Oil Market comments from MS

[dan_s]

Weekly Highlights by Morgan Stanley: Energy

Crude Oil

Rigs Rising As The US Continues to Attract Capital

US horizontal rigs continue to rise, particularly in high quality areas. A drop in the
US rig count two weeks ago was primarily linked to less impactful vertical rigs. Horizontal
rigs have been on an upward trajectory for weeks, and even longer in top tier areas.

The best Big 3 shale plays are seeing new rigs first, but especially the Permian. 17
of 23 rigs added in the Big 3 shale plays since June 3 have been in the Permian. The
Bakken is 2nd with 3, while most other plays have seen little change. Within the Permian,
the Midland Basin has seen the most additions, but it is unlikely to be the only winner.

Highgrading is another overlooked trend, which suggests the rigs added could
have an outsized impact on overall supply. The rig count in the highest IP counties of
the Permian Midland continues to march higher and is not far from its 2015 peak. Since
May 6th, the Midland has added 13 horizontal rigs in top tier counties vs. only 8 for the
entire play.

New opportunities (Delaware, SCOOP/STACK) and $50 oil are attracting even more
capital, but likely to different plays. Asset sales, IPOs, secondaries, debt refinancing
and new issuances all continue to be active in the sector, supporting a revival of the rig
count even at $50. Perhaps most striking are upcoming E&P IPOs, especially those with a
growing focus on the Permian Delaware (e.g. Centennial Resource). Interest about the
SCOOP/STACK is also rising among producers and investors. As a result, we may see
these plays attract rigs before some more traditional oil plays like the Eagle Ford.

Rising horizontal rigs should change the production profile for 2017. While we don’t
expect new rigs to change the US production profile in the next few months, a continued
ramp in the horizontal rigs could alter the path 4-6 months out. It’s also important to
consider that the rigs are going into the most prolific areas, the decline curve for shale
wells is flattening, and completing DUCS could slow declines in as short as 1-2 months.

[dan_s]

Per the EIA website: http://www.eia.gov/dnav/pet/hist/LeafHa ... RFPUS2&f=W

U.S. crude oil production peaked at 9,604,000 barrels per day the week of 6-19-2015
U.S. crude oil production dipped to 8,428,000 barrels per day the week of 7-1-2015, a 194,000 BOPD drop in just the last week.

It is puzzling that the traders viewed yesterday's EIA report as bearish. It is obvious to me that the rate of decline has accelerated.
The U.S. could be under 8,000,000 by the end of this quarter.