contra the EIA, we believe that US natural gas supplies will start this winter at a 15 year low; net oil imports at a 27 year low; distillates demand at a record high; Oct OPEC report

oil prices fell for the first time in 5 weeks on a pair of reports showing growing US oil stockpiles and on a broad based selloff in financial markets globally…after hitting a 4 year high and closing 1.3% higher at $74.34 a barrel last week, prices for US crude oil contracts for November delivery recovered from a sharp morning drop to end just 5 cents lower at $74.29 a barrel on Monday, after a new report showed a small drop in oil inventories at the key US storage hub at Cushing, Oklahoma, and as investors bet that a new Chinese monetary stimulus would stimulate crude demand…prices then rose 67 cents to $74.96 a barrel on Tuesday, on evidence of falling Iranian crude exports and on oil production shutdowns in the Gulf of Mexico due to Hurricane Michael…however, with a major stock market selloff gathering steam on Wednesday, oil prices ignored those concerns and followed equities lower, closing down $1.79 at $73.17 a barrel, and extended those losses in post-settlement trade after the American Petroleum Institute reported that US crude inventories rose by 9.7 million barrels over the prior week…oil prices continued to tank on Thursday, falling $2.20 to $70.97 a barrel, as stock markets continued falling and as the EIA confirmed a much larger-than-expected increase U.S. crude inventories…as equity markets steadied and then rose on Friday, oil prices followed stocks higher, rising 37 cents to $71.34 a barrel, even as the International Energy Agency trimmed its forecasts for world oil demand growth for this year and nextUS crude prices thus ended with a loss of 4% on the week, while Brent crude for December, the international benchmark, recovered from a Friday morning drop of over a dollar to end up 17 cents at $80.43 a barrel, still with a loss of 4.4% for the week….

natural gas prices for November, meanwhile, jumped 12.4 cents on Monday to $3.267 per mmBTU as Hurricane Michael approached the Gulf Coast and the National Weather Service called for a likelihood of below-average temperatures across much of the US in their 6 to 10 day outlook.…gas prices then traded as high as $3.368 per mmBTU on Tuesday, the highest natural gas price since the January cold snap, but ended the day a tenth of a cent lower…after a 1.8 cent increase on Wednesday, natural gas prices then fell 6.2 cents on Thursday and 6.1 cents on Friday to end the week just a half a percent higher at $3.161 per mmBTU, as the natural gas storage reported showed a seasonally large injection in line with expectations…

this week’s natural gas storage report from the EIA for week ending October 5th indicated that natural gas in storage in the US rose by 90 billion cubic feet to 2,956 billion cubic feet during that week, which left our gas supplies 627 billion cubic feet, or 17.5% below the 3,583 billion cubic feet that were in storage on October 6th of last year, and 607 billion cubic feet, or 17.0% below the five-year average of 3,563 billion cubic feet of natural gas that are typically in storage after the first week of October….this week’s 90 billion cubic feet increase in natural gas supplies was on target with market expectations that clustered in the upper 80s to lower 90s billion cubic feet range, and also matched the 90 billion cubic foot average of natural gas that have typically been added to storage during the first week of October in recent years, but was still only the 4th average or above average inventory increase in the past fourteen weeks…natural gas storage facilities in the Midwest saw a 35 billion cubic feet increase this week, reducing their supply deficit to 13.2% below normal, while supplies in the East increased by 27 billion cubic feet and are now only 9.1% below normal for this time of year…meanwhile, the South Central region saw a 25 billion cubic feet increase in their supplies, as their natural gas storage deficit decreased to 25.0% below their five-year average, but there was no addition to storage in the Pacific region, where natural gas supplies are now 22.9% below normal for this time of year…. 

back at the beginning of September, we forecast that US natural gas supplies would start this winter at a 15 year low, & maybe even lower than that, based on the level of gas in storage and the ongoing additions at that time…two weeks ago, we confirmed that outlook, as US natural gas supplies seemed certain to end September at their lowest in 15 years….this week, the October Short-Term Energy Outlook from the EIA forecast that U.S. natural gas inventories would reach 3,263 billion cubic feet by the end of October, the lowest since 2005…so we’ll take a quick look at the data to see how we differ…

as we mentioned earlier, natural gas supplies as of October 5th were at 2,956 billion cubic feet, so to hit the EIA’s target, we’d have to add 77 billion cubic feet of natural gas a week to storage through October, which is certainly possible but becomes increasingly difficult as the the weather gets colder and northern parts of the US begin to burn gas for heat….checking the historical natural gas storage archive files (xls), we find that natural gas supplies were at 3229 billion cubic feet on November 4th of 2005, and continued to rise to 3282 billion cubic feet from there, as apparently the second week in November of that year was exceptionally warm…so to truly better 2005 pre-winter storage levels, we’d not only have to add 77 billion cubic feet per week through October, we’d also have to add 20 billion cubic feet of gas to storage during the first full week of November….on the other hand, 2003 natural gas supplies only rose as high as 3187 billion cubic feet by November 7th, before they began falling as the heating season began…to better that, we’d only have to add 58 billion cubic feet to storage weekly through November 2nd, which considering the two week forecast for colder than normal weather for much of the country, now looks much more doable…so we’ll stick with our forecast for natural gas supplies to start this winter at a 15 year low…

The Latest US Oil Data from the EIA

this week’s US oil data from the US Energy Information Administration, covering the week ending October 5th, showed that despite lower oil imports and higher oil exports, we were able to add oil to our commercial crude supplies for the third time in eight weeks, partly because of a slowdown in domestic refining…our imports of crude oil fell by an average of 658,000 barrels per day to an average of 7,397,000 barrels per day, after rising by an average of 163,000 barrels per day the prior week, while our exports of crude oil rose by an average of 853,000 barrels per day to an average of 2,576,000 barrels per day during the week, which meant that our effective trade in oil worked out to a net import average of 4,821,000 barrels of per day during the week ending October 5th, 1,421,000 fewer barrels per day than the net of our imports minus exports during the prior week, and our lowest net imports since July 1991…over the same period, field production of crude oil from US wells was reportedly 100,000 barrels per day higher than last week at 11,200,000 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 16,021,000 barrels per day during this reporting week… 

meanwhile, US oil refineries were using 16,239,000 barrels of crude per day during the week ending October 5th, 352,000 barrels per day less than the amount of oil they used during the prior week, while over the same period 669,000 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 would seem to indicate that our total working supply of oil from net imports and from oilfield production was 887,000 fewer barrels per day than what refineries reported they used during the week plus what oil was added to storage….to account for that disparity between the supply of oil and the consumption or new storage of it, the EIA needed to insert a (+887,000) barrel per day figure onto line 13 of the weekly U.S. Petroleum Balance Sheet to make the reported data for the daily 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 unaccounted for crude oil as large a factor as that, we have to figure one or more of this week’s oil metrics is 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 slipped to an average of 7,797,000 barrels per day, still 5.3% more than the 7,407,000 barrel per day average that we were importing over the same four-week period last year….the net 669,000 barrel per day increase in our total crude inventories included an 855,000 barrel per day increase in our commercially available stocks of crude oil and a 187,000 barrel per day decrease in the amount of oil in our Strategic Petroleum Reserve, likely part of a sale of 11 million barrels from those reserves to Exxon et al that closed five weeks ago….this week’s crude oil production was reported as increasing by 100,000 barrels per day to 11,200,000 barrels per day because of a rounded 100,000 barrels per day increase to 10,700,000 barrels per day in the rounded output from wells in the lower 48 states, while a 4,000 barrels per day increase to 486,000 barrels per day in oil output from Alaska was not enough to impact the national total, which is now being rounded to the nearest 100,000 barrels per day….last year’s US crude oil production for the week ending October 6th was at 9,480,000 barrels per day, so this week’s rounded oil production figure was roughly 18.1% above that of a year ago, and up 32.9% from 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 88.8% of their capacity in using 16,239,000 barrels of crude per day during the week ending October 5th, down from 90.4% of capacity the prior week, but still a normal utilization rate as we head into the refinery maintenance season….the 16,239,000 barrels per day of oil that were refined this week were fractionally below the 16,258,000 barrels of crude per day that were processed during the week ending October 6th 2017, when US refineries were operating at 89.2% of capacity, and thus only the 2nd time in the past 19 weeks when our refinery throughput was not at a record for the date in question…

with the decrease in the amount of oil being refined this week, gasoline output from our refineries was likewise lower, decreasing by 239,000 barrels per day to 9,711,000 barrels per day during the week ending October 5th, after our refineries’ gasoline output had increased by 118,000 barrels per day during the week ending September 28th…with the lower output, our gasoline production during the week was thus fractionally lower than the 9,741,000 barrels of gasoline that were being produced daily during the same week last year…meanwhile, our refineries’ production of distillate fuels (diesel fuel and heat oil) decreased by just 1,000 barrels per day to 5,028,000 barrels per day, after that output had increased by 34,000 barrels per day the prior week….hence, this week’s distillates production was still 1.3% higher than the 4,964,000 barrels of distillates per day that were being produced during the week ending October 6th 2017, as refineries continue to catch up with this summer’s distillates shortfall…. 

even with the increase in our gasoline production, our supply of gasoline in storage at the end of the week still rose by 951,000 barrels to 236,172,000 barrels by October 5th, the 15th increase in the past 33 weeks, a period encompassing the spring and summer weeks of higher consumption when gasoline supplies usually trend lower….however, part of the reason our supplies of gasoline rose this week was because of a 203,000 barrel per day adjustment to correct for the imbalance created by the blending of fuel ethanol and motor gasoline blending components, as the amount of gasoline supplied to US markets fell by 24,000 barrels per day to 9,102,000 barrels per day, after rising by 115,000 barrels per day the prior week, while our exports of gasoline rose by 312,000 barrels per day to an October record high 1,029,000 barrels per day, and while our imports of gasoline fell by 20,000 barrels per day to 693,000 barrels per day….with this week’s increase, our gasoline inventories are again at a seasonal high, 6.7% higher than last October 6th’s level of 221,426,000 barrels, and roughly 9.8% above the 10 year average of our gasoline supplies for this time of the year

meanwhile, with our distillates production essentially unchanged, our supplies of distillate fuels were somewhat lower, decreasing by 2,666,000 barrels to 133,465,000 barrels during the week ending October 5th, their third straight decrease after 8 weeks of increases…our distillates supplies decreased because the amount of distillates supplied to US markets, a proxy for our domestic demand, rose by 752,000 barrels per day to a record high 4,629,000 barrels per day, while our exports of distillates fell by 597,000 barrels per day to a twenty week low of 967,000 barrels per day, and while our imports of distillates rose by 25,000 barrels per day to 4,629,000 barrels per day….after this week’s decrease, our distillate supplies ended fractionally lower than the 133,959,000 barrels that we had stored on October 6th, 2017, and roughly 5.7% below the 10 year average of distillates stocks for this time of the year…     

finally, despite higher oil exports and lower oil imports, our commercial supplies of crude oil increased for the 3rd week in a row and for the 19th time in 2018, as they rose by 5,987,000 barrels during the week, from 403,964,000 barrels on September 28th to 409,951,000 barrels on October 5th…that increase means that our crude oil inventories are again above the five-year average of crude oil supplies for this time of year, and roughly 20.6% above the 10 year average of crude oil stocks for the end of September, with the disparity arising because it wasn’t early 2015 that our oil inventories first rose above 400 million barrels…but since our crude oil inventories had been falling through most of the past year and a half, our oil supplies as of October 5th were still 11.3% below the 462,216,000 barrels of oil we had stored on October 6th of 2017, 13.5% below the 473,958,000 barrels of oil that we had in storage on October 7th of 2016, and 6.1% below the 436,590,000 barrels of oil we had in storage on October 9th of 2015…   

OPEC’s Monthly Oil Market Report

next we’re going to review OPEC’s October Oil Market Report (covering September OPEC & global oil data), which was released on Thursday and is available as a free download, and hence it’s the report we check for monthly global oil supply and demand data…the first table from this monthly report that we’ll look at is from the page numbered 58 of that report (pdf page 70), and it shows oil production in thousands of barrels per day for each of the current OPEC members over the recent years, quarters and months, as the column headings indicate…for all their official production measurements, OPEC uses an average of estimates from six “secondary sources”, namely the International Energy Agency (IEA), the oil-pricing agencies Platts and Argus, ‎the U.S. Energy Information Administration (EIA), the oil consultancy Cambridge Energy Research Associates (CERA) and the industry newsletter Petroleum Intelligence Weekly, as an impartial adjudicator as to whether their output quotas and production cuts are being met, to thus resolve any potential disputes that could arise if each member reported their own figures…

September 2018 OPEC crude output via secondary sources

as we can see on this table of official oil production data, OPEC’s oil output increased by 132,000 barrels per day to 32,761,000 barrels per day in September, from their August production total of 32,629,000 barrels per day….however, that August figure was originally reported as 32,565,000 barrels per day, so OPEC’s August output was therefore revised 64,000 barrels per day higher with this report (for your reference, here is the table of the official August OPEC output figures as reported a month ago, before this month’s revisions)…as you can tell from the far right column above, increases of 108,000 barrels per day in the oil output from Saudi Arabia and 103,000 barrels per day in the oil output from Libya were the major reasons for this month’s increase, more than offsetting the decrease of 150,000 barrels per day in Iranian output…however, excluding new member Congo, OPEC’s August output of 32,761,000 barrels per day was still 281,000 barrels per day below the 32,730,000 barrels per day revised quota they agreed to at their November 2017 meeting, mostly due to the big drop in Venezuelan output, which has also been impacted by US sanctions…  

the next graphic we’ll look at shows us both OPEC and global monthly oil production on the same graph, over the period from October 2016 to September 2018, and it’s taken from the page numbered 59 (pdf page 71) of the October OPEC Monthly Oil Market Report…on this graph, the cerulean blue bars represent OPEC oil production in millions of barrels per day as shown on the left scale, while the purple graph represents global oil production in millions of barrels per day, with the millions of barrels per day of global output shown on the right scale…      

September 2018 OPEC report global oil supply

OPEC’s preliminary estimate indicates that total global oil production rose by 230,000 barrels per day to a rounded record high 99.0 million barrels per day in September, after August’s total global output figure was revised down by 110,000 barrels per day from the 98.88 million barrels per day global oil output that was reported a month ago, as non-OPEC oil production rose by 100,000 barrels per day in September after that revision, with Latin American countries the major contributor to the non-OPEC increase….global oil output for September was also 2.72 million barrels per day, or 2.8% higher than the 96.28 million barrels of oil per day that were being produced globally in September a year ago (see the October 2017 OPEC report online (pdf) for the originally reported year ago details)…with the September increase in OPEC’s output following the upward revision to their August output, their September oil production of 32,761,000 barrels per day represented 33.1% of what was produced globally during the month, up 0.1% from their 33.0% of global share in August, which had originally been reported as a 29.9% share….OPEC’s September 2017 production was reported at 32,748,000 barrels per day, which means that the 14 OPEC members who were part of OPEC last year, excluding new member Congo, are still producing 299,000 fewer barrels per day of oil than they were producing a year ago, during the ninth month that their production quotas were in effect, with a 693,000 barrel per day decrease in output from Venezuela and a 380,000 barrel per day decrease in output from Iran from that time responsible for the cartel’s output drop… 

despite the 230,000 barrel per day increase in global oil output in September, elevated summertime demand meant that we again saw a deficit in the amount of oil being produced globally during the month, as this next table from the OPEC report will show us…  

September 2018 OPEC report global oil demand

the table above comes from page 32 of the October OPEC Monthly Oil Market Report (pdf page 42), and it shows regional and total oil demand in millions of barrels per day for 2017 in the first column, and OPEC’s estimate of oil demand by region and globally quarterly over 2018 over the rest of the table…on the “Total world” line of the fourth column, we’ve circled in blue the figure that’s relevant for September, which is their revised estimate of global oil demand during the third quarter of 2018…      

OPEC’s estimate is that during the 3rd quarter of this year, all oil consuming regions of the globe have been using 99.35 million barrels of oil per day, which was a downward revision by a rounded 0.04 million barrels of oil per day from their prior oil consumption estimate for the quarter (see demand revisions circled in green above)….meanwhile, as OPEC showed us in the oil supply section of this report and the summary supply graph above, the world’s oil producers were producing 99.0 million barrels per day during September, which means that there was a still a shortfall of around 350,000 barrels per day in global oil production vis-a vis the demand estimated for the month…   

while global demand for the 3rd quarter was reportedly revised 0.04 million barrels per day lower, that’s a rounded change from the 99.38 million barrels of oil per day that was reported last month, or 0.03 million barrels less than the rounded figure we used last month…meanwhile, total global oil output for August was revised down by 110,000 barrels per day at the same time, which means that the global shortfall of 500,000 barrels per day that we had figured for August last month should thus be revised to 580,000 barrels per day…also a month ago, we estimated there was a shortfall of around 990,000 barrels per day in global oil production vis-a vis the 99.38 million barrels per day demand then reported for July, so we have to revise our July oil shortfall figure to 960,000 barrels per day to account for the downward revision in demand….

in addition, last month we estimated there was a shortfall of around 60,000 barrels per day in global oil production vis-a vis the demand in June, a shortfall for May of 500,000 barrels per day, and a shortfall in April of 310,000 barrels per day… but as we see in the green ellipse above, oil demand for the 2nd quarter was revised 10,000 barrels per day lower, so our revised global oil shortfalls for the 2nd quarter months will thus now be 50,000 barrels per day for June, 490,000 barrels per day for May, and 300,000 barrels per day for April…

while global oil demand figures for the second quarter were revised lower, you can also see circled in green that global oil demand figures for the first quarter of 2018 were revised 40,000 barrels per day higher, which means that our previously recomputed oil surplus for the first quarter of 2018 will also have to be recomputed again….since we had last figured a global oil output surplus of 60,000 barrels per day for March, a surplus of 240,000 barrels per day for February, and a surplus of 80,000 barrels per day for January, that 40,000 barrels per day revision to demand means that our new figures will show a surplus of just 20,000 barrels per day for March, a surplus of 200,000 barrels per day for February, and a surplus of 40,000 barrels per day for January…

finally, by totaling up these 9 monthly revised estimates of surplus or shortfall, we find that for the first nine months of 2018, global oil demand exceeded production by roughly 76,470,000 barrels, actually a comparatively small net oil shortfall that is the equivalent of roughly 18.5 hours of global oil production at the September production rate

This Week’s Rig Count

US well drilling rig activity increased for the second time in 3 weeks during the week ending October 12th, but it still remains off the pace it was at the end of May, as the steady increases in drilling for oil we saw with higher oil prices during the first part of this year have stalled, with the backlog of uncompleted oil wells increasing monthly while oil futures’ prices remained in backwardation….Baker Hughes reported that the total count of rotary rigs running in the US increased by 11 rigs to 1063 rigs over the week ending on Friday, which was also 135 more rigs than the 928 rigs that were in use as of the October 13th 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 increased by 8 rigs to 869 rigs this week, their first increase in four weeks, which was 126 more oil rigs than were running a year ago, while it was 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 rose by 4 rig to 193 rigs, which was also 8 more than the 185 natural gas rigs that were drilling a year ago, but way down from the modern high of 1,606 natural gas rigs that were deployed on August 29th, 2008…on the other hand, 1 of the 2 rigs that were categorized as “miscellaneous” was shut down this week, with the one remaining still up from a year ago, when no such “miscellaneous” rigs were deployed …

offshore drilling in the Gulf of Mexico was unchanged from last week at 22 rigs, which was up from the 20 Gulf of Mexico rigs active a year ago…in addition, a single rig continued to drill offshore from Alaska this week, so the total national offshore count is at rigs, up by 3 from last year’s total of 20 offshore rigs, as a year ago there was no offshore drilling other than in the Gulf…..

the count of active horizontal drilling rigs was up by 8 rigs to 927 horizontal rigs this week, which was also 141 more horizontal rigs than the 786 horizontal rigs that were in use in the US on October 13th of last year, but 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 4 rigs to 70 directional rigs this week, which was still down from the 79 directional rigs that were in use during the same week of last year….on the other hand, the vertical rig count was down by 1 rig to 66 vertical rigs this week, which was nonetheless up from the 63 vertical rigs that were operating on October 13th 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 October 12th, the second column shows the change in the number of working rigs between last week’s count (October 5th) and this week’s (October 12th) count, the third column shows last week’s October 5th active rig count, the 4th column shows the change between the number of rigs running on Friday and those on the equivalent weekend 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 13th of October, 2017…     

October 12 2018 rig count summary

as you can see, this week’s increases were concentrated in Texas and New Mexico, where 3 of the new Permian basin rigs were located, as drilling in Texas Oil Districts encompassing the Permian only increased by 1 rig…and as you can also see, with an 11 rig increase this week, the basin count table this week is missing data on 9 rigs, as 6 oil directed rigs and 3 targeting natural gas were started up in basins not tracked separately by Baker Hughes…the other natural gas rig addition was in the Arkoma Woodford of Oklahoma, so everything else you see above references oil rigs…meanwhile, other than the changes in activity shown in the major producing states table above, Florida and South Dakota both saw their only active rig shut down this week, drilling activity which in both cases was relatively short lived; last year, neither state had any drilling during the last half of 2017…

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