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.