Energy Prospectus

Gaffney Cline & Associates 1/19/2018

Crude Oil – Nineth straight weekly drop for US crude supplies

US oil stockpiles plunged last week, while production bounced back from a prior dip of 298,000 barrels per day. The EIA indicated that crude inventories fell by 6.9 million barrels, while gasoline stocks rose by 3.6 million barrels. Crude supplies at the Cushing, Oklahoma delivery hub for US crude futures fell 4.2 million barrels in the week, the largest draw since at least 2004.

Wednesday (Jan 17), the American Petroleum Institute, an industry group, reported a 5.1 million-barrel drop in weekly stockpiles, with gasoline stockpiles up 1.8 million. Analysts had expected a 3.5 million-barrel drop in oil inventories and a 2.7 million-barrel increase in gasoline stockpiles. Total commercial petroleum inventories decreased by 13.8 million barrels last week.

US production rose 258,000 barrels a day last week, nearly recouping the prior week's drop due to cold weather conditions. EIA expects total U.S. crude oil production to average 10.3 million barrels per day in 2018, up 10% from 2017. If achieved, this would be the highest annual average U.S. oil production on record, surpassing the previous record of 9.6 million barrels per day set in 1970. In 2019, EIA expects crude oil production to continue to increase, reaching an average of 10.8 million barrels per day. [Keep in mind that global demand for oil is going up much faster, approximately 1.5 million barrels per day each year.]

Increased production from the Permian region in Texas and New Mexico accounts for most of the projected increase in the US total crude production. EIA also expects a significant contribution to crude oil production growth from the Federal Gulf of Mexico, as new oil-producing projects are slated to come online by the end of 2019.

OPEC showed concern about US output growth in its latest monthly oil market report. OPEC indicated in their monthly oil report that US shale producers lowered break-even costs between 2015 and 2017 but expect that service companies are raising rig and labor costs such that break-even prices are beginning to increase. Despite increased costs, OPEC cited a JPMorgan report that expect US shale exploration and production companies could achieve "decent rates of return" at US$60 per barrel even if oil field service costs rose by 15%.

Oil Drilling Activity

Total US rig count (including the Gulf of Mexico) stands at 936, down 3 this week with rigs targeting oil down 5. The horizontal rig count stands at 802, down 3 this week.

The total number of active onshore rigs decreased to 916. Compared to a November 2014 figure of 1,876 active rigs, the level remains 50% below the 2014 high.

Across the three major unconventional oil basins, the oil rig total increased 1; it stands at 512, with Permian up 6, Eagle Ford down 4 and Williston down 1.

U.S. crude oil inventories have declined for 9 straight weeks.

Since peaking at 535.5 million barrels on March 31, 2017, U.S. commercial crude oil inventories have declined by 122.9 million barrels.

My SWAG is that the global oil market is under-supplied by more than a million barrels per day, with the difference taken from inventories.

From Q1 2017 to Q2 2017 global demand for oil increased by 2.3 million barrels per day. Demand always goes up a lot from Q1 to Q2 with more increase in Q3.

IEA: Explosive growth in U.S. shale will test oil prices. The IEA’s latest Oil Market Report paints a mixed picture for prices. Clearly, the market is tightening, the IEA says, but it also says that shale growth will be “explosive” this year. The agency revised up its forecast growth for U.S production from 870,000 bpd to 1.1 mb/d in 2018. That, combined with gains from other non-OPEC countries, could end the price rally, although the IEA says a lot of uncertainty remains.

Ask yourself this question: How in hell does EIA know how much U.S. oil production will go up in 2018 since we have not seen hardly any guidance on 2018 D&C capex programs from the major upstream companies? Answer: EIA's projection is nothing more than a Wild Ass Guess. Plus, the U.S. shale plays have not been producing long enough to really know how the wells will produce over time. There are well over 100,000 high decline rate horizontal shale oil wells on-line. Most of them have been completed in the last five years.

Per EIA weekly reports: U.S. production growth has slowed even though upstream companies are completing a lot of DUC wells to get them into their year-end reserve reports.
U.S. crude oil production for the week ending:
12/1/2017: 9,707,000 barrels per day
1/12/2018: 9,750,000 barrels per day < If U.S. oil production only went up 43,000 BOPD during this six weeks, why does EIA think it will go up 1,100,000 BOPD in 2018?

Venezuelan oil production plunges by over 200,000 bpd. Venezuela’s December output cratered to 1.6 million barrels per day (mb/d), falling by 216,000 bpd from a month before. The shocking single-month decline raises the prospect of a much more serious meltdown in the country’s oil sector than most analysts previously believed. Debt, lack of maintenance, a lack of cash to invest, the decrepit state of PDVSA’s oil assets, and a brain drain are all contributing to the steep decline. Analysts see output falling to 1.3 mb/d this year, perhaps lower. “The only discussion right now is how much is it going to decline by. There is no talk of a turnaround,” Luisa Palacios, analyst at consultancy Medley Global Advisors in New York, told the WSJ.

Permian bottleneck looming. Argus Media reports that surging oil production in the Permian could run into a ceiling of midstream capacity in the coming years, threatening the boom. For now, there is enough pipeline capacity to carry Permian oil to the Gulf Coast, but at some point the pipeline network will be maxed out, and there is “going to be a day of reckoning,” Enterprise Products Partners senior vice president Brent Secrest said at the Argus Americas Crude Summit in Houston, Texas. Pipeline companies see the bottleneck beginning in 2019 or 2020.

MY TAKE: All these wild projections of "explosive" production growth may be ignoring the fact that (a) the U.S. production decline rate is increasing the more dependent we become on tight oil zones and (b) we need a lot more infrastructure to get a big spike in production to market.