Oil Rallies On, Ignoring Saudi Production Claims

Today's weekly EIA inventory report has provided a very (very) welcome distraction from the production freeze jawboning. A solid draw to crude stocks, helped in large part by another large draw to the West Coast (h/t low imports) has been a supportive element, as has a solid draw to gasoline. Refinery runs hit their highest level for the year to boot...hence oil has pared losses. Hark, here are five things to consider in oil markets today:

1) The last couple of days we have been looking at the exports of various members of OPEC. The chart below aggregates all those members ex-Middle East. It illustrates that since the beginning of last year, exports from these various cartel members have dropped by ~1mn bpd, or some 13 percent.

This weakness is led by Nigeria of late, as well as Venezuela. While Middle East producers are ramping up exports like crazy, they are helping to offset the export losses from elsewhere:

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2) Graphic of the day is the below, which highlights how Big Oil is lagging in terms of unconventional production in the U.S. oil patch. BP, Royal Dutch Shell, Exxon and Chevron are one third less productive than the top ten operators.

Big oil companies don't have a great track record in terms of U.S. shale ventures; Shell wrote down $2 billion in assets back in 2013 - long before the oil price drop - while Exxon and Total have also made writedowns.

BP, however, is trying to make headway in the space - after previously having to sell off holdings in the Permian Basin to fund legal action and penalties due to the Deepwater Horizon accident.

BP has reduced well costs by almost two-thirds in Oklahoma and Texas, taking 37 days on average to drill a well, compared to 67 in 2013, while wells are set to produce 44 percent more natural gas than those drilled three years ago; BP believes it can produce as much as 7.5 billion barrels economically.

Just as other shale producers have had to buckle down and boost efficiencies, Big Oil appears to be on the right path too now.

3) Stat of the day comes via RBN Energy's Rusty Braziel in this podcast with the Center on Global Energy Policy. He says 60 percent of U.S. rigs are concentrated in just 20 counties. Wow.

4) These increasing efficiencies - or high-grading - in the U.S. oil patch is typified by the key shale plays of Permian, Eagle Ford and Bakken. According to EIA, new-well drilling productivity per rig is the highest in the Eagle Ford, projected at 1,089 bpd for next month. Since the end of 2014, however, Permian has seen the biggest increase in productivity per rig, climbing 140 percent (to 522 bpd); Bakken is up 79 percent to 875 bpd, and Eagle Ford up 60 percent.

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5) Our ClipperData show that we have seen 20 U.S. LNG export loadings from Sabine Pass in the period February to July, with volumes heading to 11 different countries. We have seen an additional four loadings so far this month, ramping up recently as a second LNG train has just started up at the end of July.

Argentina has been the recipient of a number of cargoes, but breaking down the costs involved, it seems these deliveries may not be economic. The delivery arriving at the Bahia Blanca terminal in Argentina in June had a delivered price of $4.18/MMBtu, according to Enarsa, Argentina's state power company.

However, according to Argus, a liquifaction fee of $2.25/MMBtu plus $1.963/MMBtu commodity costs (115 percent of final settlement price of June Henry Hub contract) totals $4.51/MMBtu. This means a loss of as much as $3.25mn was incurred, largely driven by a low natural gas price in late May. Rising prices since mean cargoes are more economical. A spot voyage from the U.S. Gulf coast to Argentina is seen at $0.70/MMBtu.

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By Matt Smith

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