DUC wells at a record high, leading to a 6.5 month backlog of unfracked wells; rig count at a 41 month high nonetheless

oil prices were down for a second week and hit a one month low on Thursday, as trading on fundamentals gave way to geopolitical concerns arising from the Saudi orchestrated dismemberment and subsequent killing of Washington Post columnist and Saudi insider Jamal Khashoggi, who apparently had information linking the Saudi royals to the 9-11 trade tower bombing and hence had to be shut up…after falling 4% to $71.34 a barrel in a broad based global market selloff last week, prices for US crude oil contracts for November delivery spiked to as high as $72.70 a barrel on Monday after Saudi Al Arabiya television warned that if the US sanctioned Saudi Arabia for the Khashoggi killing, we would “face an economic disaster that would rock the entire world,”, but settled back to close just 44 cents higher at $71.78 a barrel on an outlook for long term weakness in oil demand…oil prices then rose another 14 cents to $71.92 a barrel in cautious trading on Tuesday as expectations of higher U.S.oil inventories offset reports of lower oil exports from Iran…after an initial rally to $72.43 a barrel on Wednesday, oil prices tumbled more than 3% to close down $2.17 at $69.75 a barrel, after the EIA reported an increase in US crude supplies that exceeded expectations for the 4th week in a row…oil prices fell another $1.10 to a one month low of $68.65 a barrel on Thursday, as oil traders’ concerns turned to the potential recessionary impact of the escalating trade war between the Trump administration and Chinaoil prices then bounced back 47 cents on U.S.-Saudi tensions over the Khashoggi killing on Friday, but still ended the week 3.1% lower than last Friday at $69.12 a barrel..

natural gas prices, on the other hand, ended the week higher on volatile trading on changing weather forecasts and concerns over winter supplies…natural gas prices first rose 8.1 cents to $3.242 per mmBTU on Monday as forecasts indicated the current cold snap would linger through October, then gave up three-tenths of a cent on Tuesday, and then rose another 8.1 cents to $3.240 per mmBTU on Wednesday, again on the likelihood of below-average temperatures east of the Rockies and concern that would exacerbate the storage crisis…but a forecast that the cold weather was breaking down precipitated a dramatic Thursday sell-off in November natural gas contracts, which ended 12.2 cents lower at $3.198 per mmBTU, after the natural gas storage report came in close to expectationsnatural gas contracts for November delivery then rebounded 5.2 cents on Friday to end the week at $3.250 per mmBTU, a 2.8% increase on the week..

this week’s natural gas storage report from the EIA for week ending October 12th indicated that natural gas in storage in the US rose by 81 billion cubic feet to 3,037 billion cubic feet during that week, which left our gas supplies 601 billion cubic feet, or 16.5% below the 3,638 billion cubic feet that were in storage on October 13th of last year, and 605 billion cubic feet, or 17.0% below the five-year average of 3,642 billion cubic feet of natural gas that are typically in storage after the second week of October….this week’s 81 billion cubic feet increase in natural gas supplies was a bit below consensus expectations of an 85 billion cubic foot increase, but was a bit above the average of 79 billion cubic feet of natural gas that have been added to storage during the second week of October in recent years, still only the 5th average or above average inventory increase in the past fifteen weeks…natural gas storage facilities in the Midwest saw a 37 billion cubic feet increase this week, reducing their supply deficit to 12.0% below normal, while supplies in the East increased by 22 billion cubic feet but still saw their deficit fall to 8.5% below normal for this time of year…the South Central region saw a 24 billion cubic feet increase in their supplies, as their natural gas storage deficit decreased to 24.8% below their five-year average…however, a natural gas pipeline rupture in Canada cutoff imports to both the Mountain and Pacific regions, so Mountain region supplies fell 3 billion cubic feet and their deficit from normal rose to 16.9%, while there was just a 2 billion cubic feet addition to storage in the Pacific region, where the natural gas supply deficit rose to 23.3% below normal for this time of year…. 

to get an idea of what kind of temperature factors led to this past week’s 81 billion cubic feet increase in natural gas stores, we’ll take a quick look at the most recent average temperature summary from the EIA’s natural gas storage dashboard:

October 19 2018 average regional temperatures

the above graphic from the EIA’s natural gas storage dashboard gives us both the average daily temperature from October 5th thru October 18th in each of the five natural gas regions, as well as the variance from normal for each of those daily temperature averages, as color coded at the bottom…to take temperatures in the East for example, the initial 68 and 69 degree averages on October 5th and October 6th are colored with the 2nd lightest shade of brown, indicating those average temperatures were 5 to 9 degrees above normal for the region on those dates…temperatures in the East from October 7th through the 11th are a darker shade of brown, indicating those average temperatures were 10 to 14 degrees above normal; however, the average temperatures in the East had dropped to 56 degrees by October 13th and 14th, and are thus color coded in light blue as being 1 to 4 degrees above normal…so this graphic gives us not only the actual average temperature for each region for each day, but also indicates how much that temperature deviated from the norm..

while the departure from normal helps us understand why a particular week may have deviated from past averages, what really matters for natural gas consumption is the actual temperature…for instance, an average temperature of 68 on a given day is not going to see much heating or cooling demand whether it is above normal in the Northeast or below normal in the deep south…what this graphic shows for week ending October 12th was that temperatures in the East were a bit warm and might have seen some air conditioning use, but not much; that temperatures in the Midwest probably saw little demand for cooling or heating, at least until the last two days of the period, that temperatures in the south central states were a bit warmer than normal and probably saw some modest air conditioning demand, and that temperatures in the Mountain States and Pacific states were cooler than normal and probably saw some demand for heating…however, since we are in this so-called “shoulder season” between the cooling season and the heating season, that means that we were able to store 81 billion cubic feet of natural gas in advance of the winter for for week ending October 12th…since we can see that the current week was much cooler nationally, we would expect that more furnaces will be clicking on nationally, and the associated natural gas surplus will be much less…

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 12th, showed that because of lower oil exports, higher oil imports, and a slowdown in oil refining, we were able to add oil to our commercial crude supplies for a fourth week in a row, despite a modest hurricane related drop in domestic oil production…our imports of crude oil rose by an average of 218,000 barrels per day to an average of 7,615,000 barrels per day, after falling by an average of 658,000 barrels per day the prior week, while our exports of crude oil fell by an average of 794,000 barrels per day to an average of 1,782,000 barrels per day during the week, which meant that our effective trade in oil worked out to a net import average of 5,833,000 barrels of per day during the week ending October 12th, 1,012,000 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 reportedly 300,000 barrels per day lower than the prior week at 10,900,000 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 16,733,000 barrels per day during this reporting week… 

meanwhile, US oil refineries were using 16,316,000 barrels of crude per day during the week ending October 12th, 352,000 barrels per day less than the amount of oil they used during the prior week, while over the same period 774,000 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 357,000 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 inserted a (+357,000) 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”  (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 7,695,000 barrels per day, still 3.5% more than the 7,435,000 barrel per day average that we were importing over the same four-week period last year….the net 774,000 barrel per day increase in our total crude inventories was due to an 927,000 barrel per day increase in our commercially available stocks of crude oil, which was partially offset by a 157,000 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 six weeks ago….this week’s crude oil production was reported as down by 300,000 barrels per day to 10,900,000 barrels per day because of a rounded 300,000 barrels per day decrease to 10,400,000 barrels per day in the rounded output from wells in the lower 48 states as Gulf of Mexico production was shut in due to Hurricane Michael, while a 13,000 barrels per day increase to 499,000 barrels per day in oil output from Alaska was not enough to impact the reported 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 13th had fallen to 8,406,000 barrels per day in another hurricane impact, so comparing this week’s oil production to that of a year ago is not meaningful…

meanwhile, US oil refineries were operating at 88.8% of their capacity in using 16,316,000 barrels of crude per day during the week ending October 12th, unchanged from 88.8% of capacity the prior week, a typical utilization rate for the refinery maintenance season….the 16,316,000 barrels per day of oil that were refined this week were once again at a seasonal high, for the 18th out of the past 20 weeks, 5.7% higher than the 15,439,000 barrels of crude per day that were processed during the week ending October 13th, 2017, when US refineries were operating at 84.5% of capacity, an inordinately low figure probably due to a spate of storms active in the Gulf region at that time

despite the decrease in the amount of oil being refined this week, gasoline output from our refineries was quite a bit higher, increasing by 719,000 barrels per day to 10,430,000 barrels per day during the week ending October 12th, after our refineries’ gasoline output had decreased by 239,000 barrels per day during the week ending October 5th…with that jump in gasoline output, our gasoline production during the week was thus 4.0% higher than the 10,031,000 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 213,000 barrels per day to 4,784,000 barrels per day, after that output had decreased by 1,000 barrels per day the prior week….even so, this week’s distillates production was still fractionally higher than the 4,964,000 barrels of distillates per day that were being produced during the week ending October 13th 2017…. 

even with the big jump in our gasoline production, our supply of gasoline in storage at the end of the week still fell by 2,014,000 barrels to 234,156,000 barrels by October 12th, the 19th decrease in the past 34 weeks, a period encompassing the spring and summer weeks of higher gasoline consumption, when supplies usually trend lower….our supplies of gasoline fell this week because our exports of gasoline rose by 135,000 barrels per day to an October record high of 1,164,000 barrels per day, and because our imports of gasoline fell by 299,000 barrels per day to 394,000 barrels per day, and because the amount of gasoline supplied to US markets rose by 104,000 barrels per day to 9,182,000 barrels per day….but even after this week’s decrease, our gasoline inventories are still at a seasonal high, 5.3% higher than last October 13th’s level of 222,334,000 barrels, and roughly 10.4% above the 10 year average of our gasoline supplies for this time of the year

meanwhile, with our distillates production somewhat lower, our supplies of distillate fuels also fell again, decreasing by 827,000 barrels to 132,638,000 barrels during the week ending October 12th, their fourth straight decrease after 8 straight weeks of increases…our distillates supplies decreased even as the amount of distillates supplied to US markets, a proxy for our domestic demand, fell by 836,000 barrels per day from last week’s record high to 3,793,000 barrels per day, partly because our exports of distillates rose by 338,000 barrels per day to 1,305,000 barrels per day, while our imports of distillates fell by 22,000 barrels per day to 165,000 barrels per day….after this week’s decrease, our distillate supplies ended 1.4% below the 134,487,000 barrels that we had stored on October 13th, 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 4th week in a row and for the 20th time in 2018, as they rose by 6,490,000 barrels during the week, from 409,951,000 barrels on October 5th to 416,441,000 barrels on October 12th…that increase means that our crude oil inventories are now about 2% above the five-year average of crude oil supplies for this time of year, and roughly 22% above the 10 year average of crude oil stocks for the 2nd weekend in October, with the disparity between those figures arising because it wasn’t until 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 until just recently, our oil supplies as of October 12th were still 8.7% below the 456,485,000 barrels of oil we had stored on October 13th of 2017, 11.2% below the 468,711,000 barrels of oil that we had in storage on October 14th of 2016, and 6.3% below the 444,618,000 barrels of oil we had in storage on October 16th of 2015…    

This Week’s Rig Count

US well drilling rig activity increased for the third time in 4 weeks during the week ending October 19th, eclipsing this year’s previous high set after the first week of June, and thus it’s now the highest since March 20th 2015….Baker Hughes reported that the total count of rotary rigs running in the US increased by 4 rigs to 1067 rigs over the week ending on Friday, which was also 154 more rigs than the 913 rigs that were in use as of the October 20th 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 4 rigs to 873 rigs this week, which was also 137 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 1 rig to 194 rigs, which was also 17 more than the 177 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, the last active rig categorized as “miscellaneous” was shut down this week, so there are no “miscellaneous” rigs deployed now, same as a year ago…

offshore drilling in the Gulf of Mexico fell by 3 rigs to 19 rigs this week, which was down from the 20 Gulf of Mexico rigs active a year ago…however, a single rig continued to drill offshore from Alaska this week, so the total national offshore count is at 20 rigs, same as a year ago, when there was no offshore drilling other than in the Gulf…..

the count of active horizontal drilling rigs was down by 1 rig to 926 horizontal rigs this week, which was still 155 more horizontal rigs than the 771 horizontal rigs that were in use in the US on October 20th of last year, but down from the record of 1372 horizontal rigs that were deployed on November 21st of 2014…on the other hand, the directional rig count was up by 2 rigs to 72 directional rigs this week, which was still down from the 80 directional rigs that were in use during the same week of last year….in addition, the vertical rig count was up by 3 rigs to 69 vertical rigs this week, which was also up from the 62 vertical rigs that were operating on October 20th 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 19th, the second column shows the change in the number of working rigs between last week’s count (October 12th) and this week’s (October 19th) count, the third column shows last week’s October 12th 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 20th of October, 2017…      

October 19 2018 rig count summary

as you can see, this week’s drilling increase was all about Texas, as except for California, all other states that saw changes had their rig counts reduced…of the 8 rigs added in Texas, 4 were in the core Texas Oil District 8, or the Permian Delaware basin, and 2 were in Texas Oil District 7C, or the Permian Midland basin; so that means either that more than one Permian rig was shut down in New Mexico, or that some of the rig start ups in the Texas Permian region were conventional rigs that didn’t involve horizontal drilling in the Permian itself…note that despite the 3 rig decrease in Gulf of Mexico rigs offshore from Louisiana, the state saw no changes in its overall rig count because of the addition of 3 land based rigs in the southern part of the state at the same time…meanwhile, other than the 1 rig decrease in Pennsylvania’s Marcellus, all other rig increases or decreases in the basins shown above were oil rigs, but the natural gas rig count still rose by 1 because of a 2 rig increase in basins not tracked separately by Baker Hughes…

DUC well report for September

Monday of this past week saw the release of the EIA’s Drilling Productivity Report for October, which includes the EIA’s September data for drilled but uncompleted oil and gas wells in the 7 most productive shale regions…for the 24th consecutive month, this report again showed an increase in uncompleted wells nationally in September, even as drilling of new wells slowed while completions of drilled wells increased….like most previous months, this month’s uncompleted well increase was due to a big increase of newly drilled but uncompleted wells (DUCs) in the Permian basin of west Texas, with modest increases of uncompleted wells in the Anadarko basin of Oklahoma and 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 192, from 8,197 wells in August to 8,389 wells in September, again the highest number of such unfracked wells in the history of this report, and up 32.5% from the 6,329 wells that had been drilled but remained uncompleted in September a year ago…that was as 1,437 wells were drilled in the 7 regions that this report covers (representing 87% of all U.S. onshore drilling operations) during September, down from 1,495 in August, while 1,281 wells were completed and brought into production by fracking, a increase of 11 well completions over the 1270 completions seen in August…at the September completion rate, the 8,389 drilled but uncompleted wells left at the end of the month represent a 6.5 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 September DUC well increases were predominantly oil wells, with most of those in the Permian basin…the Permian basin saw its total count of uncompleted wells rise by 194, from 3,525 DUC wells in August to 3,722 DUCs in September, as 619 new wells were drilled into the Permian but only 425 wells in the region were fracked…at the same time, DUC wells in the Anadarko basin region in & around Oklahoma rose by 31, from 1014 DUC wells in August to 1,045 DUCs in September, as 191 wells were drilled in the Anadarko basin during September, while 160 Anadarko basin wells were completed…over the same period, the number of DUC wells in the Eagle Ford of south Texas increased by 18 to 1,584, as 179 wells were drilled into the Eagle Ford while 197 Eagle Ford wells were fracked….on the other hand, the drilled but uncompleted well count in the Appalachian region, which includes the Utica shale, fell by 22 wells, from 687 DUCs in August to 665 DUCs in September, as 114 wells were drilled into the Marcellus and Utica shales, while 136 of the already drilled wells in the region were fracked…in addition, the drilled but uncompleted well count in the Niobrara chalk of the Rockies’ front range decreased by 15 wells to 407, as 181 Niobrara wells were drilled while 196 Niobrara wells were being fracked…similarly, DUC wells in the Bakken of North Dakota fell by 11, from 778 DUC wells in August to 767 DUCs in September, as 124 wells were drilled into the Bakken in September while 135 drilled wells in that basin were completed….lastly, the natural gas producing Haynesville shale of the northern Louisiana-Texas border region saw their uncompleted well inventory decrease by 3 wells to 199, as 47 wells were drilled into the Haynesville during September, while 50 Haynesville wells were fracked during the same period…thus, for the month of September, DUCs in the 5 oil basins tracked by in this report (ie., the Anadarko, Bakken, Niobrara, Permian, and Eagle Ford) increased by a net of 217 wells to 7525 wells, while the uncompleted well count in the natural gas basins (the Marcellus, Utica, and the Haynesville) decreased by 25 wells to 864 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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