Crude oil prices inched down today after the Energy Information Administration reported a crude oil inventory build of 3.6 million barrels for the week to February 8. This compares with a build of 1.3 million barrels for the previous week.
The EIA’s report came a day after the American Petroleum Institute served one of its now regular surprises by reporting a decline in crude oil inventories of 998,000 bpd for the same period.
The EIA also reported a 400,000-barrel increase in gasoline inventories, compared with a build of half a million barrels a week earlier, and a 1.2-million-barrel rise in distillate fuel inventories, versus a draw of 2.3 million barrels in the previous week.
Crude oil pries have been rising this week, especially today, after yesterday Saudi Arabia’s Energy Minister Khalid al-Falih said the Kingdom continues to cut deeper than the OPEC+ latest agreement stipulated, with daily output seen to fall to 9.8 million bpd by March and exports to decline to 6.9 million bpd. That’s down from a production level of 11 million bpd in November and exports of 8.2 million bpd. OPEC’s total for January fell by 800,000 bpd, Reuters reported earlier today, to 30.81 million bpd.
At the same time, events in Venezuela continue top support prices, with everyone expecting its oil production to decline further amid a government crisis that has to date seen two presidents vie for the seat of power and two governments.
Back to the U.S., the EIA said earlier this week it expected local crude oil production to hit 12.4 million bpd this year, rising further to 13.2 million bpd by 2020. Price-wise, this may not be the best of news for oil bulls as refiners are already churning out excessive amounts of gasoline while demand slackens off.
Speaking of refiners, last week these processed an average 15.8 million barrels of crude daily, producing 9.6 million bpd of gasoline, compared with 9.9 million bpd a week earlier, and 4.8 million bpd of distillate fuel, compared with 5.1 million bpd in the previous week.
By Irina Slav for Oilprice.com
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The EIA also reported a 400,000-barrel increase in gasoline inventories. The question is how could there be a gasoline inventory increase of 400,000 barrels when the EIA itself is saying refiners have produced 9.6 million barrels a day (mbd) of gasoline compared with 9.9 mbd a week earlier meaning a reduction of some 300,000 b/d.
And despite a spate of almost daily pessimistic reports about a slowdown in US shale oil production, the EIA never stopped hyping about rising US oil production. The EIA is now saying that it expects US oil production to hit 12.4 mbd this year rising further to 13.2 mbd by 2020. A week ago, the EIA projected a production of 12.1 mbd in 2019 later reduced to 12 mbd and 12.8 mbd in 2020. It seems that the EIA’s hype is accelerating like its claims about US oil production.
And yet, the facts on the ground contradict the EIA’s claims. The first fact is that bulk of US shale oil production has recently been coming from the Permian particularly after the steep decline of both the Bakken and the Eagle Ford shale plays in 2016.
The second fact is that the Permian production is bound to flatten and decline soon.
According to OPEC (2018 World Oil Outlook), the Permian basin oil production curve is likely to flatten by 2020, with growth slowing down from 860,000 b/d in 2018 to a mere 230,000 b/d barrels by 2020. The Permian is already facing a production slowdown resulting from a decline in drilling, well productivity and rig count. Such developments not only argue against any pronounced rise in US oil production, but they also confirm what a pioneer of the US shale oil industry Harold Hamm and the world’s largest oilfield services company ‘Schlumberger’ and many others have been saying about the uncertain outlook for US shale oil output in 2019.
The third fact is that considering that the bulk of US shale oil production growth is generated by a single field, the Permian, changes in the growth outlook of this basin have major implications for oil prices over the short, medium and long term. The year the Permian flattens is the year OPEC will regain control of the market. Such a development will have profound implications for long term oil prices.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London