natural gas prices testing a 3 year low; natural gas drilling activity at a 20 month low

oil prices eked out a small increase this past week, as ongoing oil tanker trouble in the Persian Gulf and a large US inventory withdrawal outweighed ​the impact of falling demand from ​a global economic slowdown.​..​ after falling 7% to $55.63 a barrel last week as Gulf of Mexico production returned and tensions between the US & Iran and the US showed signs of easing, prices of US crude for August delivery rose on Monday on concerns that Iran’s reciprocal seizure of a British tanker could lead to further supply disruptions in the Gulf, with trading in the August oil contract expiring 53 cents higher at $56.22 a barrel​,​ while at the same time the more-active September WTI oil contract price rose 46 cents to end the session at $56.22 a barrel…after opening lower, oil prices continued higher on Tuesday, as expectations of lower U.S. crude supplies were only partially offset by weaker demand forecasts and the full restart of Libya’s largest oil field, with the price of September oil ending 55 cents higher at $56.77 a barrel…oil prices spiked higher early Wednesday on the the American Petroleum Institute report of the largest oil inventory draw so far this year and extended those gains when the EIA confirmed the big crude draw and also reported lower crude production, with oil rising to as high as $57.64 a barrel before traders turned their attention back to concerns about weaker energy demand and quickly pushed oil prices more than 4% lower, before they recovered a bit to close down 89 cents at $55.88 a barrel…oil prices recovered a bit on on Thursday amid ongoing Middle East tensions, but a manufacturing slowdown indicated by purchasing managers reports from Europe & the US capped the gains and US crude finished up just 14 cents, or 0.3%, at $56.02 a barrel…oil prices continued modestly higher on Friday after a stronger-than-expected U.S. GDP report and concerns over the safety of Persian Gulf oil transport, and finished the session up 18 cents at $56.20 a barrel, with September oil thus ending the week with a gain of just under 1%..

natural gas prices, on the other hand, again trended lower, and ended the week just a fraction above the multi-year low seen in June…after falling more than 8% to $2.251 per mmBTU on the recovery of Gulf production last week, prices of natural gas for August delivery moved up 6.1 cents on Monday and closed with the​ir​ first increase in 6 sessions, as forecasts indicated above normal temperatures would become more widespread ​at the end of July and to start August…prices then slipped 1.2 cents on notably lower trading volume on Tuesday, and then fell 8 cent on Wednesday as traders positioned against a possible bearish storage report…when the storage report came in line with expectations, natural gas prices recovered 2.4 cents on Thursday, but they sold off again on Friday on a forecast of cooler weather and a dip in demand in the 11-15 day time frame and ended down 7.5 cents on the day at $2.169 per mmBTU, just a penny higher than the lowest front month quote of the last three years, and only three-tenths of a cent above the June 20th lowest closing quote for this August contract..

the natural gas storage report for the week ending July 19th from the EIA indicated that the quantity of natural gas held in storage in the US increased by 36 billion cubic feet to 2,569 billion cubic feet by the end of the week, which meant our gas supplies were 300 billion cubic feet, or 13.2% greater than the 2,269 billion cubic feet that were in storage on July 19th of last year, while still 151 billion cubic feet, or 5.6% below the five-year average of 2,720 billion cubic feet of natural gas that have been in storage as of the 19th of July in recent years….this week’s 36 billion cubic feet injection into US natural gas storage was in line with the consensus market expectation, but it was lower than the average 44 billion cubic feet of natural gas that have been added to gas storage during the third week of July in recent years, the second straight below average storage build, following 17 weeks of above seasonal stock changes…. nonetheless, the 1,391 billion cubic feet of natural gas that have been added to storage over the past 17 weeks has still been the largest injection of gas into storage on record for any prior similar period of the gas injection season…

The Latest US Oil Supply and Disposition Data from the EIA

US oil data from the US Energy Information Administration for the week ending July 19th, indicated that a jump in our oil exports and a drop in our crude oil production resulted in the the 9th withdrawal withdrawal of crude from our supplies in 17 weeks, in a week where the effects of tropical storm Barry on the oil data are still quite evident…our imports of crude oil rose by an average of 194,000 barrels per day to an average of 7,028,000 barrels per day, after falling by an average of 470,000 barrels per day over the prior week, while our exports of crude oil rose by an average of 758,000 barrels per day to 3,292,000  barrels per day during the week, which meant that our effective trade in oil worked out to a net import average of 3,736,000 barrels of per day during the week ending July 19th, 562,000 fewer barrels per day than the net of our imports minus exports during the prior week…over the same period, storm impacted production of crude oil from US wells was reported to be 700,000 barrels per day lower at 11,300,000 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 15,036,000 barrels per day during this reporting week..

meanwhile, US oil refineries were reportedly using 17,034,000 barrels of crude per day during the week ending July 19th, 233,000 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 1,548,000 barrels of oil per day were being withdrawn from the supplies of oil stored in the US….hence, this week’s crude oil figures from the EIA appear to indicate that our total working supply of oil from net imports, from oilfield production, and from storage was 450,000 barrels per day short of what our 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 (+450,000) 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 they label 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 rose to an average of 7,187,000 barrels per day last week, which was still 13.7% less than the 8,331,000 barrel per day average that we were importing over the same four-week period last year…the 1,548,000 barrel per day decrease in our total crude inventories was all pulled out of our commercially available stocks of crude oil, while the amount of oil stored in our Strategic Petroleum Reserve remained unchanged…this week’s crude oil production was reported to be 700,000 barrels per day lower at 11,300,000 barrels per day because the rounded estimate of the output from wells in the lower 48 states was 700,000 barrels per day lower at 10,800,000 barrels per day, largely due to shut-in wells in the Gulf of Mexico, while a 4,000 barrels per day increase to 459,000 barrels per day in Alaska’s oil production was not enough to impact the final rounded national production total…last year’s US crude oil production for the week ending July 20th was rounded to 11,000,000 barrels per day, so this reporting week’s rounded oil production figure was still 2.7% above that of a year ago, and 34.1% 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 93,1% of their capacity in using 17,034,000 barrels of crude per day during the week ending July 19th, down from 94.4% of capacity the prior week, a drop that can largely be attributed to hurricane Barry….the 17,034,000 barrels per day of oil that were refined this week were almost 1.5% below the 17,285,000 barrels of crude per day that were being processed during the week ending July 20th, 2018, when US refineries were operating at 93.8% of capacity….

even with the decrease in the amount of oil being refined, gasoline output from our refineries was still higher, increasing by 234,000 barrels per day to 10,089,000 barrels per day during the week ending July 19th, after our refineries’ gasoline output had decreased by 563,000 barrels per day the prior week….but even with that increase in gasoline output, this week’s gasoline production was​ still​ 1.6% less than the 10,255,000 barrels of gasoline that were being produced daily during the same week last year….on the other hand, our refineries’ production of distillate fuels (diesel fuel and heat oil) fell by 142,000 barrels per day to 5,219,000 barrels per day, after our distillates output had increased by 3,000 barrels per day the prior week….but even after that decrease, the week’s distillates production was 1.2% more than the 5,157,000 barrels of distillates per day that were being produced during the week ending July 20th, 2018…. 

​despite the increase in gasoline production, our supply of gasoline in storage at the end of the week still fell for the fifth time in 6 weeks and for the 17th time in twenty-two weeks, slipping by 226,000 barrels to 232,526,000 barrels over the week to July 19th, after our gasoline supplies had jumped by 3,565,000 barrels over the prior week….our gasoline supplies decreased this week because the amount of gasoline supplied to US markets increased by 459,000 barrels per day to 9,673,000 barrels per day, while our exports of gasoline fell by 59,000 barrels per day to 558,000 barrels per day, and while our imports of gasoline rose by 133,000 barrels per day to 985,000 barrels per day…after our gasoline supplies had reached an all time record high twenty-four weeks ago, they then fell by nearly 13% over 10 weeks while US Gulf Coast refineries were crippled by the Venezuelan sanctions, and ​as a result they are still fractionally lower than last July 20th’s inventory level of 233,504,000 barrels, while just 2% above the five year average of our gasoline supplies at this time of the year…

even with the decrease in our distillates production, our supplies of distillate fuels rose for the 8th time in the past 19 weeks, increasing by 613,000 barrels to 136,816,000 barrels during the week ending July 19th, after our distillates supplies had increased by 5,686,000 barrels over the prior week…the increase in our distillates supplies was smaller this week because the amount of distillates supplied to US markets, a proxy for our domestic demand, increased by 699,000 barrels per day to 4,264,000 barrels per day, while our exports of distillates fell by 144,000 barrels per day to 972,000 barrels per day and while our imports of distillates fell by 27,000 barrels per day to 105,000 barrels per day….after this week’s inventory increase, our distillate supplies were 12.9% higher than the 121,210,000 barrels of distillates that we had stored on July 20th, 2018, and returned to near the five year average of distillates stocks for this time of the year…

finally, with ​our oil exports ​rising ​while our oil production​ was​ interrupted by tropical storm Barry, our commercial supplies of crude oil in storage fell for a sixth week in a row and for the twelfth time in 27 weeks, decreasing by 10,835,000 barrels, from 455,876,000 barrels on July 12th to 445,041,000 barrels on July 19th …but even with that big decrease, our crude oil inventories remained roughly 2% above the recent five-year average of crude oil supplies for this time of year, and roughly 33% higher than the prior 5 year (2009 – 2013) average of crude oil stocks for the 3rd week of July, 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 had generally been rising since this past Fall until the recent 6 weeks, after generally falling until then through most of the prior year and a half, our oil supplies as of July 19th were still 9.9% above the 404,937,000 barrels of oil we had stored on July 20th of 2018, but at the same time were 7.9% below the 483,415,000 barrels of oil that we had in storage on July 21st of 2017, and 9.3% below the 490,501,000 barrels of oil we had stored on July 22nd of 2016…     

This Week’s Rig Count

the US rig count fell for the 20th time in 23 weeks during the week ending July 26th, and is now down by nearly 13% for this year so far….Baker Hughes reported that the total count of rotary rigs running in the US fell by 8 rigs to a new 17 month low of 946 rigs this past week, down by 102 rigs from the 1048 rigs that were in use as of the July 27th 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 3 rigs to 776 rigs this week, which was also a 17 month low for oil rigs, 85 fewer 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 decreased by 5 rigs to 169 natural gas rigs, which was a twenty month low for natural gas rigs, down by 17 rigs from the 186 natural gas rigs that were drilling a year ago, and way down from the modern era high of 1,606 rigs targeting natural gas that were deployed on August 29th, 2008…in addition, a rig classified as miscellaneous continued to drill this week, matching the “miscellaneous” rig count of a year ago…

the rig count in the Gulf of Mexico was down by 2 to 23 rigs this week, as two rigs that had been drilling off the coast of Louisiana were shut down…that still left 22 rigs drilling offshore from Louisiana and a single rig deployed offshore from Texas, an increase of 8 rigs from the 15 rigs that were deployed in the Gulf of Mexico in the same week a year ago, when 13 rigs were drilling in Louisiana waters and two were deployed offshore from Texas…however, another rig started drilling off the coast of Alaska this week, where there are now two rigs deployed, up from the one rig drilling off the Alaskan shore a year ago…​hence, the total US offshore rig count is ​now ​at 25, an increase of 9 offshore rigs from a year ago..

however, both of the rigs that had been drilling through inland bodies of water in southern Louisiana were shut down this week, leaving no such inland waters rigs active in the US this week, the first time in my memory that the US inland waters rig count has gone to zero; a year ago, there were two such inland waters rigs deployed..

the count of active horizontal drilling rigs was down by 6 to 823 horizontal rigs this week, which was the least horizontal rigs deployed since February 2nd, 2018 and hence also a new 17 month low for horizontal drilling…it was also 99 fewer horizontal rigs than the 922 horizontal rigs that were in use in the US on July 27th of last year, and 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 2 rigs to 67 directional rigs this week, but those were up from the 64 directional rigs that were operating during the same week of last year… meanwhile, vertical rig count was unchanged at 56 vertical rigs this week, but that was down by 6 from the 62 vertical rigs that were in use on July 27th 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 July 26th, the second column shows the change in the number of working rigs between last week’s count (July 19th) and this week’s (July 26th) count, the third column shows last week’s July 19th 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 27th of July, 2018…    

July 26 2019 rig count summary

in contrast to the recent weeks where most of the variances have been in the Texas Permian, there were quite a few unusual changes ​elsewhere ​this week…as you can see, the entirety of this week’s national rig count drop could be accounted for by the 8 oil rigs that were pulled out of the Bakken shale in North Dakota’s Williston basin, the largest such drop in the Bakken since February 2015…​in addition, we’ve already accounted for the 4 rig decrease shown for Louisiana, with the ​2 ​offshore and ​2 ​inland waters rigs from that state that were shut down…on the other hand, Wyoming saw an addition of 4 rigs, including 1 in the Denver-Julesburg Niobrara chalk and three in other basins not shown above, the largest jump in the Wyoming ​rig ​count yet this year….also note that the Permian basin saw a three rig increase while the Texas ​rig ​count showed no change; that was as one rig was pulled out of Texas Oil District 8, or the core Permian Delaware, while single rigs were started up in Texas Oil District 7C, or the southern Permian Midland basin, and in Texas Oil District 8A, or the northern part of the Permian Midland…hence, that means the other two Permian rigs were added in New Mexico, in the western Permian Delaware…

for rigs targeting natural gas, two rigs were shut down in Ohio’s Utica shale, two were shut down in the West Virginia Marcellus, and two were shut down in basins not itemized separately by Baker Hughes, while a natural gas rig was started up in Oklahoma’s Arkoma Woodford…you might note that West Virginia’s rig count is only down by 1; that’s because a conventional rig began drilling in Monroe count​y​, W Va,​ targeting natural gas at a depth of less than 5,000 feet; across most of West Virginia, the Marcellus lies more than 15,000 feet below the surface..

also note that in addition to the changes in the major producing states shown above, the only rig that had been drilling in Alabama was also shut down this week, the first time since April ​that ​Alabama has had no drilling activity, and down from 1 rig a year ago; at the same time, a sixth rig began drilling in Mississippi this week, the first time this year that Mississippi had that many rigs deployed; a year ago, there were three rigs drilling in Mississippi…

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