oil production in lower 48 states at a record high, rig count at a 21 month low, and a note on last week’s OPEC report

oil prices ended lower for a 3rd week in four as the Chinese pulled a Trump and unexpectedly hit US goods with new tariffs, and Trump responded by ordering US companies to get out of China, ratcheting up the trade war to a whole new level…after managing a small 0.7% increase to $54.87 a barrel last week after Trump had decided to delay his latest Chinese tariffs, prices of US crude for September delivery opened higher on Monday after a weekend attack on a Saudi oil facility by Yemen’s Houthis threatened crude supplies, and continued higher to settle up $1.34, or 2.44% at $56.21 a barrel, with further gains limited by what was seen as a downbeat OPEC report on Friday…pricing for September oil continued higher on Tuesday, on expectations that the coming weekly oil data would show a decline in U.S. crude supplies, with trading in the September crude contracted expiring 13 cents higher at $56.34 a barrel, while crude oil for October delivery, the new front month contract, fell a penny to $56.13 a barrel….after rising to as high as $57.13 a barrel on a bullish API inventory report early on Wednesday, October oil prices then slid after the EIA reported a crude oil drawdown that was less than traders had hoped for and went on to close at $55.68, a loss of 45 cents on the day….oil prices opened higher on new tensions with Iran on Thursday, but then fell back on recession fears as the Fed’s annual economic symposium got underway in Jackson Hole, Wyoming, with oil ending down 33 cents at $55.35 a barrel…oil then sold off with global markets on Friday, after China unveiled new tariffs on U.S. goods, dampening economic expectations, and after Trump responded by ordering US firms out of China, with US crude prices settling $1.18 lower at $54.17 a barrel, after earlier falling to as low as $53.24…US crude prices thus ended 1.3% lower than the previous Friday’s close, but October Brent crude, the international benchmark, managed to show a 1.2% week-on-week increase, having risen 27 cents on Wednesday, and only falling 58 cents to $59.34 a barrel on the US/China trade war news on Friday…

natural gas prices also ended the week lower, largely because a big dome of cooler-than-normal temperatures was forecast to sit in the middle of country by the extended outlooks all week and there was no other news to move them higher…after rising 8.1 cents, or 3.8% to $2.200 per mmBTU on a bullish storage report last week, natural gas for September delivery managed to close a penny higher on Monday, overcoming cooler temperatures and record production which had pushed prices more than 6 cents lower early in the day, on word that a new natural gas export pipeline would soon be up & running…prices managed another eight-tenths of a cent gain on Tuesday before closing 4.8 cents lower on Wednesday, unable to repeat the bounce from the lows seen on Monday…prices then fell 1.1 cents on Thursday when the natural gas storage report showed no surprises, and then finished the week by slipping another seven-tenths of a cent to $2.152 per mmBTU on Friday, as cooler weather forecasts persisted for the final week of August and into the beginning of September..

the natural gas storage report for the week ending August 16th from the EIA indicated that the quantity of natural gas held in storage in the US increased by 59 billion cubic feet to 2,797 billion cubic feet by the end of the week, which meant our gas supplies were 369 billion cubic feet, or 15.2% more than the 2,428 billion cubic feet that were in storage on August 16th of last year, while still 103 billion cubic feet, or 3.6% below the five-year average of 2,900 billion cubic feet of natural gas that have been in storage as of the 16th of August in recent years….this week’s 59 billion cubic feet injection into US natural gas storage was close to the 61 billion cubic feet injection predicted by analysts surveyed by S&P Global Platts, while it was above the average 50 billion cubic feet of natural gas that have been added to gas storage during the second full week of August over the past 5 years, the 21st such average or above average storage build in the last 23 weeks…the 1,619 billion cubic feet of natural gas that have been added to storage over the 21 weeks of this year’s injection season is the second most on record, eclipsed only by the record 1660 billion cubic feet of natural gas that were injected into storage over the same 21 weeks of the 2014 natural 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 August 16th indicated that because our oil imports fell while our refinery consumption of oil rose, we had to pull oil out of storage for the first time in 3 weeks…our imports of crude oil fell by an average of 497,000 barrels per day to an average of 7,218,000 barrels per day, after rising by an average of 566,000 barrels per day over the prior week, while our exports of crude oil rose by an average of 120,000 barrels per day to an average of 2,803,000 barrels per day during the week, which meant that our effective trade in oil worked out to a net import average of 4,415,000 barrels of per day during the week ending August 16th, 617,000 fewer barrels per day than the net of our imports minus exports during the prior week…over the same period, the production of crude oil from US wells was reported to be unchanged at 12,300,000 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 16,715,000 barrels per day during this reporting week..

meanwhile, US oil refineries were reportedly processing 17,702,000 barrels of crude per day during the week ending August 16th, 401,000 more 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 390,000 barrels of oil per day were being pulled out of 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 598,000 barrels per day less than what our oil refineries reported they used during the week…to account for that disparity between the apparent supply of oil and the apparent disposition of it, the EIA inserted a (+598,000) 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”…obviously, with that much oil unaccounted for this week, it calls into question the other oil totals that the EIA has reported and we have transcribed (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 7,186,000 barrels per day last week, which was still 10.8% less than the 8,053,000 barrel per day average that we were importing over the same four-week period last year…the 390,000 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 unchanged at 12,300,000 barrels per day even though the rounded estimate of the output from wells in the lower 48 states rose by 100,000 barrels per day to a record high 12,000,000 barrels per day, because a 94,000 barrels per day decrease to 339,000 barrels per day in Alaska’s oil production lowered the final rounded national production total by 100,000 barrels per day…last year’s US crude oil production for the week ending August 17rd was rounded to 11,000,000 barrels per day, so this reporting week’s rounded oil production figure was 11.8% above that of a year ago, and 45.9% 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 95.9% of their capacity in using 17,702,000 barrels of crude per day during the week ending August 16th, up from 94.8% of capacity the prior week, refinery utilization rates that are fairly typical for mid summer….however, the 17,702,000 barrels per day of oil that were refined this week were still 1.1% below the 17,892,000 barrels of crude per day that were being processed during the week ending August 17th, 2018, when US refineries were operating at 98.1% of capacity….

even with the increase in the amount of oil being refined, gasoline output from our refineries was somewhat lower, decreasing by 306,000 barrels per day to 9,897,000 barrels per day during the week ending August 16th, after our refineries’ gasoline output had decreased by 218,000 barrels per day the prior week….that left this week’s gasoline production 2.5% below the 10,151,000 barrels of gasoline that were being produced daily over the same week of last year….on the other hand, our refineries’ production of distillate fuels (diesel fuel and heat oil) rose by 263,000 barrels per day to 5,340,000 barrels per day, after our distillates output had decreased by 209,000 barrels per day the prior week….but even with this week’s increase, our distillates production was 1.6% less than the 5,426,000 barrels of distillates per day that were being produced during the week ending August 17th, 2018…. 

even with the decrease in our gasoline production, our supply of gasoline in storage at the end of the week managed an increase for the fourth time in 10 weeks and for the 6th time in twenty-six weeks, increasing by 312,000 barrels to 234,072,000 barrels during the week to August 16th, after our gasoline supplies had fallen by 1,412,000 barrels over the prior week….our gasoline supplies increased this week because the amount of gasoline supplied to US markets decreased by 306,000 barrels per day to 9,626,000 barrels per day, and because our imports of gasoline rose by 89,000 barrels per day to 892,000 barrels per day, while our exports of gasoline rose by 213,000 barrels per day to 676,000 barrels per day…after this week’s increase, our gasoline supplies ended fractionally lower than last August 17th’s inventory level of 234,328,000 barrels, but remain roughly 4% above the five year average of our gasoline supplies at this time of the year…

with the increase in our distillates production, our supplies of distillate fuels rose for the 10th time in the past 23 weeks, increasing by 2,610,000 barrels to 138,123,000 barrels during the week ending August 16th, after our distillates supplies had decreased by 1,938,000 barrels over the prior week…our distillates supplies increased this week because our imports of distillates rose by 84,000 barrels per day to 210,000 barrels per day while our exports of distillates fell by 202,000 barrels per day to 1,419,000 barrels per day, and because the amount of distillates supplied to US markets, a proxy for our domestic demand, decreased by 101,000 barrels per day to 3,758,000 barrels per day….after this week’s inventory increase, our distillate supplies were 5.6% higher than the 130,838,000 barrels of distillates that we had stored on August 10th, 2018, while still around 2% below the five year average of distillates stocks for this time of the year…

finally, with less oil being imported at the same time our refineries were using more oil, our commercial supplies of crude oil in storage fell for the eighth time in ten weeks but for the fourteenth time in 31 weeks, decreasing by 2,732,000 barrels, from 440,510,000 barrels on August 9th to 437,778,000 barrels on August 16th…even after that decrease, our crude oil inventories were still roughly 2% above the five-year average of crude oil supplies for this time of year, and were about 31% higher than the prior 5 year (2009 – 2013) average of crude oil stocks for the 3rd Friday of August, 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 up until the most recent 10 weeks, after generally falling until then through most of the prior year and a half, our oil supplies as of August 16th were still 7.2% above the 408,358,000 barrels of oil we had stored on August 17th of 2018, but at the same time were 5.5% below the 463,165,000 barrels of oil that we had in storage on August 18th of 2017, and 11.2% below the 492,962,000 barrels of oil we had in commercial storage on August 19th of 2016…   

Why Everyone Got the OPEC Report Wrong

you should recall that we covered the August OPEC report last week, because even if you didn’t read it, our headline noted that report had showed that July’s oil output was 2 million barrels per day short of demand...since i don’t see a lot of the coverage of such Friday reports while i’m working on these newsletters on Saturdays, i was surprised to see a number of articles when the next week began characterizing that report as bearish, including those from Reuters, Bloomberg, and oilprice.com…since that certainly wasn’t my take, i went back to the OPEC report (which i had downloaded), to see where that misunderstanding was coming from…since many who covered it had reported that OPEC had reported that they had revised this year’s global demand for oil lower, i went straight to the demand section of the report, which begins on page 33, or pdf page 43…pasted below is a copy of the introduction to the demand section, so you can see how it reads…

July 2019 OPEC report global oil demand text

notice first that demand is expected to rise, but by a bit less they had previously forecast, and hence the growth of demand was revised lower…and that’s what was picked up by the Reuters article, which reads “the Organization of the Petroleum Exporting Countries cut its forecast for global oil demand growth in 2019 by 40,000 barrels per day (bpd) to 1.10 million bpd and indicated the market will be in slight surplus in 2020.“…however, that OPEC synopsis of their own report above, as repeated by Reuters, is a serious misstatement of what the data actually shows, which you’ll see on the table showing global demand for 2019, which appeared on the same page of the report as the text above, directly below it…

July 2019 OPEC report global oil demand copy

the table above came from page 33 of the August OPEC Monthly Oil Market Report (pdf page 43), and it shows regional and total oil demand in millions of barrels per day for 2018 in the first column, and OPEC’s estimate of oil demand by region and globally quarterly over 2019 over the rest of the table…in red on the right, we’ve circled the metrics that the OPEC summary, and by extension everyone else who repeated it, were referring to…as you can see on the revision line, demand growth for 2019 was expected to be 1,100,000 barrels per day, revised down -0.04 mb/d, or 40,000 barrels per day…

so, how did that revision come about?  2019’s demand growth is the change from 2018 demand to 2019 demand, and we’ve circled the revisions for demand for those years in green and blue above…in the far left column, we see that global demand for 2018 was revised HIGHER, from 98.73 million barrels of oil per day to 98.82 million barrels per day, which is rounded down to an 80,000 barrel per day UPWARD revision….in the blue ellipse, we can see that global demand for 2019 was also revised HIGHER, by 50,000 barrels per day to 99.92 million barrels of oil per day…however, when we take the difference between those two upward revisions as circled in red, we find the year over year growth in demand is lower than had previously been reported, simply because the upward revision to 2018 was greater than the upward revision to 2019…

unfortunately, everyone who is writing about this OPEC report, including the OPEC analyst who wrote the summary, has taken that downward revision of growth to mean a downward revision to demand, which is not the case…in fact, third quarter demand was revised 0.08 million barrels of oil per day higher and came in 1.98 million barrels of oil per day greater than July’s global output, as our analysis last week showed…the key point is that demand growth was adjusted lower, not that demand was adjusted lower…in fact, 2019’s demand was adjusted higher, but 2018’s demand was revised even higher, and hence the difference between 2018 and 2019, ie “growth”, was less…but an 50,000 barrel per day upward revision to 2019 demand, combined with a 2 million barrel per day shortage of oil during the month of July, is decidedly not bearish by any interpretation of the facts…

This Week’s Rig Count

the US rig count fell for the 23rd time in 27 weeks over the week ending August 23rd, and is now 15.4% lower than where it began the year at….Baker Hughes reported that the total count of rotary rigs running in the US fell by 19 rigs to a 21 month low of 916 rigs this past week, which was also down by 128 rigs from the 1044 rigs that were in use as of the August 24th report of 2018, and less than half of 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 decreased by 16 rigs to 754 rigs this week, which was a 19 month low for oil rigs and 106 fewer oil rigs than were running a year ago, and quite a bit 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 3 rigs to 162 natural gas rigs, a 28 month low for gas rig activity and down by 20 rigs from the 182 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…

however, the rig count in the Gulf of Mexico was up by 1 to 26 rigs this week, as a new rig began operating off the shore of Texas…that rig was added to the 25 rigs offshore from Louisiana already operating in the Gulf, a net increase of 10 Gulf of Mexico rigs from the 16 rigs that were deployed in the Gulf in the same week a year ago, when 14 rigs were drilling in Louisiana waters and two were deployed offshore from Texas…in addition, there continues to be two rigs deployed off the coast of the Kenai Peninsula in Alaska this week, same number as were drilling off the Alaskan shore a year ago, for a total US offshore rig count of 28, up from the total of 18 offshore rigs that were deployed a year ago…

the count of active horizontal drilling rigs was down by 18 to 797 horizontal rigs this week, which was the least horizontal rigs deployed since December 29, 2017 and hence a new 19 month low for horizontal drilling…it was also 122 fewer horizontal rigs than the 919 horizontal rigs that were in use in the US on August 24th 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 vertical rig count was down by 2 rigs to 50 vertical rigs this week, and those were down by 13 from the 63 vertical rigs that were operating during the same week of last year…on the other hand, the directional rig count was up by 1 to 69 directional rigs this week, and those were up by 7 from the 62 directional rigs that were in use on August 24th of 2018…

the details on this week’s changes in drilling activity by state and by major 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 August 23rd, the second column shows the change in the number of working rigs between last week’s count (August 16th) and this week’s (August 23rd) count, the third column shows last week’s August 16th 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 24th of August, 2018…     

August 23 2019 rig count summary

with the Permian showing a 7 rig decrease, we’ll start by looking at ​that region in ​Texas, where we find 5 more rigs were shut down in Texas Oil District 8, which would be the core Permian Delaware, and another rig was shut down in Texas Oil District 8A, encompassing the northern part of the Permian Midland, while a rig was started up in Texas Oil District 7C, or the southern part of the Permian Midland….with Texas Permian rigs thus down 5, that means that the 2 rig​s ​that were shut down in New Mexico had both been operating in the western-most reaches of the Permian Delaware, to arrive at the 7 rig decrease across the entire basin…then, ​we can figure that  ​at least 4 of the 5 rig decrease in the DJ Niobrara chalk of the Rockies’ front range appear to have been pulled out of Colorado, while the fifth one was offset by a startup in that state or Wyoming which isn’t shown, leaving us uncertain from whence it came…Oklahoma’s decreases came out of the Cana Woodford, the Ardmore Woodford, and one elsewhere in the state also not shown above, while the rig added in the Mississippian basin this week was in Kansas, which shared a spate of 65 earthquakes with Oklahoma this week, probably due to drilling waste water injections, as they occurred in an otherwise seismically inactive area…for rigs targeting natural gas, ​there was just the 3 rig decrease in the Marcellus, which came by way of a 6 rig decrease in Pennsylvania and a 3 rig increase in West Virginia, while all the other rig changes around the country you see above involved rigs targeting oil formations…we should note, however, that other than the changes shown above for the major producing states, both Florida and Illinois saw initial rig start-ups this week, while Mississippi saw its six rig deployment cut in half to three…for Florida, the rig start up seems to be a continuation of the on-and-off several weeks of drilling followed by several wees of layoff that have prevailed in the state over the past year, while the Illinois start-up is the first drilling in the state since a 4 week run last November…meanwhile, Mississippi has seen between 2 and 6 rigs drilling in the state since the beginning of 2018, with no discernible pattern to their changes in activity….

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