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Minor Bullish Signals Do Not Back Up Long Term Oil Price Rally

The main action this month has been on the oil price that continued to slide. Both WTI and Brent set new post-crisis lows but saw sharp reversals on 27th and 28th August last week. This is a story still unfolding that is discussed in greater detail in the caption to Figure 1 (below). Global oil production data remains in its up trend although there are signs from the regions that this may be slowing and reversing. Monthly data revisions continue to obscure the real picture.

1. World total liquids production down 580,000 bpd to 96.57 Mbpd.
2. OPEC production down 20,000 bpd to 31.79 Mbpd (C+C)
3. N America production down 240,000 bpd to 19.55 Mbpd.
4. Russia and FSU down 100,000 bpd to 13.87 Mbpd
5. Europe up 50,000 bpd to 3.34 Mbpd (compared with July 2014)
6. Asia down 140,000 bpd to 7.91 Mbpd.
7. Middle East rig count is stable. The international oil rig count continues to decline while the US oil and gas rig count is flat-lining.

Figure 1 With production data always running one month in arrears, the oil price and rig counts give us the most up to date indicators for the oil market. August has seen a lot of action for the oil price with the slide that began in July continuing through August. But then on 27th and 28th August there was a sharp reversal of fortune. Note that at time of writing the EIA price data stops on 24 August. I have used data from the FT to illustrate the recent uptick in price.

Does this mean an end to the rout in oil prices? It certainly means a pause in the recent down trend but may not necessarily mean that the rout is over. The FT reports that the 27th and 28th recovery was down to traders covering short positions. The WSJ suggests that Venezuela calling for an emergency OPEC meeting underlies the rally. The recent slide has broken support levels of $43.39 for WTI marked on 17th March and $45.13 for Brent marked on 13th January. The new lows set on 24 August are $38.22 for WTI and $41.59 for Brent.

The July 2015 Vital Statistics are here. EIA oil price and Baker Hughes rig count charts are updated to end August 2015, the remaining oil production charts are updated to July 2015 using the IEA OMR data.

Figure 2 The bigger picture shows more clearly how the January / March lows have failed. It also shows how the post 2008/09 pattern is not repeating. This is largely down to OPEC taking opposite action now compared to then. In 2009 OPEC began to cut production aggressively to support price. Today they are increasing production in a quest for market share.

Figure 3 The US rig counts for oil and gas are effectively flat-lining with oil directed rigs up 11 and gas directed rigs down 7 for the month of August. As discussed in this recent post, the oil directed rig count has not fallen far enough to erase sufficient LTO production in the US to provide support for the oil price. Something has to give.

Figure 4 The bigger picture of US rig count.

Figure 5 The detailed picture of recent US oil production continues to be clouded by the IEA revisions. At face value, US production is down from 13.01 to 12.70 Mbpd from June to July = 310,000 bpd. But the June figure of 12.88 Mbpd reported in July has been revised up to 13.01 Mbpd in August, i.e. by 130,000 bpd. Hence 42% of the August fall can be attributed to this revision.

Related: Productivity Gains Prevent Collapse Of U.S Light Tight Oil Production

In my post on US Shale Oil: drilling productivity and decline rates I estimated that LTO production may fall by 830,000 bpd with current rig count and drilling efficiency. So far we are down 540,000 bpd from the April high. There may not be a lot more US decline to come with current rig count although shutting down stripper wells will remove more oil from the US market.

Figure 6 OPEC spare capacity stands at 3.21 Mbpd and has been declining steadily in recent months. The IEA have booked 730,000 bpd spare capacity for Iran in anticipation of sanctions being lifted. And they book 1.94 Mbpd for Saudi Arabia which is likely heavy sour crude that does not currently have a refinery market. Apart from those two countries the rest of OPEC is pumping flat out. In the August OMR, the IEA have an interesting section on the schedule for lifting Iranian sanctions that is reproduced in a separate post here.

Figure 7 OPEC production plus spare capacity in grey. The chart conveys what OPEC could produce if all countries pumped flat out although, as stated previously, the status of Saudi spare capacity needs to be questioned. OPEC crude oil production stood at 31.79 Mbpd in July, down 20,000 bpd on June after revisions are taken into account. Production + capacity stands at 35.00 Mbpd and has bumped along this plateau since 2009. The signs are that the days of production growth in OPEC may be over. Their recent behavior may be linked to this, but as discussed in OPEC’s Gigantic Blunder they may have misread the best way to play the new oil market. Much better to have a smaller share of a large pie.

Figure 8 Saudi production fell by 80,000 bpd to 10.40 Mbpd in July after revisions. Saudi production has risen by 780,000 bpd this year, one of the principle reasons for the rout in oil price. NZ = neutral zone which is neutral territory that lies between Saudi Arabia and Kuwait where production from the Wafra heavy oil field is shared equally between them. The NZ used to pump at over 500,000 bpd in 2013, but this has now effectively fallen to zero. The heavy oil in the Wafra reservoir is helped to the surface by steam injection. It seems that this is not economical sub $60.

Figure 9 The ME OPEC oil rig count is on a rising trend with operational cycles superimposed.

Figure 10 The international oil rig count continues its slide, which like the slide in US oil rig count, must impact production at some point. The recent peak in international oil rigs was 1080 in July 2014. That has since fallen 231 (21%) to 849 units in July 2015. These statistics may be clouded by companies that have rigs on contract which are now “stacked” i.e. not being used. The bigger picture is that the international drilling rig fleet has grown by over 400 units since 1997.

Related: Oil Prices Tank Over Mediocre Chinese Economic Data

Figure 11 Russia and other FSU oil production remains rock steady effectively glued to 14 M Bpd. Russia is one of the world’s largest producers with 10.99 Mbpd in July 2015, down 70,000 bpd on June. Other FSU was down 30,000 bpd at 2.88 Mbpd after revisions. Group production down 100,000 bpd.

Figure 12 The cycles in European production data are down to summer maintenance programs in the offshore North Sea province. To get an idea of trend it is necessary to compare production with the same month a year ago. The dashed line shows that European production has been essentially flat for three years. The post-peak declines have been arrested. Compared with July 2014, European production is up 50,000 bpd.

1. Norway Jul 2014 = 1.93 Mbpd; Jul 2015 = 1.89 Mbpd; down 40,000 bpd YOY
2. UK Jul 2014 = 0.80 Mbpd; Jul 2015 = 0.90 Mbpd; up 100,000 bpd YOY
3. Other Jul 2014 = 0.56 Mbpd; Jul 2015 = 0.55 Mbpd; down 10,000 bpd YOY

Figure 13 This group of S and E Asian producers has been trending sideways since 2010. The group produced 7.91 Mbpd in July, down 140,000 bpd on the revised June figure.

Figure 14 N American production is beginning to look like it has topped:

1. USA June 2015 13.01 Mbpd; July 2015 12.70 Mbpd; down 310,000 bpd
2. Canada June 2015 4.20 Mbpd; July 2015 4.22 Mbpd; up 20,000 bpd
3. Mexico June 2015 2.58 Mbpd; July 2015 2.63 Mbpd; up 50,000 bpd

Group production down 240,000 bpd from June to 19.55 Mbpd.

Figure 15 Total liquids = crude oil + condensate + natural gas liquids + refinery gains + biofuel. July production was 96.57 Mbpd down 580,000 bpd on the revised June figure. This chart shows how supply growth accelerated in 2014 giving rise to the price collapse.

Figure 16 To understand this chart you need to read my earlier posts [1, 2]. The design of the chart has been modified into time slices as presented in Oil Price Crash of 2014 / 2015 Update. Recent price action is going to take this trend vertically down.


Figure 17 The IEA crude oil supply and demand data are updated quarterly. Hence this chart is unchanged from the last report. See Vital Statistics July 2015 for narrative. See also Figure 19.

Related: Is George Soros Betting on the Long-Term Future of Coal?

Figure 18 The change in oil inventory is the difference between supply (production) and demand shown in Figure 18. Hence, like Figure 17 this chart is unchanged from July Vital Statistics.

Figure 19 IEA composite supply and demand chart from the August OMR including their forecast. The IEA sees demand continuing to grow along historic trend and supply flat-lining as of 2/4 2015. The over supply situation continues throughout 2016. This confirms my earlier concern that oil price may weaken further from current position and the strong recovery I expected in 2016 may be delayed. Both factors are due to greater momentum in supply growth this year than I and many others did not anticipate.

(Click to enlarge)

Figure 20 To conclude, this interesting chart from Art Berman shows the top production winners and losers from June to July.

Concluding thoughts

The low oil price is causing severe distress to the oil industry, the OPEC producers and Russia. The most significant chart is perhaps Figure 19 where the IEA see over supply continuing throughout 2016. Even then, the glut will continue since storage will be brim full. This backdrop suggests that the oil price may go lower and remain weak throughout 2016. That is unless something gives on the production front. Either US drilling drops down to a much lower level or OPEC reverse their policy.

On the demand front, cracks are opening in China countered by strong growth in the USA. Low oil price should stimulate demand and growth throughout the global economy.


[1] Energy Matters The 2014 Oil Price Crash Explained

[2] Energy Matters Oil Price Scenarios for 2015 and 2016

By Euan Mearns

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