natural gas prices at a 34 mo. low after largest April injection on record; active rigs lowest in a year; first DUC drop in 12 mo, backlog at 6.1 months

oil prices managed to increase for a 7th week in a row in slow trading in a holiday shortened week, but not by much, as traders remained cautious while waiting for clarification on Iran sanction exemptions that are due to expire in the first week of May…after rising 1.3% to $63.89 a barrel on deeper than expected OPEC output cuts last week, prices of US crude for May delivery fell 49 cents to $63.40 a barrel on Monday after the Russian finance minister was quoted as saying that Russia might decide to boost production to fight for market share, rather than continue the production cuts they agreed to enact with OPEC… however, prices rebounded 1% on Tuesday, as fighting in Libya and falling Venezuelan and Iranian exports renewed concerns about tightening global supply, with US WTI crude ending 65 cents higher at $64.05 a barrel…oil prices continued moving higher early Wednesday, rising as high as $64.61 a barrel in morning trading, before tumbling in the afternoon to settle down 29 cents at $63.76 a barrel after EIA data showed US crude inventories fell less than the American Petroleum Institute had reported late Tuesday…however, oil prices edged back up on Thursday, as a decrease in Saudi Arabia’s crude exports, a drop in U.S. drilling rigs, and lower oil, gasoline & distillate inventories underpinned prices, which went on to finish the day 24 cents higher at $64.00 a barrel, thus managing to end the week with a net gain of 11 cents, or less than 0.2% from the prior week’s close….

natural gas prices, on the other hand, were down every day this week, as notably warmer forecast changes and higher natural gas production, combined with a record early April storage injection relentlessly drove prices lower…after ending nearly unchanged at $2.660 per mmBTU in trading last week, natural gas contracts for May delivery fell 7 cents on Monday, 1.8 cents on Tuesday, 5.5 cents on Wednesday, and 2.7 cents with the storage report release on Thursday to end the week down 17 cents or 6.4% at $2.490, the lowest weekly close since June 3rd, 2016…

with natural gas prices thus at a 34 month low, we’ll include a longer term graph of the intervening price trajectory, to show you how current prices compare to recent historical prices…

April 20 2019 natural gas prices

the above graph is a Saturday morning screenshot of the interactive US natural gas price graph at Daily FX, an online platform that provides trading news, charts, indicators and analysis of the markets…each bar on the above graph represents natural gas prices for a week of trading between the last week of 2015 and this past week, wherein the green bars represent the weeks when the price of natural gas went up, and red bars represent the weeks when the price of natural gas went down…for green bars, the starting natural gas price at the beginning of the week is at the bottom of the bar and the price at the end of the week is at the top of the bar, while for red or down weeks, the starting price is at the top of the bar and the price at the end of the week is at the bottom of the bar…also barely visible on this shrunken “candlestick” style graph are the very faint grey “wicks” above and below each bar, to indicate trading prices during the week that were above or below the opening to closing price range for that week…note that the lighter red & green bars at the bottom of the graph represent the trading volume for each day, which doesn’t concern us, except to note the poor graph design that has similarly colored natural gas price bars crossing into the trading volume metrics…

we can see that through most of 2018 until October, natural gas prices had stayed in a range roughly between $2.60 and $3 per mmBTU, and it was only when the possibility of a wintertime natural gas shortage became widely known that prices began to move higher…then prices shot up to nearly $5 when November turned cold, and withdrawals of gas from storage were much above normal…then, with the milder temperatures and smaller withdrawals from storage during December and January, natural gas traders figured that the crisis had passed, and hence natural gas prices retreated back to below their previous baseline…

with natural gas prices now near a three year low, the question naturally arises as to whether those who continue to drill for gas will be able to maintain profitability or not….circa 2014, before the OPEC glut which hit natural gas prices at the same time as oil prices were diving, widely quoted analysis had it that the so-called break-even price for natural gas wells in the Pennsylvania Marcellus shale was around $4 per mmBTU…in addition to pointing out that no two wells will exhibit common enough characteristics to put any kind of stake in that kind of single figure analysis anymore, we also have to note there have been efficiency and productivity gains since then that have lowered the price of natural gas extraction considerably from those days…still, at prices below $2.50 per mmBTU, we have to consider that some marginal well prospects will be unprofitable, and in many of those cases will not be completed…

note that while some drillers may have been able to lock in the higher prices of that November price spike for their future drilling plans, prices for gas output from most of the wells started during late 2018 were more than likely contracted for months earlier, when natural gas prices were still below $3 per mmBTU…but even with prices at that level or lower for most of the year, US natural gas production still managed to grow by 11% over that of the prior yearwith domestic consumption growing at a 10% rate and LNG exports expected to double, production growth with have to continue at the 2018 pace or better to satisfy that demand..

returning to current data, the natural gas storage report for the week ending April 12th from the EIA indicated that the quantity of natural gas held in storage in the US increased by 92 billion cubic feet to 1,247 billion cubic feet over the week, which still left our gas supplies 57 billion cubic feet, or 4.4% below the 1,304 billion cubic feet that were in storage on April 13th of last year, and 414 billion cubic feet, or 24.9% below the five-year average of 1,661 billion cubic feet of natural gas that have typically remained in storage as of the second weekend in April in recent years….this week’s 92 billion cubic feet injection into US natural gas storage was a bit above expectations of an 88 to 90 billion cubic foot addition to storage, while it was quite a bit more than the 21 billion cubic feet of natural gas that are normally added to gas storage during the second week of April…in fact, it was the largest addition of natural gas to storage in any week of April in any of the EIA’s natural gas storage records..

The Latest US Oil Supply and Disposition Data from the EIA

this week’s US oil data from the US Energy Information Administration, reporting on the week ending April 12th, indicated that a large decrease in our oil imports meant that oil had to be withdrawn from our commercial supplies of crude for the first time in 5 weeks…our imports of crude oil fell by an average of 607,000 barrels per day to an average of 5,992,000 barrels per day, after falling by an average of 166,000 barrels per day the prior week, while our exports of crude oil rose by an average of 52,000 barrels per day to 2,401,000 barrels per day during the week, which meant that our effective trade in oil worked out to a net import average of 3,591,000 barrels of per day during the week ending April 12th, 659,000 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 down by 100,000 barrels per day to 12,100,000 barrels per day, so our daily supply of oil from the net of our trade in oil and from well production totaled an average of 15,691,000 barrels per day during this reporting week…

meanwhile, US oil refineries were using 16,078,000 barrels of crude per day during the week ending April 12th, 22,000 fewer barrels per day than the amount of oil they used during the prior week, while over the same period the EIA reported that 199,000 barrels of oil per day were being withdrawn from the oil that’s in storage in the US…..therefore, this week’s crude oil figures from the EIA would seem to indicate that our total working supply of oil from net imports, from oilfield production, and from storage was 188,000 fewer barrels per day than the amount of oil refineries reported they used during the week…to account for that disparity between the supply of oil and the disposition of it, the EIA inserted a (+188,000) 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) indicated that the 4 week average of our oil imports fell to an average of 6,474,000 barrels per day last week, now 20.6% less than the 8,157,000 barrel per day average that we were importing over the same four-week period last year….the 199,000 barrels of oil per day decrease in our total crude inventories was all pulled from our commercially available stocks of crude oil, as the oil stored in our Strategic Petroleum Reserve remained unchanged…this week’s crude oil production was reported to be 100,000 barrels per day lower at 12,100,000 barrels per day because the rounded estimate for output from wells in the lower 48 states was 100,000 barrels per day lower at 11,600,000 barrels per day, while a 6,000 barrel per day decrease in Alaska’s oil production to 478,000 barrels per day was not enough to make a difference in the rounded national total…last year’s US crude oil production for the week ending April 13th was at 10,540,000 barrels per day, so this reporting week’s rounded oil production figure was 14.8% above that of a year ago, and 43.6% 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 87.7% of their capacity in using 16,078,000 barrels of crude per day during the week ending April 12th, up from 87.5% of capacity the prior week, but still quite a bit lower than before Venezuelan imports of heavy crude that Gulf Coast refineries are optimized to use were cut off….similarly, the 16,078,000 barrels per day of oil that were refined this week were down by 5.1% from the 16,949,000 barrels of crude per day that were being processed during the week ending April 13th, 2018, when US refineries were operating at 92.4% of capacity… 

even with the relatively small decrease in the amount of oil being refined, the gasoline output from our refineries was considerably lower, decreasing by 252,000 barrels per day to 9,917,000 barrels per day during the week ending April 12th, after our refineries’ gasoline output had increased by 356,000 barrels per day the prior week….with that decrease in gasoline output, this week’s gasoline production was 2.8% less than the 10,204,000 barrels of gasoline that were being produced daily during the same week last year….at the same time, our refineries’ production of distillate fuels (diesel fuel and heat oil) fell by 215,000 barrels per day to 4,823,000 barrels per day, after that distillates output had increased by 168,000 barrels per day the prior week…and after this week’s decrease, the week’s distillates production was 5.3% less than the 5,094,000 barrels of distillates per day that were being produced during the week ending April 13th, 2018…. 

with the decrease in our gasoline production, the supply of gasoline left in storage at the end of the week fell for the 9th week in a row, decreasing by 1,174,000 barrels to 227,955,000 barrels over the week to April 12th, after supplies had fallen by 7,700,000 barrels over the prior week….the draw from our gasoline supplies was less this week than last because the amount of gasoline supplied to US markets decreased by 386,000 barrels per day to 9,420,000 barrels per day, after increasing by 675,000 barrels per day the prior week, and because our imports of gasoline rose by 276,000 barrels per day 990,000 barrels per day, while our exports of gasoline fell by 57,000 barrels per day to 599,000 barrels per day…after having reached an all time record high eleven weeks ago, our gasoline inventories are now 3.4% lower than last April 13th’s level of 235,967,000 barrels, and have now fallen to roughly 1% below the five year average of our gasoline supplies at this time of the year…

with the decrease in our distillates production, our supplies of distillate fuels fell for the 22nd time in twenty-nine weeks, decreasing by 362,000 barrels to 127,691,000 barrels during the week ending April 12th, after our distillates supplies had decreased by 116,000 barrels over the prior week…the draw on our distillates supplies was a bit greater this week because our exports of distillates rose by 286,000 barrels per day to 1,660,000 barrels per day, while our imports of distillates rose by 40,000 barrels per day to 138,000 barrels per day while the amount of distillates supplied to US markets, a proxy for our domestic demand, fell by 226,000 barrels per day to 3,553,000 barrels per day…but even after this week’s inventory decrease, our distillate supplies were still 1.9% higher than the 125,340,000 barrels of distillate that we had stored on April 13th, 2018, while also still roughly 5% below the five year average of distillates stocks for this time of the year…

finally, with a drop in our oil imports and a decrease in our oil production, our commercial supplies of crude oil in storage decreased for the fourth time in 13 weeks, falling by 1,396,000 barrels over the week, from 456,550,000 barrels on April 5th to 455,154,000 barrels on April 12th…that decrease was enough to knock our crude oil inventories back to 2% below the recent five-year average of crude oil supplies for this time of year, while they remained more than 30% above the prior 5 year (2009 – 2013) average of crude oil stocks after the second week of April, with the disparity between those comparisons arising because it wasn’t until early 2015 that our oil inventories first rose above 400 million barrels…since our crude oil inventories have mostly been rising since this past Fall, after generally falling until then through most of the prior year and a half, our oil supplies as of April 12th were 6.5% above the 427,567,000 barrels of oil we had stored on April 13th of 2018, but at the same time still 14.5% below the  532,343,000 barrels of oil that we had in storage on April 14th of 2017, and 10.3% below the 507,312,000 barrels of oil we had in storage on April 15th of 2016…         

This Week’s Rig Count

Note: due to the holiday, this week’s rig count was released on Thursday of this week and thus includes the rig changes over just 6 days; nonetheless, US drilling rig activity decreased for the eighth time in nine such weekly reports, and has now dropped below year ago levels for the first time since 2016….Baker Hughes reported that the total count of rotary rigs running in the US fell by 10 rigs to 1012 rigs over the short week ending April 18th, which was also down by 1 rig from the 1013 rigs that were in use as of the April 20th report of 2018, while well down from the shale era high of 1929 drilling rigs that were deployed on November 21st of 2014, the week before OPEC announced their attempt to flood the global oil market…  

the count of rigs drilling for oil fell by 8 rigs to 825 rigs this week, which was still 5 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 10th, 2014…at the same time, the number of drilling rigs targeting natural gas bearing formations decreased by 2 rigs to 187 natural gas rigs, which was also down by 5 rigs from the 192 natural gas rigs that were drilling a year ago, and way down from the modern era high of 1,606 natural gas targeting rigs that were deployed on August 29th, 2008…

drilling activity offshore in the Gulf of Mexico remained unchanged at 23 rigs this week, which was still 5 more rigs than the 18 rigs active in the Gulf a year ago…however, the number of active horizontal drilling rigs decreased by 3 rigs to 896 horizontal rigs this week, which was the least horizontal rigs deployed in any week over the past year, and 3 fewer horizontal rigs than the 889 horizontal rigs that were in use in the US on April 20th of last year, and well down from the record of 1372 horizontal rigs that were deployed on November 21st of 2014…..at the same time, the directional rig count also decreased by 3 rigs to 75 directional rigs this week, but that was up by 5 rigs from the 70 directional rigs that were in use during the same week of last year….in addition, the vertical rig count decreased by 4 rigs to 51 vertical rigs this week, which was down from the 54 vertical rigs that were operating on April 20th of 2018… 

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 oil & gas 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 April 18th, the second column shows the change in the number of working rigs between last week’s count (April 12th) and this week’s (April 18th) count, the third column shows last week’s April 12th active rig count, the 4th column shows the change between the number of rigs running on Friday and the number running before 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 the 20th of April, 2018…    

April 19 2019 rig count summary

there’s not much particularly noteworthy in these counts this week; as you can see, the rig count reductions were fairly widespread and for the most part were in those states with the greatest activity to begin with, save the rig that was shut down in Alaska…with no rig changes apparent in New Mexico, we assumed that the Permian reduction had come out of Texas, and that turned out to be accurate, as a single rig was pulled out of Texas Oil District 8A, or the northern Permian Midland basin, while rig counts in the other Permian regions remained unchanged…the week’s natural gas rig reductions were also straightforward; 2 natural gas rigs were removed from the Haynesville shale in northwestern Louisiana, while natural gas rigs operating in all other basins also remained unchanged…

DUC well report for March

Monday of this past week saw the release of the EIA’s Drilling Productivity Report for April, which includes the EIA’s March data for drilled but uncompleted oil and gas wells in the 7 most productive shale regionsfor the first time in 12 months, this report showed a small decrease in uncompleted wells nationally in March, as drilling of new wells decreased and completions of drilled wells increased….while there continued to be a large increase of newly drilled but uncompleted wells (DUCs) in the Permian basin of western Texas and New Mexico, all other regions either saw decreases or little change, thus more than offsetting the Permian increases…for all 7 sedimentary regions covered by this report, the total count of DUC wells decreased by 4 wells, from a revised 8,504 DUC wells in February to 8,500 DUC wells in March, still a 25.6% increase from the  6,769 wells that had been drilled but remained uncompleted as of the end of March a year ago…that was as 1,388 wells were drilled in the 7 regions that this report covers (representing 87% of all U.S. onshore drilling operations) during March, down by 14 from the 1,423 wells drilled in February and the lowest in 11 months, while 1,392 wells were completed and brought into production by fracking, a increase of 113 well completions from the 1,327 completions seen in February and the 1212 completions of January…at the March completion rate, the 8,500 drilled but uncompleted wells left at the end of the month represent a 6.1 month backlog of wells that have been drilled but not yet fracked…  

in a contrast with what we’ve seen over most of the past couple of years, a number of ​the ​March DUC well decreases were in oil producing regions, with the Anadarko basin region centered in Oklahoma seeing the largest drop… DUC wells left in the Anadarko decreased by 29 to 1,019, as 139 wells were drilled into the Anadarko basin during March while 168 Anadarko wells were being fracked….at the same time, DUC wells in the Bakken of North Dakota fell by 12, from 722 DUC wells in February to 710 DUCs in March, as 113 wells were drilled into the Bakken in March, while 125 of the drilled wells in that basin were completed…in addition, the drilled but uncompleted well count in the Appalachian region, which includes the Utica shale, fell by 8 wells, from 509 DUCs in February to 501 DUCs in March, as 130 wells were drilled into the Marcellus and Utica shales, while 138 of the already drilled wells in the region were fracked…and in​ a​ major change from recent months, DUC wells in the Eagle Ford of south Texas decreased by 5, from 1,514 DUC wells in February to 1,509 DUCs in March, as 203 wells were drilled in the Eagle Ford during March, while 208 Eagle Ford wells were completed…

on the other hand, the Permian basin of west Texas and New Mexico saw its total count of uncompleted wells rise by 49, from 3,972 DUC wells in February to 4,021 DUCs in March, as 554 new wells were drilled into the Permian, but only 505 wells in the region were fracked…in addition, the natural gas producing Haynesville shale of the northern Louisiana-Texas border region also saw their uncompleted well inventory increase by 1 well to 212, as 57 wells were drilled into the Haynesville during March, while 56 Haynesville wells were fracked during the same period…lastly, the drilled but uncompleted well count in the Niobrara chalk of the Rockies’ front range ​remained unchanged at 528, as 192 Niobrara wells were drilled in March while 192 Niobrara wells were being fracked…thus, for the month of March, DUCs in the five oil basins tracked by in this report (ie., the Anadarko, Bakken, Niobrara, Permian, and Eagle Ford) increased by a net of 3 wells to 7,787 wells, while the uncompleted well count in the natural gas basins (the Marcellus, Utica, and the Haynesville) decreased by 7 wells to 713 wells, although as the report notes, once into production, more than half the wells drilled nationally will produce both oil and natural gas…

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