As U.S. crude oil production continued through an eighth consecutive weekly decline, domestic crude oil stockpiles decreased in the third week of May ― the first time there has been a net draw on U.S. crude inventories in 17 weeks.
According to the International Energy Agency, the decline in U.S. production is the result of a “supposed standoff” between U.S. producers of “light, tight oil” and the Organization for Petroleum Exporting Countries, a standoff in which the U.S. “appears to have blinked.”
And while at the same time crude oil prices have been rising, West Texas Intermediate has made stronger relative gains on the New York Mercantile Exchange than has Brent on the Intercontinental Exchange, a trend IEA attributes to the softening of U.S. output.
“Slowing US LTO (light, tight oil) supplies pushed Nymex WTI prices 14 percent higher in April vs. March, roughly twice the increase in ICE Brent,” IEA said in its monthly oil market report in mid-May.
After reaching record production of 9.42 million barrels in the third week of March, U.S. crude oil output has been decreasing ― falling to 9.26 million bpd on May 15 according to the latest data available from the U.S. Energy Information Administration.
And following a short lag period, domestic crude stocks have followed suit declining from 1.181 billion barrels on April 24 to 1.178 billion barrels on May 1, the first time domestic stocks have declined since December 2014. Through the first half of May, U.S. crude stocks have continued to decline standing at 1.173 billion barrels on May 15.
“Expectations that the market would start tightening by mid-year seem to be coming true ― or so would have it the bulls who over the last month have given WTI crude a 14 percent price lift, and counting,” IEA said.
The battle goes on
Even though U.S. light, tight oil production has declined as OPEC has maintained its production, IEA believes it would be “premature” to conclude the cartel has won the battle for market share. “The battle, rather, has just started.”
IEA said OPEC’s decision in November 2014 to maintain its output of approximately 30 million bpd was only the first step in a larger plan which includes actually increasing the cartel’s production along with “aggressively” investing capital in future production capacity. “Bucking the global trend, Kuwait, Saudi Arabia and the UAE (United Arab Emirates) are all raising their rig count and expanding their drilling programs. Iraq and Libya, meanwhile, continue to raise production against all odds.”
OPEC’s production averaged approximately 31 million bpd in April, which represents a slight increase of approximately 18,000 bpd from March, most of which came from Iran and Iraq.
Reuters reported May 24 that Iran’s Oil Minister said OPEC is unlikely to lower its production ceiling at its next meeting in Vienna on June 5 according to the Tehran news agency Mehr.
But IEA also notes that there is much uncertainty in the market. “Amid continued political turmoil in the Middle East and North Africa, there is no lack of upside risk to prices ― and downside risk to supply ― in today’s oil market.”
Impact on product stocks
As more crude oil is drawn from supplies by refiners, IEA expects stocks of refined products to rise. The Paris-based intergovernmental organization cites data indicating that product stocks among Organization for Economic Cooperation and Development Countries began growing in April.
“More such builds may follow as global demand goes through a seasonal soft patch and refining activity increases worldwide.”
Global demand predictions
According to the U.S. Energy Information Administration’s May short-term energy outlook report, global crude oil consumption is expected to grow by 1.2 million bpd ― 2016 growth is forecast at 1.3 million bpd. EIA estimates 2014 global consumption averaged 92 million bpd, which puts the agency’s 2015 projected global oil consumption at 93.2 million bpd and 2016 consumption at 94.5 million bpd. Those forecasts are both up by 200,000 bpd from EIA’s April projections “as lower prices stimulate demand growth more than previously expected.”
In its May oil market outlook, IEA projects global oil demand will average 93.6 million bpd in 2015, a 1.1 million bpd increase over that agency’s previous 2015 forecast.
OPEC also increased its prediction for 2015 global oil demand in May and the cartel now predicts demand will grow by 1.2 million bpd over the year and average 92.5 million bpd. OPEC puts 2014 global demand at 91.3 million bpd, slightly lower than EIA’s estimate of 92 million bpd.
Oil prices?
After hitting a six-year low in January, average monthly West Texas Intermediate and Brent prices rebounded in February, then held moderately steady in March and rebounded again in April.
WTI averaged $54.44 per barrel on the New York Mercantile Exchange in April, a 15 percent increase since January and a 12 percent increase over March. Nymex Brent averaged $61.14 in April, a 23 percent increase over January and up 7 percent from March.
Crude prices made additional gains in the first three weeks of May with WTI averaging $59.62 and Brent averaging $66.02 through May 22.
EIA is forecasting Brent to average $61 throughout 2015 and $70 in 2016. That is a $1 per barrel increase for 2015 over EIA’s April forecast, but a decrease of $5 for the 2016 forecast.
For WTI, EIA forecasts a discount from Brent of $6 in 2015 and $5 in 2016, putting WTI at $55 in 2015 and $64 in 2016.
As Petroleum News Bakken reported May 17, Scotia Bank Economics and Commodity Market Specialist Patricia Mohr is looking for WTI to rise to $65 by the end of 2015 and to average $58 for the year. Mohr also expects WTI to remain at $65 in 2016.
Rig count
The domestic oil drilling rig count is showing signs of stabilizing. After hitting a recent high of 1,609 in October 2014, the U.S. oil rig count has been in steady decline standing at 659 rigs as of May 22. However, the May 22 U.S. oil drilling rig count was a decline of only one from the previous week, the smallest weekly decline since October 2014 and a fraction of the average decline of 30 oil rigs per week since October. The largest recent weekly decline in the U.S. oil rig count was in the last week of January when the number of rigs declined by 94 from the previous week.
As of May 22, North Dakota has 78 operating rigs, down one from the previous week according to Baker Hughes data. Montana has not had any operating rigs since the rig count from one to zero between May 1 and May 8.
As of May 22, Canada had 72 drill rigs operating, 24 drilling oil wells and 48 drilling gas wells. Of those 72 rigs, 48 were land rigs drilling in Alberta, 14 in British Columbia and seven in Saskatchewan with the remaining three drilling offshore Newfoundland.
Bottomed out?
Looking at a slight increase in projected global demand coupled with at least a short-term stabilization in crude oil prices and a possible leveling of the domestic rig count, the question becomes: has the domestic oil bust bottomed out? Unfortunately that’s a question nobody can answer. But with the rates of decline in oil prices and drilling activity having slowed, and with some positive signs in crude oil prices, the upstream sector has at least been given a chance to catch its breath after six months of a depressed global crude oil market.
