crude_oil_inventory022015Crude oil inventories rose yet again in the Energy Information Administration’s (EIA) report for the week ended February 20, 2015, setting another record high. For those keeping track, the inventory has climbed by more than 60 million barrels since its report on September 25, 2014 (18%), and approximately 48.6 million barrels since the end of 2014 (11%).

Why do Inventories Keep Rising?

The United States, just like several oil-dependent nations, is adjusting in real time to the changing fundamentals of the crude market. In a nutshell, a lower commodity environment has prompted the majority of U.S. E&Ps to lay down rigs, cut back on expenditures and focus on more guaranteed returns. The U.S. rig count has fallen by more than 650 (more than 34% overall) since December 5, with the latest update consisting of 1,277 domestic rigs in operation.

“The rig counts are going down, but they are going down in some of the less efficient areas,” said Timothy Hess, a Petroleum Expert for the EIA, in an interview with Oil & Gas 360®. “At the same time, the average production per well is actually going up because you’re getting away from some of the marginal areas. That’s why we haven’t seen an effect on production yet.”

BAKER HUGHES RIG COUNT

Region

12/5/2014

2/27/2015

California

43

15

Colorado/Wyoming

129

77

North Dakota

180

108

Oklahoma

211

146

Ohio/ Pennsylvania/
West Virginia

131

106

Texas

896

570

TOTAL U.S.

1,920

1,267

Activity in the Marcellus/Utica region, as evidenced by the rig count table, has remained relatively consistent in the face of the rig slowdown. California has seen the steepest drop-off of any state, cutting its count by nearly two-thirds, while the tally in oil-heavy states like Texas and North Dakota has declined by about 37%.

Volumes Maintain Upward Trend

A report issued by the EIA in December said that operational efficiency, in addition to a backlog of projects, would serve as a cushion to projects that were deferred when oil prices headed south. Producers themselves were projecting volume increases despite reduced expenditures in their 2015 guidance plans. Oil & Gas 360® compiled forecasts from more than 60 companies and the majority are projecting volumes increases in 2015, even though E&Ps are dialing back capital expenditures by an average of 34%.

The International Energy Agency expects the U.S. to remain the top source of supply growth through 2020. The volume of 270 MMBO produced in November 2014 was the most since (you guessed it) January 1986.

Refinery runs have dipped in recent weeks and worker strikes are grabbing headlines, but the effects are not impactful in the grand scheme of things, says Hess. “You might have some minor effects on the West Coast, but keep in mind the inventories are building on the East Coast and they’ve been hit with some cold weather lately,” he explains. “It’s really just your typical seasonality.”

Source: EnerCom's Monthly Report

Source: EnerCom’s Monthly Report

But Imports (and Demand) are Down

The EIA reported earlier this month that light grade crude imports to the Gulf Coast have been virtually eliminated – a direct result of increased volumes of tight oil. Imports of liquefied natural gas (LNG) fell to zero in November 2014 – the first time since 1996. In a report in April 2014, the EIA determined 2013 yielded the least amount of net energy imports in 20 years. U.S. oil consumption has declined in four of the last six years, and its 2013 demand was roughly 9% below the demand of 2007.

Overall crude imports, in turn, are also declining. The total of 269.0 MMBO of oil imported in November 2014 is 40% below the all-time import high of 455.6 MMBO in August 2006. OPEC’s role has also disintegrated to 30% of total imports from 43% in the same time frame, while Canada filled the void, boosting its market share to 39% from 17%. Hess mentioned that most of the volumes from our northern neighbors have flowed into the Midwest and has increased on a year-over-year basis.

Whose Oil Are We Storing?

Believe it or not, the climbing crude inventories are not being supported by outside sources; the expanding storage is all from domestic production. North American E&Ps are arguably victims of their own success, and a shift in the supply/demand scale has led to the revamped market.

Sub-$50 oil leaves a slim margin for E&Ps, so some have elected to sell their products on the futures market. “Prices right now are lower than future prices, so that incentivizes putting the oil into inventory and selling it forward,” says Hess. “This has led to contango, because nobody is going to pay up for oil right now because there’s so much of it on the market.”

At this time of writing, generic WTI crude futures are nearing the $56/barrel mark for August 2015 and exceed the $60/barrel mark in February 2016. Current WTI prices are below $50/barrel, down roughly 5% from when the latest inventory build was announced.

“Brent is also in contango, but stocks are building much faster in the United States, which does contribute to a low widening in the WTI-Brent spread,” Hess says. Brent has recovered to the $60+ per barrel territory, and the spread expanded to $11.81 in early trading on February 26, its widest amount since January 2014.

Source: EnerCom's Monthly Report

Source: EnerCom’s Monthly Report

Important disclosures: The information provided herein is believed to be reliable; however, EnerCom, Inc. makes no representation or warranty as to its completeness or accuracy. EnerCom’s conclusions are based upon information gathered from sources deemed to be reliable. This note is not intended as an offer or solicitation for the purchase or sale of any security or financial instrument of any company mentioned in this note. This note was prepared for general circulation and does not provide investment recommendations specific to individual investors. All readers of the note must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Investors should consider a company’s entire financial and operational structure in making any investment decisions. Past performance of any company discussed in this note should not be taken as an indication or guarantee of future results. EnerCom is a multi-disciplined management consulting services firm that regularly intends to seek business, or currently may be undertaking business, with companies covered on Oil & Gas 360®, and thereby seeks to receive compensation from these companies for its services. In addition, EnerCom, or its principals or employees, may have an economic interest in any of these companies. As a result, readers of EnerCom’s Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this note. The company or companies covered in this note did not review the note prior to publication. EnerCom, or its principals or employees, may have an economic interest in any of the companies covered in this report or on Oil & Gas 360®. As a result, readers of EnerCom’s reports or Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.


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