Despite OPEC’s Best Efforts Oil Inventories Have Grown

Friday June 16, 2016

In the latest edition of the Numbers Report, we'll take a look at some of the most interesting figures put out this week in the energy sector. Each week we'll dig into some data and provide a bit of explanation on what drives the numbers.

Let's take a look.

1. Permian production lower than you think

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- The EIA is out with a new Drilling Productivity Report, expecting shale production increases of about 127,000 barrels per day in July. The largest source of growth is predicted to come from the Permian Basin, with additions of 65,000 bpd. The Permian has become the hottest shale play in the country.
- But the EIA has had to continually revise its production estimates lower over time as actual production figures have disappointed.
- At the same time, the number of drilled but uncompleted wells in the Permian has ballooned, having climbed by more than 30 percent this year.
- As such, the Permian could have a lot more production sitting on the sidelines, not yet in production.

2. Permian sees productivity decline

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- The Permian Basin has also seen productivity run into a brick wall, with new-well production per rig having declined every month so far this year.
- The extraordinary productivity increases came to a halt in 2016.
- Back in August 2016, the average rig could produce just over 700 barrels of oil per day from a new well.
- That figure has dropped to an estimated 602 barrels per day for July 2017.
- Falling productivity suggests that the sweetest spots have been taken up, and that if the industry wants to produce more, it will have to spend more and drill in marginal areas.

3. Someone bet on $80 oil

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- Bloomberg reported that a large volume of options were sold last week when oil prices fell sharply, a bet that would pay off if Brent surges to $80 by the end of the year.
- Analysts chalked up the purchase as a hedge against geopolitical tension. Several Gulf States including Saudi Arabia cut off diplomatic relations with Qatar. Also, Libya's largest oil field has come online and gone offline because of protests.
- The bet is an outlier, and does not necessarily portend any trend in the market. For now, investors have made some initial bullish moves after a selloff in April.
- Prices dipped to a six-month low on Thursday. The next steps are uncertain - bearish fundamentals are dragging oil lower, but are we at a buying opportunity for investors?

4. U.S. shale gas revolution resumes

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- The shale gas revolution in the U.S. appeared to finally reach its limits last year, as years of low prices combined with the drop off in oil drilling activity, leading to the first overall decline in shale gas production in years.
- But gas output is back on the rise. The reason is that gas production from the most prolific shale gas basin - the Marcellus Shale - is climbing rapidly. Also, the Permian Basin is giving the Marcellus a run for its money.
- All of the oil drilling in the Permian is leading to a surge in natural gas production, which is produced as a byproduct when drilling an oil well.
- The surge in output from both shale plays could keep natural gas prices low for the foreseeable future.
- Individual shale companies will benefit if they are growing gas production, but they will also be hit by headwinds if the wave of new supply keeps prices low.

5. Global oil inventories higher now than at start of 2017

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- As the IEA said in its latest Oil Market Report, "the currency used to express re-balancing is the five-year average level of oil stocks." Unfortunately for OPEC and other oil bulls, oil stocks are higher today than they were at the start of the year, despite six months of OPEC cuts.
- OECD commercial stocks rose in April by 18.6 million barrels, much higher than they should have for that time of the year. They are also still 292 million barrels above the five-year average.
- They have started to decline, but the IEA doesn't see the stocks coming back into the five-year average range until the end of the OPEC compliance period after the first quarter of 2018.
- The figures are pessimistic, and bearish for oil prices.

6. Non-OPEC supply to swamp global market

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- The IEA predicts that non-OPEC producers will add a whopping 1.5 million barrels per day (mb/d) in 2018, a volume that will exceed total global demand growth of 1.4 mb/d.
- Much of the production increase will come from the U.S. at 780,000 bpd. But Canada and Brazil will also add sizable contributions to global supply.
- "Our first outlook for 2018 makes sobering reading for those producers looking to restrain supply," the IEA wrote in its report.
- The cutbacks from OPEC are being met by surging non-OPEC supplies, which could leave the cartel weakened and with a smaller market share.
- Ultimately, OPEC may be faced once again with a decision in 2018 on whether to extend the cuts for another period of time or return production to higher levels and potentially risk another downturn in prices.

7. Coal production declining sharply

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- Global coal production plunged by a record amount in 2016, according to BP (NYSE: BP), which produces a widely-cited annual review of trends in energy markets.
- Both China and the U.S. saw production decline, a result of waning demand in both countries.
- Coal production was down 6 percent globally, while consumption was also down by 1.7 percent.
- In the U.S., demand for electricity is flat, while natural gas is cutting into coal's market share. In China, stricter laws targeting air pollution are the culprit.
- "The fortunes of coal appear to have taken a decisive break from the past," BP's Chief Economist Spencer Dale said at a briefing in London on Tuesday. The largest ramification is for "carbon emissions, which saw little or no growth for a third consecutive year."

That's it for this week's Numbers Report. Thanks for reading, and we'll see you next week.