by an average of 1,496,000 barrels per day to an average of 7,518,000 barrels per day, after rising by an average of 1,083,000 barrels per day the prior week, while our exports of crude oil fell by an average of 437,000 barrels per day to an average of 1,155,000 barrels per day during the week, which meant that our effective trade in oil worked out to a net import average of 6,363,000 barrels of per day during the week ending August 17th, 1,059,000 fewer 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 higher at a record 11,000,000 barrels per day, which means that our daily supply of oil from the net of our trade in oil and from wells totaled an average of 17,363,000 barrels per day during the reporting week… 

meanwhile, US oil refineries were using 17,892,000 barrels of crude per day during the week ending August 17th, 89,000 barrels per day less than the record amount they used during the prior week, while over the same period 834,000 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 305,000 barrels per day more than what refineries reported they used during the week….to account for that disparity between the supply of oil and the disposition of it, the EIA needed to insert a (-305,000) 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 was at +631,000 barrels per day during the prior week, we know that the week over week changes for one or more of this week’s EIA oil metrics must be in error by a statistically significant amount…(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 8,053,000 barrels per day, now 2.2% less than the 8,233,000 barrel per day average that we were importing over the same four-week period last year….the 834,000 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, even as a new sale of 11 million barrels from those reserves was announced this week….this week’s crude oil production was reported being 100,000 barrels per day higher at a record 11,000,000 barrels per day because the output from wells in the lower 48 states increased by a rounded 100,000 barrels per day to 10,600,000 barrels per day while oil output from Alaska rose by 34,000 barrels per day, and hence the national total, which is now being rounded to the nearest 100,000 barrels per day to reflect the EIA’s inability to accurately model oil output from all the wells in the lower 48 states, was thus also up by 100,000 barrels per day…..US crude oil production for the week ending August 18th 2017 was reportedly at 9,528,000 barrels per day, so this week’s rounded oil production figure was roughly 15.4% 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…

meanwhile, US oil refineries were operating at 98.1% of their capacity in using 17,892,000 barrels of crude per day during the week ending August 17th, unchanged the prior week, again the highest refinery utilization rates seen in 17 years….the 17,892,000 barrels per day of oil that were refined this week were also at a seasonal high, now for the 12th week in a row, as compared to any previous 3rd week of August….this week’s refinery throughput was 2.5% higher than the 17,461,000 barrels of crude per day that were being processed during the week ending August 18th 2017, when US refineries were operating at 95.4% of capacity….

with the modest reduction in the amount of oil being refined this week, gasoline output from our refineries was likewise modestly lower, decreasing by 83,000 barrels per day to 10,151,000 barrels per day during the week ending August 17th, after our refineries’ gasoline output had increased by 321,000 barrels per day during the week ending August 10th…with this week’s decrease, however, our gasoline production during the week was 3.9% lower than what had been a record 10,566,000 barrels of gasoline that were produced daily during the same week of last year…meanwhile, our refineries’ production of distillate fuels (diesel fuel and heat oil) rose by 89,000 barrels per day to a seasonal high of 5,426,000 barrels per day, after rising by 100,000 barrels per day over the prior week…that meant this week’s distillates production was 6.6% higher than the 5,091,000 barrels of distillates per day that were being produced during the week ending August 18th, 2017…

even with the modest decrease in our gasoline production, our supply of gasoline in storage at the end of the week still rose by 1,200,000 barrels to a seasonal high of 234,328,000 barrels by August 17th, the 11th increase in 26 weeks, and the 25th increase in 41 weeks, as gasoline inventories, as usual, were being built up over the winter months….our supplies of gasoline rose this week because our imports of gasoline rose by 154,000 barrels per day to 817,000 barrels per day, while our exports of gasoline fell by 291,000 barrels per day to 644,000 barrels per day, and because the amount of gasoline supplied to US markets fell by 59,000 barrels per day to 9,453,000 barrels per day, after rising by 166,000 barrels per day the prior week…after this week’s increase, our gasoline inventories were 1.9% higher than last August 18th’s level of 229,902,000 barrels, and roughly 9.8% above the 10 year average of our gasoline supplies for this time of the year…     

meanwhile, with the increase in our distillates production, our supplies of distillate fuels increased by 1,849,000 barrels to 130,838,000 barrels during the week ending August 17th, the 10th increase in 13 weeks…our supplies increased even though the amount of distillates supplied to US markets, a proxy for our domestic consumption, rose by 106,000 barrels per day to 4,065,000 barrels per day, after decreasing by 43,000 barrels per day the prior week, and even though our exports of distillates rose by 185,000 barrels per day to 1,043,000 barrels per day, while our imports of distillates fell by 29,000 barrels per day to 145,000 barrels per day….however, since our distillate supplies are still coming off the 14 year seasonal low that they hit 4 weeks ago, because they had been falling during the spring, when distillates supplies are usually increasing, this week’s inventory increase still leaves our distillates supplies 11.8% below the 148,415,000 barrels that we had stored on August 18th, 2017, and roughly 12.1% lower than the 10 year average of distillates stocks for this time of the year…  

finally, with our oil imports down by nearly 1.5 million barrels per day, our commercial supplies of crude oil decreased for the 17th time in 2018 and for the 30th  time in the past year, falling by 5,836,000 barrels during the week, from 414,194,000 barrels on August 10th to 408,358,000 barrels on August 17th …but even with that decrease, our crude oil inventories are still a bit above the five year average of crude oil supplies for this time of year, and roughly 15.5% above the 10 year average of crude oil stocks for the 3rd week of August…but since our crude oil inventories had been falling through most of the past year and a half, our oil supplies as of August 17th were 11.8% below the 463,165,000 barrels of oil we had stored on August 18th of 2017, 17.2% below the 492,962,000 barrels of oil that we had in storage on August 19th of 2016, and 2.5% below the 418,990,000 barrels of oil we had in storage on August 21st of 2015, when US supplies of oil had already risen above the nearly stable levels of under 400 million barrels that we’d seen during the prior years…  

This Week’s Rig Count

US drilling activity decreased for the sixth time in eleven weeks during the week ending August 24th, 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 have stalled since oil futures’ prices have shifted into deep backwardation…. Baker Hughes reported that the total count of rotary rigs running in the US fell by 13 rigs to 1044 rigs over the week ending on Friday, which was still 104 more rigs than the 940 rigs that were in use as of the August 25th report of 2017, but was still 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 was down by nine rigs at 860 rigs this week, which was still 101 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 fell by 4 rigs to 182 rigs this week, which was only 2 more rigs than the 184 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…meawhile, two rigs drilling exploratory wells considered to be “miscellaneous” continued operating this week, up from just one such “miscellaneous” rig a year ago…

three of the rigs that were shut down this week had been drilling from platforms in the Gulf of Mexico, cutting the Gulf of Mexico rig count down to 16 rigs, down from the 17 rigs that were drilling in the Gulf last year at this time…however, two rigs continued drilling offshore from Alaska this week, so the total national offshore count is at 18 rigs, which is thus up from last year’s total of 17 offshore rigs, as a year ago there was no offshore drilling other than in the Gulf…in addition to Gulf rigs, one of the rigs that had been drilling through an inland body of water in southern Louisiana was also shut down this week, leaving the ‘inland waters’ rig count at 1, down from the 3 rigs that were drilling on inland waters a year ago…

the count of active horizontal drilling rigs was down by 3 rigs to 919  horizontal rigs this week, which was still 123 more horizontal rigs than the 796 horizontal rigs that were in use in the US on August 25th of last year, but down from the record of 1372 horizontal rigs that were deployed on November 21st of 2014…at the same time, the vertical rig count decreased by 2 rigs to 63 vertical rigs this week, which was thus down from the 64 vertical rigs that were in use during the same week of last year…moreover, the directional rig count decreased by 8 rigs to 62 directional rigs this week, which was also down from the 80 directional rigs that were operating on August 25th 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 24th, the second column shows the change in the number of working rigs between last week’s count (August 17th) and this week’s (August 24th) count, the third column shows last week’s August 17th 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 25th of August, 2017…  

August 24 2018 rig count summary

as you can see, most of this week’s drilling pullback was in two states; Louisiana, which shed a total of 7 rigs, and North Dakota, which was down by 4 Williston oil rigs…the Louisiana count includes the 3 newly idled offshore rigs that were in the state’s waters in the Gulf of Mexico, the inland waters rig that was shut down, and three rigs in the northern part of the state, with some of those in the Haynesville shale, which saw a 3 rig increase on the Texas side of the state line, thus accounting for the Texas rig increase, even as other rigs were shifted elsewhere around Texas at the same time…note that the count in the major basins was down by 6 rigs, while the total horizontal count was down by just three; that would mean that 3 horizontal rigs began drilling elsewhere, in a basin not tracked separately by Baker Hughes…where that might be is not immediately evident, so one would have to dig through the individual well logs in the Baker Hughes pivot table to ascertain where…meanwhile, there are no changes hidden in the basin counts above, such as a switch of a rig from oil to gas drilling or vice-versa; what we see above are actually the only basin changes that occurred…thus, natural gas rigs were shut down in Ohio’s Utica and Pennsylvania’s Marcellus, while an additional gas directed rig was added in the Haynesville…the other 3 natural gas rigs that were shut down would have thus had to have been among the rigs other than those we’ve already accounted for, with even the three Louisiana offshore rigs among the likely possibilities….

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