at their meeting in Vienna on Wednesday, the member nations of OPEC agreed to cut their oil production by 4.5% for a period to run 6 months, effective January 1st...the amount of oil output each member is expected to forgo is generally based on their October production, although for some countries, such as Iran, the baseline for the output cut has been adjusted for special factors...Libya and Nigeria, whose recent production has been disrupted by civil conflict, will be exempt from the cuts...Indonesia, an oil importer who would not agree to a cut, was suspended from OPEC, and what they would have cut was to be absorbed by other member....figures released by OPEC indicate they want a cut of almost 1.2 million barrels per day, or roughly in line with what we previewed last week...in addition, OPEC announced that non-OPEC oil producers, who were not represented at the meeting, will contribute an additional output cut of 600,000 barrels per day... presumably, details on those non-OPEC oil production cuts will be worked out at a December 9th meeting at Doha, but since Russia is on board with a cut of 300,000 barrels per day, achieving that target should not be difficult....oil traders apparently believe that OPEC and other producers will be able to achieve what they've set out, because since the announcement of the deal, oil prices have risen 14%...
as you may recall, last week i was skeptical that such an agreement could be worked out, and thought that even if it were, it would quickly fall apart...i'm now of the opinion that their production cut will hold, and that it will be at least partially if not completely effective in reducing the global oil glut, and thereby push up the price of oil...one factor i hadn't counted on was the direct involvement of Vladimir Putin in the deal; originally, the Russian oil companies had only committed to give up the increase in production they planned for next year; now it appears they've also been pressured into participating in an actual 300,000 barrels per day cut in their own production...moreover, Putin himself acted as an intermediary between Saudi Prince Mohammed bin Salman and Iran's Ayatollah Ali Khamenei and President Hassan Rouhani to grease the skids for the deal that was eventually made, that allowed Iran's production figures to be overstated such that their "cut" actually amounts to a small increase from their current production...with the Saudis and Iranians waging proxy wars in both Syria and Yemen, that Putin could convince them to put their animosity aside and agree to a deal was a major breakthrough for OPEC...moreover, their strategy has already resulted an instant success, which will now convince all parties to hold the line irregardless of their personal differences...after agreeing to cut their production by 4.5%, oil prices immediately rose 14%, so they already have a gain of 9.5% on the oil that they will be producing over what they would have had otherwise....
to put this production cutback in perspective, we'll next include a series of graphics which should give you a decent idea how big this production cut is relative to OPEC's recent and earlier oil production, and relative to the global oil supply...first, we'll start with a graph of OPEC's monthly oil production over the past dozen years...
the above graph, taken from the 'OPEC oil charts" page at the Peak Oil Barrel blog, shows total oil production, in thousands of barrels per day, for the 14 members of OPEC for the period from January 2005 to October 2016...as we pointed out last week, OPEC production has been spiking the past few months as member states pumped what they could to be better positioned for any percentage cutback resulting from this earlier planned meeting, and had reached 33.643 million barrels per day as of the October report...the agreed to production cuts will reduce their output to approximately 32.5 million barrels per day, which you should notice is about what they were producing in March and April of this year...
next, we have a table of oil production by each of the members of OPEC for the recent months, quarters, and years, which comes from the November OPEC Monthly Oil Market Report, which was released on November 11th...here you can see that the total oil output for the first quarter of 2016 (1Q16) was 32,500,000 barrels per day, exactly what these "cutbacks in production" hope to get back to...for the Persian Gulf OPEC members, much of cut that will be close to their normal seasonal reduction anyhow, since they usually ramp up their oil production during the summer months to generate electricity for air conditioning...
note that the numbers shown in the October column above are close to the reference production levels on which the 4.5% production cuts are based...for instance, the Saudis will be cutting from 10,544,000 barrels per day back to 10,058,000 barrels per day, the Iraqis will be cutting from the 4,561,000 barrels per day shown above to 4,351,000 barrels per day, and the Kuwaitis will be cutting from 2,838,000 barrels per day to 2,707,000 barrels per day...the exception is for Iran, whose cuts are based on their production from Table 5.8: OPEC crude oil production based on direct communication in that same OPEC monthly report, wherein Iran reported oil production of 3,920,000 barrels per day in October...thus, when Iran cuts 4.5% from that level, their allowed production will be 3,797,000 barrels per day, actually 90,000 barrels per day more than their OPEC reference production...
the next graphic, as the heading tells us, shows both OPEC and world oil production monthly on the same graph, from November 2014 to October 2016, and it also comes from the November OPEC Monthly Oil Market Report...the pale blue bars represent OPEC oil production in millions of barrels per day as shown on the left scale, while the green graph represents global oil production in millions of barrels per day, and that's shown on the right scale...global oil production reached 96.32 million barrels per day in October, just short of last year's November record, and OPEC production represented 34.9% of what was produced globally...note that the June OPEC Monthly Oil Market Report indicates global production in May was at 94.51 million barrels per day, so if OPEC is successful in cutting their production by 1.2 barrels per day from October levels, and the non-OPEC producers cut another 600,000 barrels per day, global oil production will be reduced all the way back to the level that we saw in May of this year, when there was an acceleration of rebel attacks on oil facilities and pipelines in Nigeria and Canadian oil production was interrupted by the Alberta wildfires...
lastly, instead of explaining in detail how oil prices moved this week, we'll just include a chart which shows oil prices for every hour, every day, for the 5 trading days in question...the graph below is a Saturday afternoon screenshot of the oil price graph at DailyFX, a trading news platform which specializes in foreign exchange (FX) trading...each bar on this graph represents oil prices for one hour of trading; when oil prices went up during a given hour, the bar will be green, with the starting price at the bottom of the bar and the price at the end of the hour at the top of the bar...during hours when the price of oil fell, the bar will be red, with the starting price at the top of the bar and the price at the end of the hour at the bottom of the bar...this variety of graph is called a candlestick, and the range of oil prices outside of the opening and closing price for any given period is indicated by a thin 'wick' above or below the "candlestick" part of the graph...thus we can see that in the wee hours of Wednesday morning, when it appeared neither Iran or Iraq would agree to a cut, oil prices fell below $45 a barrel, as some were even forecasting that oil prices would fall to $20 a barrel after the presumed OPEC meeting failure...oil prices then ran up to as high as $51.75 a barrel during the day on Thursday, before sliding back to close at $51.06...but the rally picked up again on Friday and oil closed the week with another gain at $51.68 a barrel, up 14.2% in the three days after the OPEC meeting..
oil prices above $50 a barrel will likely accelerate the return of US drillers and frackers to the field, as we've already seen 5 months of steadily rising rig counts with oil prices stuck between $42 and $50 a barrel...also recall that two weeks ago, the Drilling Productivity Report for November showed that the count of drilled but uncompleted wells rose to 5,155 in October, with more than half of those in the Permian and the Eagle Ford, the two big shale oil fields of Texas...we would expect a pickup in completion of those wells, and an attendant increase in US oil production as prices rise, partially ameliorating the OPEC production cuts...and should oil prices top $60 a barrel, the Dallas Fed 3rd quarter energy survey of American oil and gas executives indicates that between 65% and 70% of oil execs would then pull out all the stops and start drilling everywhere again...
The Latest Oil Stats from the EIA
the US Energy Information Administration's release of oil data for the week ending November 25th indicated that our imports of oil were little changed, and that gasoline and distillates production and inventories rose, while our supplies of crude oil were slightly lower...the crude oil fudge factor that was needed to make the weekly U.S. Petroleum Balance Sheet (line 13) balance decreased to +384,000 barrels per day, from last week's +419,000 barrels per day, which still means that 384,000 more barrels of oil per day showed up in our final consumption and inventory figures this week than were accounted for by our crude production or import figures, meaning that one or several of this week's metrics were off by that amount...that's the 6th large positive adjustment in a row, but the cumulative daily average of that adjustment remains at +116,000 barrels per day, meaning the EIA's week figures remain out of balance for the whole year...as we saw last week, much of that imbalance has been due to under-reported oil production
for the week ending November 25th, the EIA reported that production of crude oil from US wells rose by 9,000 barrels per day to an average of 8,699,000 barrels per day, the 7th increase in 8 weeks, as output from Alaskan fields rose by 11,000 barrels per day while production from well in the lower 48 states was 2,000 barrels per day lower....that left the week's domestic oil production 5.5% lower than the 9,202,000 barrels of crude we produced during the week ending November 27th of last year, and 9.5% below the record 9,610,000 barrels per day of oil production that we saw during the week ending June 5th 2015...
at the same time, the EIA reported that our imports of crude oil fell by an average of 30,000 barrels per day to an average of 7,548,000 barrels per day during the week ending November 25th, as the 4 week average of our oil imports reported by the EIA's weekly Petroleum Status Report (62 pp pdf) fell back to an average of 7.7 million barrels per day, now just 5.3% higher than the same four-week period last year...meanwhile, our exports of crude oil rose by an average of 5,000 barrels per day to an average of 474,000 barrels per day for the week, in data that is not directly comparable to last year's exports of 445,000 barrels per day during the week ending November 27th...
meanwhile, the EIA also reported that the amount of crude oil used by US refineries fell by an average of 114,000 barrels per day to an average of 16,283,000 barrels of crude per day during the week ending November 25th, as our refinery utilization rate slipped back to 89.8% during the week, after last week's 90.8%, which left it way down from the refinery utilization rate of 94.5% of the week ending November 27th last year...US oil refining is now down 3.8% from the pre Labor Day high of 16,930,000 barrels per day, at which time refinery utilization rate had peaked at 93.7%...the rate of crude oil refined this week nationally is also down 3.1% from the 16,803,000 barrels of crude per day US refineries used during the week ending November 27th last year, and down a half percent from the 16,356,000 barrels per day that were being refined during the equivalent week in 2014...
however, even with the decrease in the amount of crude oil being refined, refineries’ production of gasoline rose by 286,000 barrels per day to 9,986,000 barrels per day during the week ending November 25th, as we continue to see large swings in the fudge factor for gasoline, shown in Table 2 on page 7 of the U.S. Petroleum Balance Sheet, which the footnote tells us is an "adjustment to correct for the imbalance created by the blending of fuel ethanol and motor gasoline blending components"...that fudge factor fell by 307,000 barrels per day this week, from -339,000 barrels per day to -32,000 barrels per day, accounting for the apparent increase in production from last week's distorted figure...the year over year comparison now shows that our gasoline production was up 2.4% from the 9,752,000 barrels per day of gasoline produced during the same week a year ago, despite the lower refining throughput...the EIA also reported that refinery output of distillate fuels (diesel fuel and heat oil) rose by 136,000 barrels per day to 5,216,000 barrels per day during the week ending November 25th, the highest since last December 4th....that distillates output was 0.9% higher than the 5,168,000 barrels per day that was being produced during the week ending November 27th last year, and 3.7% higher than the 5,028,000 barrels per day of distillates produced during the equivalent week of 2014...
with the jump in gasoline production, the EIA reported that our gasoline supplies rose by 2,097,000 barrels to 226,123,000 barrels as of November 25th, as both our domestic consumption of gasoline and our gasoline imports were little changed...as a result, our gasoline inventories as of November 25th were 4.3% higher than the 216,867,000 barrels of gasoline that we had stored on November 27th of last year, and 8.4% higher than the 208,567,000 barrels of gasoline we had stored on November 28th of 2014....at the same time, our distillate fuel inventories rose by 4,957,000 barrels to 154,196,000 barrels by November 25th, the largest one week jump in distillate supplies since January 8th of this year...so while our distillates inventories are still down by 10.8 million barrels over the past 10 weeks, they were 6.8% higher than the distillate inventories of 144,415,000 barrels of November 27th last year, and 32.7% above the distillate inventories of 116,174,000 barrels of November 28th, 2014…
finally, with our oil imports still below the recent mean, our inventories of crude oil fell by 884,000 barrels to 488,145,000 barrels by November 25th, which left them 4.7% below their April 29th peak of 512,095,000 barrels...however, we still ended the week with 6.8% more crude oil in storage than the 457,212,000 barrels we had stored as of the same weekend a year earlier, and 40.7% more crude oil than the 347,015,000 barrels we had stored on November 28th of 2014...
This Week's Rig Count
because of last week's Thursday holiday, the Baker Hughes rig count report for the week ending December 2nd covers changes in drilling activity for the nine days from November 23rd to December 2nd.. for that period, they reported that drilling rig activity increased for the 10th time out of the last 11 weeks, as the active rig count rose by 4 rigs, from 593 rigs on November 23rd to 597 rigs on December 2nd....that was still down from the 737 rigs that were working as of the December 4th report last year, and down from the recent high of 1929 drilling rigs that were in use on November 21st of 2014....noteworthy in this week's report was that Canadian drillers added 26 rigs, which brought their active rig total up to 200, surpassing the 177 rigs they had deployed a year ago at this time..
rigs deployed drilling for oil in the US rose by 3 rigs to 477 rigs during the week, which was the most oil rigs we've had working in any week since January 29th, as oil drilling activity has only been down once in the past 23 weeks...but oil drilling was still down from the 545 oil directed rigs that were working on December 4th a year ago, and down from the recent high of 1609 oil rigs that were drilling on October 10, 2014...at the same time, the count of drilling rigs targeting natural gas formations increased by 1 rig to 119 rigs, which still left active gas rigs down from the 192 natural gas rigs that were in use a year ago, and down from the recent natural gas rig high of 1,606 natural rigs that were deployed on August 29th, 2008...one rig that was classified as miscellaneous also remained active, an increase from a year ago, when no such miscellaneous rigs were working...
one of the rigs that had been working on a drilling platform offshore from Louisiana was shut down this week, which reduced the Gulf of Mexico rig count to 22, and also cut the total US offshore count to 22 rigs, down from the 25 rigs that were working in the Gulf of Mexico last year at this time, which was also the total for all US offshore rigs active a year ago...in addition, one rig that had been drilling through inland freshwater in southern Louisiana was also shut down, leaving just one rig working on inland waters, down from 2 such rigs a year ago...
the number of working horizontal drilling rigs increased by 10 rigs to 485 rigs this week, which was still down from the 569 horizontal rigs that were in use on December 4th of last year, and down from the record of 1372 horizontal rigs that were deployed on November 21st of 2014...at the same time, six directional drilling rigs were pulled out and stacked, reducing the directional rig count to 46, which was down from the 64 directional rigs that were deployed during the same week last year...meanwhile, the vertical rig count of 66 rigs was unchanged from last week, but down from last year's deployment of 104 vertical rigs..
as usual, the details on this week's changes in drilling activity by state and by shale basin are included in our screenshot below of that part of the rig count summary from Baker Hughes which shows those changes...the first table below shows weekly and year over year rig count changes for the major producing states, and the second table shows weekly and year over year rig count changes for the major US geological oil and gas basins...in both tables, the first column shows the active rig count as of December 2nd, the second column shows the change in the number of working rigs between last week's count (on November 23rd) and this week (December 2nd), the third column shows last week's November 23rd active rig count, the 4th column shows the change in the number of rigs running this Friday from the equivalent Friday a year ago, and the 5th column shows the number of rigs that were drilling at the end of that reporting week a year ago, which in this case was for December 4th of 2015...
this week's variances show a return to the pattern we've being seeing for most of the past 5 months, wherein the biggest jump in drilling was again in the Permian basin of western Texas, which at 235 rigs now shows more drilling activity than the 217 rigs that were working there a year ago...since both the Dallas area Barnett shale and the south Texas Eagle Ford also saw two rig increases, that suggests that Texas saw an increase of 11 horizontal rigs, while other drilling rig types were pulled out...also note the increase of 3 gas directed drilling rigs in the Haynesville, generally a northwestern Louisiana field, although with the 4 rig decrease in that state, those additions could be in across the border in Texas too...also hard to square is the 4 rigs that were added in Wyoming; they weren't in any of the major basins, since the DJ Niobrara saw a 2 rig decrease...all in all, this week’s changes were not as immediately clear as we normally see...
note: there's more here...