Firm OPEC And U.S Production Keep Hopes For Higher Oil Prices Down

The US oil directed rig count was up 31 for the month of July and WTI is down about $11 for the month at time of writing. Global total liquids production was up 540,000 bpd in June. The production momentum built in recent years is proving very difficult to switch off. Amongst other things, an inventory of over a thousand wells drilled but uncompleted in the US shale oil patch will continue to be switched on for several months to come. The IEA sees global oil stocks rising at 3.3 Mbpd in 2Q 2015, that is close to 100 Mbbls per month.

1) World total liquids production up 540,000 bpd to 96.64 Mbpd. The recent trend remains sharply upwards.
2) OPEC production up 340,000 bpd to 31.71 mbpd (C+C)
3) N America production up 50,000 bpd to 19.66 Mbpd.
4) Russia and FSU down 60,000 bpd to 13.98 Mbpd
5) Europe up 140,000 bpd to 3.26 Mbpd (compared with June 2014)
6) Asia up 110,000 bpd to 8.20 Mbpd.
7) Middle East rig count is stable. The international oil rig count continues to decline while the US oil rig count is rising slowly.

Figure 1 The oil directed US rig count has turned a corner and has begun to rise slowly for the time being. The low point was 628 on 26th June and the latest was 659 on 24th July, up 31 for the month. This is bearish for the oil price and the survival of US shale oil companies. The gas directed rig count has been stable at 220±10 since the end of March (4 months).

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

Figure 2 The oil price is on the skids again as LTO production and production from everywhere else just keeps on coming. If the support level for WTI at around $43 does not hold then further sharp falls may be expected.

Figure 3 Detail showing the last 18 months of WTI and Brent. A feature of recent months has been the Brent-WTI spread opening and closing.

Figure 4 US rig count, bigger picture showing the recent uptick in oil directed drilling and stability of gas directed drilling discussed in Figure 1. The possible reasons for the increase in oil directed drilling would make an interesting discussion point in comments. Related: Is France Ready To Move Away From Nuclear Energy?

Figure 5 The detailed picture of US oil production is clouded by the pattern of IEA revisions to data that are discussed in Figure 6.

At face value US production was down 50,000 bpd in June, not enough to call a production peak. My recent post on US Shale Oil: drilling productivity and decline rates anticipates a fall in US shale oil production of the order 830,000 bpd based on current drilling rig numbers and efficiencies. That would take US production down towards 12 Mbpd, not enough to substantially impact the global supply and demand dynamic or price. Something has got to give. C+C+NGL = crude oil + condensate + natural gas liquids.

Figure 6 The pattern of IEA revisions to US oil production. The left hand column shows the report month. The most recent report for July reports figures for June and revised figures for May and April and so forth. My spread sheet is updated for these revisions each month. Note that the Dec 14 figure was first reported as 12.36 Mbpd but revised upwards by 260,000 bpd come Mar 15. The Mar 15 figure was reported as 12.62 Mbpd in May 15 and revised upwards by 360,000 bpd come June 15. The largest revision is for Apr 15, first reported as 12.60 Mbpd in May 15 but revised upwards by 640,000 bpd come Jul 15. These large revisions, which are of course justified, cloud the picture of the near term trend. It is too early to call April as the peak.

Figure 7 OPEC spare capacity stands at 3.23 Mbpd. The IEA have booked 800,000 bpd spare capacity for Iran in anticipation of sanctions being lifted. And they book 1.99 Mbpd for Saudi Arabia which is likely heavy sour crude that does not currently have a refinery market. Apart from those two counties the rest of OPEC is pumping flat out.

Figure 8 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 production stood at 31.71 Mbpd in June, up 340,000 bpd on May after revisions are taken into account. Iraq alone added 270,000 bpd. Since the crisis began in September 2014, OPEC production has risen by 940,000 bpd.

Figure 9 Saudi production rose by 50,000 bpd to 10.35 Mbpd in June. Saudi production is effectively moving sideways since around 2012. 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 suggesting production problems. The heavy oil in the Wafra reservoir is helped to the surface by steam injection. It is possible that this is not economical sub $60.

Figure 10 The ME OPEC oil rig count is on a rising trend with operational cycles superimposed.

Figure 11 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 1065 in May 2014. That has since fallen 193 (18%) to 872 units in June 2015. These statistics may be clouded by companies that have rigs on contract which are now “stacked” i.e. not being used. Related: The Broken Payment Model That Costs The Oil Industry Millions

Figure 12 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 11.04 Mbpd in June 2015, unchanged on May. Other FSU was down 60,000 bpd at 2.94 Mbpd after revisions.

Figure 13 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. Compared with June 2014, European production is up 140,000 bpd.

1) Norway Jun 2014 = 1.78 Mbpd; Jun 2015 = 1.90 Mbpd; up 120,000 bpd YOY
2) UK Jun 2014 = 0.83 Mbpd; Jun 2015 = 0.82 Mbpd; down 10,000 bpd YOY
3) Other Jun 2014 = 0.51 Mbpd; Jun 2015 = 0.54 Mbpd; up 30,000 bpd YOY

The decline in North Sea production has been arrested and there is little sign yet that the oil price crash has impacted oil production in this sector.

Figure 14 This group of S and E Asian producers has been trending sideways since 2010. The group produced 8.02 Mbpd in June, up 110,000 bpd on the revised May figure.

Figure 15 N American production may have topped, but it is too early to say. Related: Buffet’s Solar “Insurance” Coup In Nevada

1) USA May 2015 12.93 Mbpd; June 2015 12.88 Mbpd; down 50,000 bpd
2) Canada May 2015 4.08 Mbpd; June 2015 4.16 Mbpd; up 80,000 bpd
3) Mexico May 2015 2.6 Mbpd; June 2015 2.62 Mbpd; up 20,000 bpd

Group production up 50,000 bpd from May to 19.66 Mbpd.

Figure 16 Total liquids = crude oil + condensate + natural gas liquids + refinery gains + biofuel. June production was 96.64 Mbpd up 540,000 bpd on May. This chart shows how supply growth accelerated in 2014 giving rise to the price collapse.

Figure 17 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. For the price to recover, either demand must rise, taking the trend up and to the right, or supply fall, taking the trend up and to the left, or both. At present supply is still growing and demand is in decline (See Figures 18 and 19). The market has thus far not responded in a way that many, including myself, expected. Momentum has led to supply growth at a time that low price was expected to lead to a decline in supply.

Figure 18 This and the following chart are new additions to Vital Statistics. Quarterly data are taken from table 1 of the IEA OMR. Overall the data show growing supply and demand since 2010. Two things to note are the last nine quarters have shown continuous supply growth and the last two quarters show a decline in demand. This translates to a surge of surplus oil (Figure 19).

Figure 19 The change in oil inventory is the difference between supply (production) and demand. I imagine that the IEA may actually monitor stocks and production and calculate demand on that basis. The key observation is that since 2010 supply and demand have been in balance, until recently, showing cyclical deficits and surpluses. We have OPEC to thank for maintaining that balance. Since OPEC abandoned their swing production role last year the surplus production has swollen to over 3 Mbpd during the 2Q of 2015. That is almost 100 Mbbls per month. We must surely run out of storage tanks at some point. There is little sign of production being pegged back anywhere and with large uncertainties in parts of the global economy – Grexit, China, interest rates – it is possible that demand continues to be weak although the IEA predict a cyclical recovery in demand the second half of this year. Note that the more recent quarterly data will be subject to future revisions by the IEA.

References
[1] Energy Matters The 2014 Oil Price Crash Explained
[2] Oil Price Scenarios for 2015 and 2016

By Euan Mearns

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