EIA predicts month-over-month declines at main tight oil basins (same news as previous post but now with chart)

Of the three basins where the vast majority of recent production growth has been, two are now predicted by EIA to decline in April.  There is a chance that we are seeing the peak in US production.  Unfortunately, the market will still be far from balanced unless we get significant declines in production or increases in demand.  Crude stocks have been building in the USA by just under 1 million barrels per day for the last 90 days.  Now some of this is due to refinery turn-around season, perhaps 1/4 to 1/3 of the build if the past five year history is a model.  We have had fairly high utilization rates during this turnaround season, which should have minimized the crude build under normal circumstances.  Gasoline stocks are significantly above average as well.

Also, since we are a net importer why has our over production not simply displaced imports?  The only answer that makes sense to me is that we have fully displaced all light crude imports and the refineries still are importing heavy crudes since that is what they are set up to refine.  Almost all of the crude being produced from the tight oil plays is light crude.  So the build in inventories is not just a sign of overproduction, it is a sign that there is a miss-match  in the type of oil that is being produced and what the refineries want.




This EIA article from february shows how light crude imports have totally disappeared, and medium crude imports are on their way out too.  I don't think there is available data showing how much inventory is which type of crude, but you can bet that the vast bulk of it is light crude.

So how do we get out of this situation of US inventory builds?

1) major increases in consumption- Hard to see this happening in as significant a way as it would need to to make a major impact.  Even with very big consumption growth it couldn't really solve the glut of light oil, though it could make a dent in the global supply-demand balance.

2) US ends the oil export ban.  This is an incredibly obvious thing to do, and just the type of bill the republican congress would love to pass.  This is the easiest solution, but I would hate to be in the position of relying on the government to do something.  If this happened we would be importing heavy oil and exporting light oil.

3) Refineries switch over to lighter grades- My non-expert sense is that this isn't something that happens fast.  Also, only some switch-overs in the US Gulf Coast might create a glut of the heavy grades that come from Canada, Mexico, and Venezuela supporting the economics of those grades as well and disincentivizing massive change-overs to light grades.  I don't think this solution is likely to be rapid enough to address the problem.

4) Exports of "lightly refined" crudes-  This is what Valero and Pioneer did with lease condensate exports.  They run it through a simple distilation tower and call it a refined product, which is thus eligible for exports.  NGLs have always been exportable too.  But why not go heavier and push the envelope further?  I don't know enough about the rules to say whether this is really practical.

But if nothing happens, you could see even more egregious discounts for Eagleford and especially Bakken grades.  Although spreads haven't apparently totally blown out yet, I would point out, that in percentage terms, the discounts are very high indeed.  A $15 discount to Brent is more than 25% at current prices.

How likely is an Iran deal?

If I were Iran, I would view the current period as a golden opportunity for a nuclear deal.  The senate Republicans and Netenyahu have presented the Iranians with something of a win-win situation if they have any intention at all of making a deal.  For one, if the Republicans are able to scuttle a deal that the Obama administration signs onto, then that may well cause the sanction resolve of China and Russia to weaken.  If the US isn't willing to negotiate in good faith then how can Iran be faulted?  So they might be able to sign up for a deal, and when the Republicans vote it down they can resume previous activities while blaming America.  On the other hand, if the Republicans aren't able to scuttle the deal, then the Iranian moderates have some serious political cover.   They can say: Look how good this deal was for us, Netenyahu hated it so much that he breached normal diplomatic protocol to give a speech in the US Senate.  The Republicans hated it so much that they wrote an unprecedented letter to the Supreme Leader that was resulted in various political commentators calling them traitors.

Any Iran deal is bearish for oil over both short and long time horizons.  If Iran actually became a normal country, their production might dramatically increase over the long term.  Today they export 1-1.5 million barrels per day.  But they are only producing 3 or 3.5 compared to 5.5 million per day which they produced in the 1970s before the revolution.

Updates and inventories

I mentioned a week ago that I had picked up some Whiting on the back of takeout rumors.  I sold that position back for a very small gain yesterday.  Just as everyone had been focusing on the declining rig count in January and February, now everyone seems focused on the US inventory numbers, which are at a record and moving ever higher.  Cushing inventories are around 70% full according to someone on CNBC yesterday.  If we really run up against storage limits, there will be no limit to how far the price can fall in the short term.

I had last posted about the US inventories a few weeks ago.  I just wanted to reiterate a few points.

1) US inventories are not world inventories.  US inventories have very reliable data from EIA, so they are  a major data point that everyone focuses on, but the US only uses 20% of the worlds oil production now.

2) It is not clear how much the US build is due to total excess supply of oil and how much is due to the specific glut of light oil from the unconventional plays.  This oil cannot be exported except under a few specific circumstances.

3) The refinery turnaround season has also had an effect on the inventory build.  Utilization tends to be highest in the summer and low in the winter, so we are coming off a period of low refinery utilization which causes inventory builds.

Now that EIA is predicting declines in Bakken and Eagleford, and refinery utilization rates should be on the upswing, perhaps we will soon see an end to the dramatic inventory builds.

New EIA drilling productivity report shows production in Bakken and Eagleford may be declining in April

EIA is now predicting Bakken and Eagleford production declines in April.  Permian still is increasing, and all the tight oil regions taken together have flat production.  If this is true it means that US production will be peaking before many analysts were expecting.  This is a bullish sign for oil equities.

Whiting up for sale?

Whiting is up 10% this morning and I just bought a chunk at 37.55. This is the first purchase I have made in energy since last September.

Bloomberg and WSJ are both reporting that it is up for sale.  The price is right, trading at under $10 per barrel on a P1 basis.  There are deepwater projects that have recently been approved on a $20 per estimated recoverable barrel basis.  Statoil and Exxon are logical buyers since they have plenty of firepower and are already heavily involved in the Bakken.  PE is also a possibility since there has been lots of fundraising activity recently.

Inventories and Rig Count update

I haven't had much time recently, but I did want to check in on inventories and rig count.

Rig counts are still heading south at an incredible pace with the numbers from Baker Hughes showing another drop of 75 last week.  Inventories continue to climb at a rapid pace in the USA.

Beyond this, we are seeing continued delays to completions.  Because the market is in reasonably steep contango, an oil company can delay completion on the well and sell the oil forward to lock in a higher price than they would get if they turned it on today.  As an added bonus, service costs are falling, so the cost of completion will be lower 6 months from now, or so everyone expects.  This means that the US inventory builds, as impressive as they are, might actually be understated.

The monthly International Energy Administration publication the Oil Markets Report from January is now available for free (you have to pay to get it on time).  They are now showing the market in balance (but not working off elevated inventories) beginning in Q3 and Q4 of this year.  They note that there was a downward revision of 350mbbl/d for non-opec supply growth.  They also project about 1% growth rate for demand this year, up from around .6-.7% for last year.  They divide oil demand into OECD, which is about half the market, and Non-OECD.  OECD demand is declining at about 2% per year, and non-OECD is growing at about 2 to 2.5%. 

Total inventories (through November, see below) are not at all alarming.  Low European inventories and high US inventories more or less are cancelling each other out.  Although it should be pointed out that the alarming rise in US inventories really started in late November, after the data shown from the IEA January report.

I think one reason for the big rise in US inventories with total OECD inventories building, but only at their 5 year average as of November, could be the overproduction of light oil in the USA.  A reason for US inventory builds might be that we are producing so much light oil that the refiners are having trouble taking it.  Even though the USA still imports a lot of oil, over the past few years, light oil imports have gone to zero.  Since light oil production is still going up, they have to find something to do with the surplus.  US law forbids exporting oil, so it may be that the inventory build is related to the overproduction of light oil in the USA as much as it is a signal of global overproduction.  If this is the case, it would indicate that US  inventories may not be particularly useful for evaluating global oil supply-demand balances.