The Oil Glut Is Growing
The American Petroleum Institute reported that U.S. crude stocks rose by an eye opening 7.1 million barrels. This increase comes as refiners go into maintenance as runs fell to 85.9 % of capacity and demand for oil is weak. Still, if you can look beyond the glut, there are strong signs that U.S. output is getting ready to fall even more drastically than some had predicted.
Predictions that Cushing, Oklahoma would run out of storage space have not come true yet and it increased by only 2200 barrels this week. This lead to a big 2.2 million drop in distillate inventories and a slight 694,000 barrels of gasoline supply!
Whither Prices?
Yet the glut and low prices may drive U.S. oil output down even further. Output that is currently at 9.1 million barrels a day should follow that 9.0 million barrel mark and raise concerns whether this will exceed that level for years to come. Reuters News is reporting that “stagnating rig productivity shows U.S. shale-oil producers are running out of tricks to pump more with less in the face of crashing prices and points to a slide in output that should help rebalance global markets.
Over the 16 months of crude's price rout, production from new wells drilled by each rig has risen about 30 percent as companies refined their techniques, idled slower rigs and shifted crews and high-speed rigs to "sweet spots" with the most oil.
Such "high-grading" helped shale-oil firms push U.S. output to the loftiest levels in decades even as oil tumbled by half to less than $50.00 a barrel and firms slashed rig fleets by 60 percent.
But Reuters points out that recent government and private data show output per rig is now flat lining as the industry reaches the limits of what existing tools, technology and strategies can accomplish. Drillinginfo, a consultancy with proprietary data, told Reuters that well productivity has fallen or stabilized in the top three U.S. shale fields -- the Permian Basin and Eagle Ford of Texas and the Bakken of North Dakota -- since July or August.
The U.S. Energy Information Administration, whose benchmark drilling productivity index is based in part on Drillinginfo data, forecasts next month's new oil production per rig in U.S. shale fields to stay at October levels, which it estimates at 465 barrels per day (bpd).
"The big challenge of shale oil work is that well output drops off quickly, often more than 70 percent in the first year alone. So producers need to keep squeezing more oil out of new wells drilled by the currently deployed rig fleet just to offset steep declines in what existing wells produce.” A must read in Reuters.
Major-Cycle Bottom
Oil may get some support on the rising stock market. Weak data out of Japan is getting global markets ready for more Japan style quantitative easing. We still are looking at this as a great time to put on long-term energy positons. We feel we are at the bottom of a major cycle and it's time to look ahead a few years.
Andrew Weissman released his “Flash Briefing” and these are some key points to follow on natural gas. The CFTC's Commitment of Traders Report shows that as of the reporting week ended October 13, a significant number of money managers decided to close out short positions prior to the start of the winter heating season, exiting the market prior to last Friday's new contract lows. Net short positions declined by 3% but are still near multi-year highs.
Nuclear generation reached a new low for the Fall season on Monday, dropping to 74.7 GW. The decline in nuclear generation and accompanying increase in the power sector gas burn helped to partially offset a drop in space heating demand as frigid weather in the Northeast started to retreat.
In an important development, the U.S. Supreme Court decided Monday to review a second major case. This time relating to the dividing line between federal and state authority over electricity markets. The case involves an effort by the State of Maryland to provide incentives to build new generation. A lower court had overturned the Maryland law, finding that it infringed on FERC's jurisdiction. The Supreme Court's decision to take the case is a blow to FERC, which seeks to have the lower court decision upheld. If the court upholds the Maryland law, it could significantly alter the ground-rules for building new generation nationwide.