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The rig count is dropping, but crude inventories continue to grow. In fact, EnerCom’s Crude Oil Cuttings inventory report is at risk of expanding the maximum range of barrels, a move we’ve never been prompted to make.

The Energy Information Administration (EIA) announced yet another build that exceeded analyst estimates, reporting gains of 8,874 barrels for the week ended January 23, 2015. The gain pushed total inventories up to 406,727 barrels, the highest on record. Based on Bloomberg data reaching back to the 1980’s, the total has never cracked the 400,000 mark.

Total gains in the last three works have amounted to 24,334 barrels overall. It is the largest three-week gain since March of 2001.

In the meantime, rig counts have dropped by 178 since January 2. Currently, a fleet of 1,633 rigs are in the field.  In December, Cowen & Co. predicted as many as 500 rigs would vanish from the field in comparison to peak Q4’14 numbers.

“Should [$65 to $70 WTI] continue for the whole year we could go well below 1,300 rigs in the second half of 2015,” said the report. “Given modest improvement in the oil price in the second half we forecast a decline in rig activity to about 1,400 rigs in the US in the second half for an average US rig count of 1,515 (down by 18% from our forecast average of 1,855 in 2014). Our 2016 forecast is 1,500.”

Earlier this week, the EIA said production will remain steady despite the reduced rig activity, possibly through 2016. A backlog of wells that have yet to be completed will only add to the amount of oncoming production. The backlog in the majority of plays range from about three to seven months.

ppt crude

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Analyst Commentary

KLR Group (1.28.15)

Thesis (as of January 13, 2015)

We expect Brent/NYMEX $62.50/$57.50 oil prices this year and $85/$80 next year. In our view, the negative supply implication of lower global oil resource capitalization over the next two years, evident in the U.S., supports a long-term Brent/NYMEX oil price forecast of $100/$92.50. A long-term Brent/NYMEX $100/$92.50 oil price is sufficient to generate an industry norm ~5% return on invested capital.

We believe from Saudi’s perspective, the magnitude of the necessary supply reduction, largely attributable to robust growth in U.S. tight oil, rendered the role of swing producer less economic than maintaining output and allowing oil prices to fall meaningfully below equilibrium in the near-term.  

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