WTI Above $60 Will Drive Rig Increase

Baker Hughes Rig Count vs WTI Monthly Peak Price 

EIA Monthly Crude Prod

Many are worried that as soon as WTI tops $40 it will bring a flood of rigs back to work and a surge in US oil production with it.  In fact some writers have been driving these fears with articles claiming this is the case.  However, US producers actions from last year and from 2009 do not support this assertion.

Oil Traders Mindset Needs to Change

Additionally, an article in Investors Business Daily quoted the CEO of EOG stating that they would not look to increase production until prices topped $60 and they felt confident they would stay there.

The chart above clearly shows producers waited about 2 months in the spring/summer of 2015 to start increasing rigs.  What has changed so dramatically in 9 months to change that.  Producers still have a large backlog of uncompleted wells, DUCs.  North Dakota reports a backlog of almost 1000, Texas likely has 2 to 3 times as many.  On top of that producers are just a month away from a period where they dropped 20% of working rigs in a single month and are still dropping 2%/week or 8-10%/month.

Granted the rig count is much lower now than June 2015, with only 386 rigs working the week of 3/11/2016 compared to 628 the week of 6/26/2015.  However, oil companies do not make decisions to idle rigs and lay off workers or restart rigs and hire workers lightly.  The last thing these companies want to do is flip back and forth between hiring and firing every few months.  They want to have a stable and consistent workforce.

In investing they always say past performance is not indicative of future results.  But in this case the signs point to more rig counts until the weekly rig count report says otherwise.

US Storage Isn't Close to Full

Many have started to talk about how full US storage is.  Some even believe it is going to be full in just a few weeks.  I saw a post stating US storage would be full in 8 weeks.  Even some mainstream articles lead one to believe that US storage is just about full.  The problem is data is being mixed and matched.

I saw an article stating Gulf Coast (PADD 3) working storage is about 302 MM barrels.  The same article stated PADD 3 inventory was about 250MM bbl--EIA reported 271MM bbl in the latest week.  That would put utilization at almost 90%.  But wait, the EIA storage report from Nov. 2015 showed PADD 3 utilization at 58%, while inventory has risen only 13% since the September reporting date.  That would imply that PADD 3 storage is only about 66% utilized--58% x 1.13=66%.  This is indeed the case.  Why?  Because total PADD storage included pipeline, tanker and rail storage, while working storage capacity does not include capacity in pipelines, tankers or rail cars.  So using the Sept. 2015 EIA storage report as a guide, Gulf Coast inventory in refineries and tank farms is about 206MM bbl.  206/302 = 68% utilization.

If we repeat this calculation for the Midwest (PADD 2) and the Cushing portion of PADD 2 the following is found.  PADD 2 is 79% utilized and Cushing is 90% utilized.  Overall US total refinery and tank farm storage is between 67% and 70% utilized.  The US has 551MM bbl of tank farm and refinery storage for crude, with about 371MM bbl in that storage.   The remainder of the reported 523MM bbl of storage is mostly in pipelines, which likely are not 100% full and in tankers and rail cars.  Given how cheap lease rates are now on rail cars, it is likely there are a lot of empty rail cars around the country as well.

Saudi's US Market Share is Growing Fast

psw08 2016-3-16

Saudi Arabia's US crude oil market share is growing fast.  The above chart clearly shows a surge in US imports from Saudi Arabia starting in November 2015.  Calculations indicate imports from SA began to increase on a year over year (YoY) basis early in the summer of 2015.  However, the pace was slow and EIA weekly data was pointing to rising US production this likely was one of the reasons the Saudis were so against any price support in the December 2015 OPEC meeting.

But now US imports for the start of 2016 are up 27% versus the same period in 2015.  At the same time it is quite apparent US production is in fast decline, and is locked into decline for months or even years to come with under 390 oil rigs working and that number falling weekly.

An increasing crude oil market share for the Saudis in the US is the linchpin that will keep the Saudis behind a drive to support prices.  With WTI under $60 this trend should not reverse anytime soon.  The Saudis don't need to be in a hurry to grow their US market share in terms of barrels they just need to know it's growing and US producers are staying the same or contracting.  However, it is in the Saudis best interest to grow their overall market share in terms of dollars quickly.  Especially if they want to maximize the return on their Aramco IPO.

US Production + Unaccounted for Oil YoY Comparison

Data from EIA Weekly Report

psw01 2016-3-16

Many continue to believe that US production is relatively untouched over 2015.  However, the true story is exposed when you include Unaccounted for Oil.  The above plot clearly indicates that US production is dramatically down over 2015 and continues to trend down.  The official US production number is 9.06MM bbl/day fro the week of March 11, 2016, but when Unaccounted for Oil is included the total has been well below 9MM bbl/day 6 of the last 7 weeks.

US production + unaccounted for oil is cumulatively down almost 50MM bbl for the beginning of 2016 compared to the same time period in 2015.  This is a 6.7% drop.  While the mainstream financial news and many analysts still promote a story that US production is barely touched.  Some stories have been saying US production is down only 1% compared to the same time in 2015.  The weekly production numbers seem to support that.  However, this analysis masks the true trend.  Even when you use the EIA weekly production estimate and plot 2015 over 2016 as in the figure below, it becomes quite obvious there is a major divergence in 2016 production over 2015.  It is not hard to project that the divergence will be very pronounced come summer, with gasoline demand projected to be surging at or near a record pace.  This should push prices up much more than expected especially with 70% of world production coming together on April 17 to create a plan for production controls to support prices.  Those believing US shale will snap back to soak up any slack conceded by these producers are wrong, given less than 390 oil rigs are working in the US and the number continues to fall weekly.

Data from EIA Weekly Report

psw01 2016-3-16

Gasoline Supplied up 3.77% YoY for First 9 Weeks of 2016

psw01 2016-2-18

US refineries supplied 3.77% more gasoline in the first 9 weeks of 2016 than the same 2105 time period.  This could shoot some holes in the thesis that demand for refined products remains weak.  Certainly that is not the case for gasoline.  Refineries are acting in response to high gasoline demand with refinery inputs up 3% YoY for the last 9 weeks as well.

psw01 2016-1-13

Even with distillate demand weak, overall petroleum demand exceeds 2015.  Total petroleum demand is trending towards being up 1% YoY.  With heating season reaching an end, we may soon find that total petroleum demand is actually up significantly.

EIA Overestimates US Production, Huge Production Drop in the Works #7

It looks like EIA continues to grossly overestimate US production, even showing a slight increase in total US production and in lower 48 production this week.  It looks to me like the 174k bbl/day (5.5%) surge in imports from Canada this week driving a bigger than expected uptick in Midwest and Cushing inventories has fooled the model used to estimate weekly production again.  This is a huge disservice to many traders and investors who continue to expect falling crude prices driven by "resilient" US production.  They just can't understand how crude prices keep surging after supposedly such bearish news on production.

When unaccounted for oil is factored in, it can be clearly seen there is a problem with the production data especially when this is coupled with reported well completion (frack) rates from the states of Texas and North Dakota.   Reported completion rates support an approximate 2%/month or more total production decline with recent months showing no change in that trend.

The continuous negative values and the magnitude of those values in unaccounted for oil since Dec. 4 is truly unprecedented.   Since then 9 of 13 weeks EIA has reported a negative value for unaccounted for oil.  The chart above clearly indicates that unaccounted for oil was typically positive over the prior 2 years.  In fact unaccounted for oil averaged 184k BPD over the 2 year span prior to Dec. 4.  However, since Dec. 4 unaccounted for oil has averaged -142k BPD, a huge divergence.  Cumulatively since Dec. 4 unaccounted for oil totals 14MM barrels.  If unaccounted for oil were to be zero'd out in a single week it would require a 2MM BPD adjustment.  At some point the production estimation model will be adjusted to either zero out this error or return it to typically showing positive unaccounted for oil.  The chart below graphically shows how the error has been building on a weekly basis, and clearly indicates the trend will continue until EIA starts reporting much lower weekly production numbers.  I expect that to happen as Canadian imports drop with seasonal maintenance.

US Manufacturing is NOT Doing Well #2

Manufacturing 2016-3

Last month some were saying US manufacturing was doing well, when in fact it is in a downturn.  This months BLS labor report further supports a downturn in manufacturing.  The unadjusted data shows manufacturing lost 9000 jobs in February.  Normally February is a good month for hiring in manufacturing, at least under good conditions employment doesn't fall.  The BLS seasonally adjusted data set supports this assertion showing a 16k job loss in manufacturing since the seasonal adjustment formula was expecting manufacturing employment to rise like normal.

Oil Traders Mindset Needs to Change on US Production Strength

I just saw a recent article where an author or analyst stated that US production for the week of Feb 26 was down 2.6% over the same week a year ago.  Why do so many in the mainstream media continue to downplay the drop in US production and have really been playing it up as being "strong", "robust" and "resilient".  Stating the efficiency improvements and cost reductions have made this possible.  While ignoring various other metrics that clearly show US production is falling fast and is far weaker than is being reported.

The table below clearly shows multiple data points that can be used to show a much more dramatic fall in production and more clearly show what is really happening.  The biggest story is the one told when Unaccounted for Oil is factored in.  Using unaccounted for oil it appears US production is 10% off peak, and when you look at the trend since Dec 4 it is falling off a cliff.  In fact I found an article on Bloomberg indicating that the global glut has been grossly overestimated and the inventory numbers show a much lower oversupply.   Another analyst was quoted in a Reuters article stating US production is falling much faster than most realize.

Oil Traders Mindset Needs to Change
EIA Overestimates US Production in Weekly Reports

US Production Change for Various Time Windows and Data Sets

	Then	Now	% Change
2/27/2015, Weekly Data	9324	9077	-2.65%
6/5/2015, Weekly Data	9610	9077	-5.55%
1/15/2016, Weekly Data	9235	9077	-1.71%
Sept 2015, Monthly Data	9452	9077	-3.97%
April 2015, Monthly Data	9694	9077	-6.36%
7/17/2015, Prod + Unacc for Oil, 4 week averages	9843	8881	-9.77%

Gasoline Demand Remains Robust

This post is a followup to This is Why Refiners Didn't Act Like Gasoline Demand was Weak Last Week, Even if Traders Did and Refiners Aren't Acting Like Gasoline Demand is Weak, Even if Traders Are.  US refinery run rates remain high and gasoline demand is very strong pouring some cold water on the popularly held notion that crude and petroleum demand is terrible.

psw01 2016-2-18

A year over year comparison of gasoline supplied clearly indicates 2016 demand is well above 2015.  Year to date gasoline supplied is up 3% over 2015.  This is especially significant given for the same period in 2015 was up 5.1% over 2014.

psw01 2016-1-13

Refinery inputs are up 3% over 2015 as is gasoline supplied.

psw01 2016-1-13

Overall petroleum supplied is tracking 2015 levels well. 

Oil Traders Mindset on US Production Needs to Catch Up

psw01 2016-2-24

The mindset of many oil traders remains heavily bearish.  Many are in disbelief that prices can be rising with such severe oversupply remaining.  They cannot understand the incentive OPEC, Russia, Oman and others have to cap or even cut production.  The mindset remains one that US production has barely dropped and can increase dramatically on the smallest price increase.

This flawed mindset is produced by EIA weekly production estimates that have been wildly off the mark.  EIA monthly data and Unaccounted for Oil category in the weekly reports proves the weekly estimate varies wildly from reality.

In trading knowing the trend and especially knowing trend reversals is key.  A big problem arises when the easily interpreted reported data does not match up with the reality.

The above chart indicates why many traders do not fully embrace that US production is falling and falling fast, and will continue to fall fast.  Weekly reports have touted how "robust" US shale production has been in the face of low prices going back to early last fall.  Indeed if you look at the weekly production estimate it was flat to rising from September 2015 to mid January 2016.  But the monthly production data is telling a completely different story.  It shows US production clearly falling since September.  The problem is the monthly data lags by 2 months and many traders don't even follow the monthly reports.  Worse yet, the EIA monthly production forecasts had projected steady production increases through February 2016.  All the data has proven the rising forecasts to be wrong through December, and is indicating the January and February forecasts were wrong as well.

The traders that follow the mainstream media have the belief that US production has just started to fall and has only been falling for 3 weeks, when in reality US production has been falling for 5 months.  So most traders have a mistaken belief that it took sub $30 oil to get US production to fall when the reality is sub $45 oil had production falling, and sub $30 pretty much has producers in panic mode dropping about 25% of active rigs in a month.  The rig count is now about 400, which was the number in operation in 2009 to support total production levels around 5MM bbl/day.

This will lead to a mindset where many traders will continue to believe every move up in price will spur US producers to bring on more oil.  I even read an article stating that $40 is the new $70 and that as soon as $40 is hit to expect a big spike in output.  Recent history does not support that assertion.  Even the CEO of EOG has stated they will not look to boost output until prices remain above $60 for a considerable period.  I take that to mean 3 months or more since they moved in summer 2015 with 2 months over $60 and look what happened.  I believe WTI will actually end up hitting $70 before US production stabilizes and begins to rise.

The reason the Saudis are now supporting moves to support oil prices and get them on an uptrend is that it is now clear to them based on published data that oil prices are plenty low to kill off US and Canadian production, as well as other high cost producers.  It is clear that sub $45 had US production in decline and anything close to $30 was near panic mode.  This means they can allow prices to creap up about 50% with a negligible change in shale producers mode of operation.  Once drilling rigs are laid down, they will not come back into service until prices top $60.  In fact there is likely to be a slow decline in rig count until $60 is hit.

The chart below puts the US oil rig count in historical context with 2009 when prices were comparable.  When WTI price is included it is seen that in summer of 2015 rig counts began to rise after $60 was hit and the same is true for 2009.

North America Rotary Rig Count (Jan 2000-Current) 2016-2-19