oil prices drop most this year; US gasoline imports at 8 year high; DUCs down; uncomplete well backlog at 6.0 months

oil prices saw their largest drop of 2019 this week, as a worsening impasse in the US-China trade war threatened to precipitate a global economic slowdown and an associated decrease in demand for oil…after rising 1.8% to $62.76 a barrel on an outbreak of attacks on oil infrastructure in the Middle East last week, prices of US crude for June delivery opened higher and rose to as high as $63.81 a barrel on Monday morning following Trump’s tweeted threat to destroy Iran, but eased from that multi-week high later in the day to settle 34 cents higher at $63.10 a barrel, on indications from OPEC leadership that they would drive down crude inventories “gently”…June oil prices started higher again on Tuesday, but then pulled back on concerns that a lengthy trade war between the US and China would limit crude demand, ending the day 11 cents lower at $62.99 a barrel as trading in the US June oil contract expired…quoting the price of the oil contract for July, which had slipped 8 cents to $63.13 a barrel on Tuesday, Wednesday saw oil prices sink as an unexpected build in U.S. crude stockpiles compounded worries that a prolonged trade war would dent crude demand and end $1.71 or 2.7% lower at $61.39 a barrel…extending those already steep losses, oil prices tumbled nearly 6% on Thursday, as concerns grew that the China-U.S. trade conflict was fast turning into a technology war between the world’s two largest economies, and ended $3.51 a barrel, or 5.7%, lower, $57.91 a barrel, having earlier touched $57.33 a barrel, the lowest oil price since March 13th…oil prices recovered a bit on Friday ahead of the long U.S. and UK holiday weekends, with US crude rising 72 cents or 1.2% to $58 a barrel as oil drillers cut rigs for third week in a row, but were still down more than 6% for the week in posting the worst week this year, pressured by rising inventories and concerns over an economic slowdown…

since oil prices seem to have turned the corner after rising most of this year, we’ll include a graph of their recent trajectory here so you can see what that change looks like…

May 25 2019 oil prices

the above graph is a Saturday afternoon screenshot of the interactive US oil 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 oil prices for a day of oil trading between December 24, 2018 and Friday of this week, wherein the green bars represent the days when the price of oil went up, and red bars represent the days when the price of oil went down…for green bars, the starting oil price at the beginning of the day is at the bottom of the bar and the price at the end of the day is at the top of the bar, while for red or down days, the starting price is at the top of the bar and the price at the end of the day is at the bottom of the bar…also slightly visible on this “candlestick” style graph are the faint grey “wicks” above and below each bar, to indicate trading prices during the day that were above or below the opening to closing price range for that day…(note that since the above graph includes off market and after hours trading, the prices shown above do not correspond exactly to the NYMEX exchange prices we have been quoting)…you can see that oil prices had been rallying steadily since falling to a 35 month low on Christmas eve, and had been up more than 50% from that low by April 23rd, after which they turned lower on a large inventory build and Trump’s jawboning of OPEC…now down 4 out of the last 5 weeks, the trend now appears to be for them to head lower, with no resolution to the US China trade war in sight….   

natural gas prices also ended lower this week as another triple digit storage build and rebounding production more than offset forecasts for possible near term record high temperatures in the Southeast….after rising 1.2 cents to $2.631 per mmBTU on forecasts for warmer temperatures last week, prices of natural gas for June delivery recovered from a 13 cent drop midweek to end the week just 3.3 cents lower at $2.598 per mmBTU​ after the weekly EIA​ storage​ report ​came in on the low end of ​expectationsthe natural gas storage report for the week ending May 17th from the EIA indicated that the quantity of natural gas held in storage in the US increased by 100 billion cubic feet to 1,753 billion cubic feet by the end of the week, which meant our gas supplies were 137 billion cubic feet, or 8.5% more than the 1,616 billion cubic feet that were in storage on May 18th of last year, while still 274 billion cubic feet, or 13.5% below the five-year average of 2,027 billion cubic feet of natural gas that have typically been in storage as of the third weekend in May in recent years….this week’s 100 billion cubic feet injection into US natural gas storage was a bit below the 103 billion cubic foot increase in supplies projected by Platts, while it was still higher than the 88 billion cubic feet of natural gas that have historically been added to gas storage during the same week of May….while this week’s​ inventory​ increase was above average for this time of year, it fell short of the 108 billion cubic feet that were added during the same week of 2014, hence bringing to an end the 7 week streak of 5 year seasonal high injections that we’ve seen this spring…nonetheless, the 646 billion cubic feet of natural gas that have been added to storage over the past 8 weeks exceeds the addition in any previous similar 8 week period in the modern record, topping the 630 billion cubic feet of gas that were added to storage over the same 8 weeks of 2010….early spring injections for most previous years weren’t even close; for instance, only 246 billion cubic feet of natural gas were added to storage over the same 8 weeks of 2018…

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 May 17th, showed that a drop in our oil imports was mostly offset by a drop in our oil exports and an increase in our oil production, so we again saw a sizable addition to our commercial supplies of crude for the seventh time in nine weeks…our imports of crude oil fell by an average of 669,000 barrels per day to an average of 6,943,000 barrels per day, after rising by an average of 919,000 barrels per day over the prior week, while our exports of crude oil fell by an average of 425,000 barrels per day to 2,922,000 barrels per day during the week, which meant that our effective trade in oil worked out to a net import average of 4,021,000 barrels of per day during the week ending May 17th, 244,000 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 12,200,000 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 16,221,000 barrels per day during this reporting week…

meanwhile, US oil refineries were using 16,578,000 barrels of crude per day during the week ending May 17th, 98,000 fewer barrels per day than the amount of oil they used during the prior week, while over the same period the EIA reported that a net of 516,000 barrels of oil per day were being added to the oil that’s in storage in the US….hence, we can see that 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 872,000 barrels per day short of what was added to storage plus what the 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 (+872,000) 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 that much oil unaccounted for, we have to figure one or more of this week’s crude oil metrics are off 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) indicated that the 4 week average of our oil imports fell to an average of 7,166,000 barrels per day last week, 9.4% less than the 7,908,000 barrel per day average that we were importing over the same four-week period last year…the 516,000 barrel per day increase in our total crude inventories was due to a 678,000 barrels per day addition to our commercially available stocks of crude oil, which was partially offset by a 162,000 barrel per day withdrawal from the oil stored in our Strategic Petroleum Reserve, part of a release from our reserves intended to blunt the shortage of crude in the Gulf resulting from the Venezuelan oil sanctions…this week’s crude oil production was reported to be 100,000 barrels per day higher at 12,200,000 barrels per day because the rounded estimate of the output from wells in the lower 48 states was 100,000 barrels per day higher at 11,700,000 barrels per day, while a 4,000 barrel per day decrease to 477,000 barrels per day in Alaska’s oil production was not enough to impact the final rounded national total…last year’s US crude oil production for the week ending May 18th was at 10,725,000 barrels per day, so this reporting week’s rounded oil production figure was 13.8% above that of a year ago, and 44.8% 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 89.9% of their capacity in using 16,578,000 barrels of crude per day during the week ending May 17th, down from 90.5% of capacity the prior week, and below the historical refinery utilization rate for this time of year….likewise, the 16,578,000 barrels per day of oil that were refined this week were a bit below the 16,628,000 barrels of crude per day that were being processed during the week ending May 18th, 2018, when US refineries were operating at 91.8% of capacity… 

with the decrease in the amount of oil being refined, gasoline output from our refineries was a bit lower, decreasing by 29,000 barrels per day to 9,883,000 barrels per day during the week ending May 17th, after our refineries’ gasoline output had decreased by 217,000 barrels per day the prior week….with that decrease in gasoline output, this week’s gasoline production was 1.7% below than the 10,052 ,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) fell by 58,000 barrels per day to 5,206,000 barrels per day, after our distillates output had increased by 175,000 barrels per day the prior week…but even with this week’s decrease, the week’s distillates production was 5.4% more than the 4,938,000 barrels of distillates per day that were being produced during the week ending May 18th, 2018…. 

despite the decrease in our gasoline production, our supply of gasoline in storage at the end of the week rose for just the second time in 14 weeks, increasing by 3,716,000 barrels to 228,740,000 barrels over the week to May 17th, after ​our ​gasoline supplies had fallen by 1,123,000 barrels over the prior week….our gasoline supplies rose this week even though the amount of gasoline supplied to US markets increased by 281,000 barrels per day to 9,429,000 barrels per day, after decreasing by 723,000 barrels per day the prior week, because our imports of gasoline rose by 598,000 barrels per day to an eight year high of 1,350,000 barrels per day, while our exports of gasoline fell by 369,000 barrels per day to 416,000 barrels per day…but even after having reached an all time record high seventeen weeks ago, our gasoline supplies are now 2.2% lower than last May 18th’s inventory level of 233,897,000 barrels, while they are back to near the five year average of our gasoline supplies at this time of the year…  

since the week’s jump in gasoline imports was quite exceptional, we’ll take a look at a historical graph of those imports and try to ​figure out what’s been going on…

May 22 2019 gasoline imports up to May 17

the above graph is a slightly truncated version of the long term graph of US gasoline imports that accompanies the EIA’s html historical gasoline imports spreadsheet​, and​ as the heading indicates, th​is graph shows the weekly volume of US gasoline imports in thousands of barrels per day from 1995 to the current week, which shows the obvious spike to an 8 year high…while there is a seasonality to gasoline imports, ie, generally higher in the summer and lower in the winter, gasoline imports over recent weeks have been above the ​seasonal ​trend of previous years; part of the reason for that increase ​has been our falling gasoline inventories; as we noted earlier, our gasoline supplies had hit a record high of 259,615,000 barrels 17 weeks ago, ​but had fallen by more than 13% up until this week’s increase…so why have our gasoline supplies been falling ​so precipitously ​this early, before the summertime driving season?  part of it is ​seasonal, as refineries undergo seasonal maintenance and gear up for warm weather blends in the late winter & early spring months; but this year has seen US refineries slow much more than usual as they seek replacements for the heavy sour crude they had been receiving from Venezuela before the ​administration sponsored coup attempt and related export sanctions; ​just ​two weeks after our gasoline supplies hit a record high, our oil imports fell to a 22 year low and refinery utilization fell to 85.9%, its lowest in 16 months in the immediate impact of those sanctions…and while it has recovered​ from that nadir, refinery utilization has remained below trend since, with a corresponding decrease in gasoline output…the problem is that the heavy sour crude that US Gulf Coast refineries were built ​to use has limited alternative sources outside of Venezuela; ie, the tar sands of Canada, Mexican Maya, and some sours from the Saudis and Iraq…since those supplies were unavailable or already contracted for, US refineries have been forced to buy Russian Urals ​crude ​at a premium price to replace the Venezuelan crude they lost to sanctions…at the same time, the Russians are providing the financing for Venezuela to sell their oil to other markets, like India, ​thus ​getting around the sanctions that shut off our ​own ​supply…

meanwhile, even with the modest decrease in our distillates production, our supplies of distillate fuels managed to increase for the second time in 10 weeks, rising by 768,000 barrels to 126,415,000 barrels during the week ending May 17th, after our distillates supplies had increased by 84,000 barrels over the prior week….our distillates supplies rose because the amount of distillates supplied to US markets, a proxy for our domestic demand, fell by 307,000 barrels per day to 3,787,000 barrels per day, and because our imports of distillates rose by 61,000 barrels per day to 102,000 barrels per day, while our exports of distillates rose by 212,000 barrels per day to 1,411,000 barrels per day …after this week’s inventory increase, our distillate supplies were 10.9% higher than the 113,995,000 barrels of distillate that we had stored on May 18th, 2018 (a four year low at the time) even as they remain roughly 4% below the five year average of distillates stocks for this time of the year…

finally, ​with higher crude production and a drop in our oil exports, our commercial supplies of crude oil in storage increased for the thirteenth time in 18 weeks, rising by 4,470,000 barrels, from 472,035,000 barrels on May 10th to 476,775 ,000 barrels on May 17th….that increase lifted our crude oil inventories to 4% above the recent five-year average of crude oil supplies for this time of year, and to more than 35% higher than the prior 5 year (2009 – 2013) average of crude oil stocks as of the first weekend in May, 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 generally 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 May 10th were 8.8% above the 438,132,000 barrels of oil we had stored on May 18th of 2018, but at the same time still 7.7% below the 516,340,000 barrels of oil that we had in storage on May 19th of 2017, and 5.6% below the 505,571,000 barrels of oil we had stored on May 20th of 2016…    

This Week’s Rig Count

the US rig count was down for the thirteenth time in fourteen weeks this past week, and hence was at another 14 month low….Baker Hughes reported that the total count of rotary rigs running in the US fell by 4 rigs to 983 rigs over the week ending May 24th, which was also down by 76 rigs from the 1059 rigs that were in use as of the May 25th report of 2018, and quite a bit below 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 5 rigs to 797 rigs this week, which was also 62 fewer oil rigs than were running a year ago, and less than half of 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 rose by 1 rig to 186 natural gas rigs, which was still down by 12 rigs from the 198 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 was unchanged with 22 rigs still deployed this week, with 20 of those offshore from Louisiana and two more drilling in Texas offshore waters; that’s up from the 18 rigs that were deployed in the Gulf in the same week a year ago, when 17 rigs were drilling in Louisiana waters and one was offshore from Texas, and up from the national total of 19 rigs offshore a year ago, as a rig was also set up in the waters offshore from Alaska at that time…

the count of active horizontal drilling rigs was down by 3 to 863 horizontal rigs this week, which was thus another 14 month low for horizontal drilling, with 63 fewer horizontal rigs running ​this week than the 926 horizontal rigs that were in use in the US on May 25th of last year, ​which was also 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 was down by 4 rigs to 69 directional rigs this week, but those were still up by 2 rigs from the 67 directional rigs that were in use during the same week of last year…on the other hand, the vertical rig count was up by 3 rigs to 51 vertical rigs this week, but those were still down from the 66 vertical rigs that that were operating on May 25th 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 May 24th, the second column shows the change in the number of working rigs between last week’s count (May 17th) and this week’s (May 24th) count, the third column shows last week’s May 17th 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 25th of May, 2018…       

May 24 2019 rig count summary

the 4 rig decrease you see indicated for New Mexico all came out of the Permian basin, as the Texas Permian saw a net increase​ of one rig​…while two rigs were shut down in Texas Oil District 8A, or the northern Permian Midland basin, and two more rigs were idled in Texas Oil District 7C, or the southern Permian Midland basin, Texas Oil District 8, which would be the core Permian Delaware, saw a 5 rig increase, thus putting the net Texas Permian into the plus column…elsewhere in Texas, three rigs were added in Texas ​Oil ​District 1, while two were pulled from District 2 and one was shut down in District 3, which combined netted a one rig increase in the Eagle Ford​ and a one rig decrease outside of the basin​, while another rig was pulled out of the Granite Wash in panhandle District 10, which suggests a rig was concurrently added back in the Oklahoma portion of of the Granite Wash…among natural gas rigs, one was ​set up in the Denver-Julesburg Niobrara​ oil play​, which also had two oil rigs shut down at the same time, and two more natural gas rigs were added in the Marcellus, one each in Pennsylvania and in West Virginia, while natural gas rigs were idled in Ohio’s Utica​ shale​ and in another basin not tracked separately by Baker Hughes…

DUC well report for March

last week saw the release of the EIA’s Drilling Productivity Report for May, which includes the EIA’s April data for drilled but uncompleted oil and gas wells in the 7 most productive shale regions…for the second month in a row, this report showed a decrease in uncompleted wells nationally in April, as drilling of new wells decreased and completions of drilled wells increased….while there continued to be a 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 the 7 sedimentary regions covered by this report, the total count of DUC wells decreased by 43 wells, from a revised 8,433 DUC wells in March to 8,390 DUC wells in April, which still represents a 23.7% increase from the 6,781 wells that had been drilled but remained uncompleted as of the end of April a year ago…that was as 1,364 wells were drilled in the 7 regions that this report covers (representing 87% of all U.S. onshore drilling operations) during April, down by 14 from the 1,386 wells drilled in March and the lowest in 11 months, while 1,407 wells were completed and brought into production by fracking, an increase of 12 well completions from the 1,395 completions seen in March, and the 1329 well completions of February…at the April completion rate, the 8,390 drilled but uncompleted wells left at the end of the month represent a 6.0 month backlog of wells that have been drilled but not yet fracked…  

in a contrast ​to what we’ve seen over most of the past couple of years up until a month ago, most of the April DUC well decreases were in oil producing regions, with all major oil producing regions except for the Permian showing double digit drops… DUC wells left in the Oklahoma Anadarko decreased by 26 to 998 wells, as 136 wells were drilled into the Anadarko basin during April while 162 Anadarko wells were being fracked….meanwhile, DUC wells in the Eagle Ford of south Texas decreased by 22, from 1,510 DUC wells in March to 1,488 DUCs in April, as 186 wells were drilled in the Eagle Ford during April, while 208 Eagle Ford wells were completed…in addition, the drilled but uncompleted well count in the Niobrara chalk of the Rockies’ front range decreased by 13 to 545, as 182 Niobrara wells were drilled in April while 195 Niobrara wells were being fracked…at the same time, DUC wells in the Bakken of North Dakota fell by 12, from 726 DUC wells in March to 714 DUCs in April, as 118 wells were drilled into the Bakken in April, while 130 of the drilled wells in that basin were completed…finally, the drilled but uncompleted well count in the Appalachian region, which includes the Utica shale, fell by 19 wells, from 479 DUCs in March to 460 DUCs in April, as 130 wells were drilled into the Marcellus and Utica shales during the month, while 149 of the already drilled wells in the region were fracked…

on the other hand, the Permian basin of west Texas and New Mexico saw its total count of uncompleted wells rise by 47, from 3,9​1​​7 DUC wells in March to 3,964 DUCs in April, as 555 new wells were drilled into the Permian, but only 508 wells in the region were fracked…lastly, the natural gas producing Haynesville shale of the northern Louisiana-Texas border region also saw their uncompleted well inventory increase by 2 wells to 221, as 57 wells were drilled into the Haynesville during April, while 55 Haynesville wells were fracked during the same period….thus, for the month of April, DUCs in the five oil basins tracked by in this report (ie., the Anadarko, Bakken, Niobrara, Permian, and Eagle Ford) decreased by a net of 26 wells to 7,709 wells, while the uncompleted well count in the natural gas basins (the Marcellus, Utica, and the Haynesville) decreased by 17 wells to 681 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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