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Matt Smith

Matt Smith

Taking a voyage across the world of energy with ClipperData’s Director of Commodity Research. Follow on Twitter @ClipperData, @mattvsmith01

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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:

(Click to enlarge)

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.

(Click to enlarge)

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.

(Click to enlarge)

By Matt Smith

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  • Kr55 on August 17 2016 said:
    I would argue the primary source of productivity gains has been simply how producers in shale plays are only drilling in the absolute best locations. If they were drilling everywhere, places where you are going to get less IP30 production and obvious where it's impossible to breakeven at todays prices, those productivity numbers (production divided by rigs active) would be much flatter. If shale does ever ramp up (not likely to happen in Eagle Ford or Bakken any time soon), you will see those productivity numbers drop as the lower quality plays start to be tapped into again.
  • Cm on August 17 2016 said:
    I would also point out a great deal of the efficiencies are due in large part to extreme price cuts by service companies trying to stay afloat.
  • avenger 426 on August 17 2016 said:
    High oil is bad for the consumer...you know the people that put money in big oils pocket. It is bad for production, transportation and every sector in the market. The only thing high oil is good for is the raping oil companies.
    However, high oil has started an alternative energy and transportation boom. Basically, though oil is not out of the picture, it's importance is and will fade. Basically, high oil and greed is sowing it's on seeds of its own demise and that is an excellent prospect. Oil prices will back off. Shale is profitable at 35 bucks a barrel and that price drops as the shale producers get better and more efficient at what they are doing. Oil is a dying commodity.
  • Joe on August 17 2016 said:
    Agree with KR55 and CM. Also when money can be made at a certain price, the banks are there backstopping the oil companies. When they over do it and the price collapses, the oil companies have to carefully cherry pick the best plays and the banks pull back and force oil companies to continue operating at a lower profit margin, as long as the loan payments are being made. The shareholders have to suck it up until the cycle begins again.

    I am cheering the alternate energy business and they are entitled to their day in the sun (no pun intended). If they can replace 97 million bbls/day, have at it.

    Joe

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