- May 23, 2015
- Posted by: Art Berman
- Category: The Petroleum Truth Report
Storage withdrawals and falling rig count have been the main sources of hope that U.S. tight oil production will fall and that oil prices will rebound. That hope is fading as it is now clear that recent withdrawals from U.S. crude oil storage are because of price, not falling supply, and that the drop in rig count has stalled.
Figure 1 below shows the relationship between U.S. crude oil storage inventory and WTI price. The thinking around recent withdrawals from storage is that this reflects depleting supply. The data, however, reflects that traders were storing crude oil during the price collapse in order to realize higher prices later. With rising prices over the last month, traders are selling their stored volumes. The recent inventory build correlates almost perfectly with the fall in oil prices and the withdrawals from storage over that last 3 weeks correlate with the 35% increase in oil prices since late March.
Figure 1. Monthly change in U.S. crude oil inventory and WTI oil price (3-month moving average of inventory volumes). Source: EIA and Labyrinth Consulting Services, Inc.
(click to enlarge image)
Previous builds and withdrawals from inventory also correlate with price but generally price followed changes in inventory. In the recent case, price lead inventory changes.
The other important point about Figure 1 is that inventory additions and withdrawals are seasonal. A Spring and Summer “de-stocking” is normal. In that sense also, the recent withdrawals from storage say less about oil supply than they do about northern hemisphere summer driving demand and the end of regularly scheduled refinery maintenance in the U.S.
Falling U.S. rig counts have been the main hope for a drop in U.S. oil production that might help balance the global market. This appears to have ended as shown in Figure 2 below.
Figure 2. Tight oil horizontal rig counts for key tight oil plays. Source: Baker Hughes and Labyrinth Consulting Services, Inc.
(click to enlarge image)
The Bakken rig count has stabilized between 78 and 80 rigs over the last month. Decrease in Niobrara rig count ended at 28 in mid-April and has been steady at 30 rigs for the last 3 weeks. The Eagle Ford play reached its low in early May at 102 and has been at 104 rigs for the last two weeks. The Permian trend remains lower although one rig was added last week for a total of 172 horizontal rigs. In many ways, these rig count trends reflect the economic attractiveness of the plays.
It is true that these rig counts remain substantially below 2014 highs and the lag from spud date to first production is about 5 months in the Bakken and 3 months in the other plays. In other words, the effects of lower rig counts have not yet been reflected in current production data which lags about 3 months itself. Published EIA production for February and April is an estimate.
The third pillar of hope for decreased U.S. oil supply has been growth in demand because of low price. That support remains strong as March vehicle miles traveled data indicates the highest gasoline demand since 2007, just before the Financial Crisis began.
The recent 35% increase in WTI and 40% increase in Brent prices is based more on sentiment than real evidence and I expect that prices will fall unless tangible data appears to support present prices. A geopolitical risk premium or an OPEC production cut in early June would constitute a “hard” reason for higher prices.
Present data, however, suggests that the global over-supply has gotten worse, not better, that overall demand for liquids remains weak, and the world economic outlook is discouraging. At the same time, market movements are not always based on fundamentals. In the long run, however, fundamentals rule so I maintain my view that the current price surge is at best premature.
Wow, with new rigs pulling 2/3 of total oil out within year one it’s no wonder that supply has not decreased a lot yet, only the strong ones were left open. I’d say give it a month or two and supply will drop precipitouslty. Not to mention, you can’t just turn rigs back on without lending & banks are very hesitant to lend. Prediction $70 by EOY 2015 & $95 by EOY 2016
The rig count has just about reached the number that the oil price in January predicted it would. The current oil price probably foreshadows that the count will start to recover, albeit slowly.
US Production is probably falling already but we won’t have reliable data to back that up for a while; what is certain is that US shale producers aren’t now capturing market share from OPEC. So Naimi will be happy with that.
But the flip side of OPEC pumping like crazy is that OPEC spare capacity is next to nothing. I don’t know how true this article is but it seems like a straw in the wind to me.
All we need now to get the oil price back up are some “events, dear boy, events” as Macmillan is reputed to have said.
The article on China points to this problem:
Saudi Arabia, Kuwait Tensions Underlie Oilfield Closure
Saudi Arabia’s closure of an offshore oilfield it shares with Kuwait has revived speculation of renewed tensions between the two, and put Chevron’s role in the shared Neutral Zone in focus.
The loss of Khafji’s 280,000 barrels per day of Arabian Heavy crude will be felt more in Kuwait, which has far less spare output than its neighbor, the world’s top oil exporter. Oil prices rose briefly to over $86 a barrel on Monday on the news.
The April 2015 Monthly Oil Market Report
has Neutral Zone Production as 200 kb per day, while levels were 520 kb/d previously
Ron Patterson has this graph
I gather that you no longer expect a 500Kb/d fall in Shale oil output by the end of June – in your opinion ,has the fall been postponed, or cancelled?, is the observed output plateau (to date) due to a flood of new investor money or the recovery to 60$ WTI, or miscalculation?. What credence do you give to claims that a 8 hour frac pump service can now be undertaken in 15 minutes, and other Stakhanovanite cost reduction claims from the shale patch management?.
Are you still long term bullish on oil and nat gas prices?
On May 23rd, 2015 at 5:59 pm, you wrote; “Assuming that the rate of well completions continues according to the model I developed a month ago, production from the 3 main tight oil plays could decrease 500,000-600,000 bopd by the end of the year.”
I think that you meant that oil production may be REDUCED BY 500K to 600K barrels/day by the end of 2015, didn’t you? If production from the three main tight oil plays fell to 500K-600K, then the surplus really would be gone!
I realize that natural gas is being sold well below the cost of production, but as long as fracking continues with money from Wall Street, it would be by-product being sold for what could be fetched on the market. What is your reason for optimism for natural gas?