Masters Of War

Come you masters of war You that build all the guns You that build the death planes You that build all the bombs You that hide behind walls You that hide behind desks I just want you to know I can see through your masks. You that never done nothin' But build to destroy You play with my world Like it's your little toy You put a gun in my hand And you hide from my eyes And you turn and run farther When the fast bullets fly. Like Judas of old You lie and deceive A world war can be won You want me to believe But I see through your eyes And I see through your brain Like I see through the water That runs down my drain. You fasten all the triggers For the others to fire Then you set back and watch When the death count gets higher You hide in your mansion' As young people's blood Flows out of their bodies And is buried in the mud. You've thrown the worst fear That can ever be hurled Fear to bring children Into the world For threatening my baby Unborn and unnamed You ain't worth the blood That runs in your veins. How much do I know To talk out of turn You might say that I'm young You might say I'm unlearned But there's one thing I know Though I'm younger than you That even Jesus would never Forgive what you do. Let me ask you one question Is your money that good Will it buy you forgiveness Do you think that it could I think you will find When your death takes its toll All the money you made Will never buy back your soul. And I hope that you die And your death'll come soon I will follow your casket In the pale afternoon And I'll watch while you're lowered Down to your deathbed And I'll stand over your grave 'Til I'm sure that you're dead.------- Bob Dylan 1963

Sunday, February 11, 2018

oil and natural gas prices crash 10%, US oil production at an all time high, drilling rigs jump to 34 month high

both oil and natural gas prices crashed 10% this week, as a stock market crash spread to bonds, industrial commodities, cryptocurrencies, and to other major global markets (although one might easily see what happened as a US Treasury bond market crash that spread to stocks and beyond)...technically a "correction", US stock markets have been falling in volatile trading since hitting an all time high on January 26th, with the widely followed Dow Jones Industrial Average dropping more than 2,400 points to end the week at 24,190.90, including a 1,175 point drop on Monday of this week that was the largest point drop in its history, albeit far from the greatest drop percentage-wise...while the connection between dropping stock prices and prices for commodities such as oil and gas is tenuous at best, what underlies it that the fear that a weakening economy that is presumably indicated by falling stocks will ultimately bring on a recession and thereby reduce demand for energy...however, it could also be argued that US stocks had become excessively overvalued anyway (up 45% since Trump was elected), and this recent crash is just bringing their valuations more in line with what they're actually worth..

since it's difficult, if not impossible, to ascertain any specific reasons for this week's drop in energy prices in the midst of the wave of near panic selling that hit the global financial markets, we'll start by just including the most recent graphs of their price trajectories, and then review some of the fundamentals that may have contributed to the price moves...(NB: longer term price graphs for both oil & natural gas were included in this letter and posted online here two weeks ago, when they were both at interim record highs)...we'll start with oil...

February 10 2018 oil prices

the above graph is a Saturday afternoon screenshot of the live interactive US oil price graph at Daily FX, an online platform that provides trading news, charts, indicators and analysis of the markets...each bar on the graph represents oil prices for one day of oil trading between September 1st and February 9th, with green bars representing days when the price of oil went up, and red bars representing the days when the price of oil went down...for green bars, the starting oil price at the beginning of the day is at the bottom of the bar and the price at the end of the day is at the top of the bar, while for red or down weeks, the starting price is at the top of the bar and the price at the close is at the bottom of the bar...also faintly visible on this "candlestick" style graph are the feint grey "wicks" above and below each bar, to indicate trading prices during each day that were above or below the opening to closing price range for that day...

above we can see that after closing at a 37 month high of $66.14 a barrel two weeks ago, the five week rally in oil prices sputtered last week, closing down about 1% at $65.45 a barrel, before this week's selling kicked in, with the global equity market selloff largely seen as responsible for the subsequent drop in oil prices...further contributing to the oil price drop after Wednesday was the weekly EIA report, which indicated that both U.S. crude and fuel inventories rose during the prior week, while oil production from domestic wells showed an inordinately large jump to a record high (as we'll see, that production jump was largely a data adjustment, but oil traders did not know that)...oil prices were actually attempting to stage a rally on Friday, with crude prices 50 cents higher in the morning, but they then fell $2.70 a barrel in the afternoon to $58.07 after Baker Hughes reported a big jump in new drilling, before recovering to close the week at $59.20 a barrel...for the week, oil prices fell $6.25 a barrel, their largest weekly drop in over a year, after falling 35 cents on the prior Friday for a 6 day loss of just over 10% (btw, the above graph shows a small price increase on Tuesday due to an after hours rally precipitated by an American Petroleum Institute report of a crude oil draw; since that off-hours report was reversed by the EIA data released the next day, that brief Tuesday evening rally did not show up in the NYMEX oil price record, which now indicates oil prices have been down for six days straight...

next, we have a graph of natural gas prices, as quoted daily:

February 10 2018 natural gas prices

like the oil price graph we posted earlier, the above graph is a Saturday screenshot of the live interactive natural gas price graph at Daily FX, wherein each bar on the graph represents natural gas prices for one day of trading between September 1st and February 9th, with green bars representing days when the price of natural gas went up, and red bars representing the days when the price of natural gas went down...as you can see, natural gas prices continued the crash from their year high levels that began last week, when quotes for natural gas dropped more than 80 cents as the front month contract rolled over from February to March...the first big drop this past week, of 9.9 cents on Monday, seems to have been exacerbated by forecasts of milder weather further out, while the drop of 11.3 cents on Friday followed a modest withdrawal of gas from storage and a sense among traders that the worst of winter was behind them...natural gas prices thus ended the week down 26.2 cents at a 16 month low of $2.58 per mmBTU, after the February contract had been quoted at a 13 month high of $3.66 per mmBTU just nine trading sessions earlier...natural gas prices at these levels now should slow down any preparations that might be being made for spring drilling, at least for the time being...

The Latest US Oil Data from the EIA

this week's US oil data from the US Energy Information Administration, covering the week ending February 2nd, indicated a big jump to new record in oil production from US wells and a big increase in operations at US refineries, while at the same time a decrease in oil imports was mostly offset by a drop in exports, leaving crude left over for storage for the second week in a row...our imports of crude oil fell by an average of 538,000 barrels per day to an average of 7,892,000 barrels per day during the week, while our exports of crude oil fell by an average of 478,000 barrels per day to an average of 1,287,000 barrels per day, which meant that our effective trade in oil worked out to a net import average of 6,605,000 barrels of per day during the week, 60,000 barrels per day less than the net imports of the prior week...at the same time, field production of crude oil from US wells rose by 332,000 barrels per day to a weekly record high of 10,251,000 barrels per day, which means that our daily supply of oil from our net imports and from wells totaled an average of 16,856,000 barrels per day during the reporting week..

during the same week, US oil refineries were using 16,797,000 barrels of crude per day, 784,000 barrels per day more than they used during the prior week, while at the same time 337,000 barrels of oil per day were being added to oil storage facilities in the US....hence, this week's crude oil figures from the EIA seem to indicate that our total supply of oil from net imports and from oilfield production was 278,000 barrels per day less than what refineries reported they used during the week plus what was added to storage...to account for that disparity, the EIA needed to insert a (+278,000) barrel per day figure onto line 13 of the weekly U.S. Petroleum Balance Sheet to make the data for the supply of oil and the consumption of it balance out, essentially a fudge factor that is labeled in their footnotes as "unaccounted for crude oil"...(how this weekly data is gathered, and the reason for that "unaccounted" oil, is explained here)

further details from the weekly Petroleum Status Report (pdf) indicate that the 4 week average of our oil imports rose to an average of 8,078,000 barrels per day, 4.5% less than the 8,463,000 barrels per day average we imported over the same four-week period last year....the 337,000 barrel per day increase in our total crude inventories came about on a 271,000 barrel per day addition to our commercial stocks of crude oil and a 66,000 barrel per day addition of oil to our Strategic Petroleum Reserve, likely a return of oil that was borrowed from the Reserve during the post Hurricane Harvey emergency, since the Reserve is not authorized to buy oil at this time....this week's 332,000 barrel per day increase in our crude oil production included a 315,000 barrel per day increase in output from wells in the lower 48 states, and a 17,000 barrels per day increase in output from Alaska...the 10,251,000 barrels of crude per day that were produced by US wells during the week ending February 2nd was the highest week on records going back to 1983, 14.2% more than the 8,978,000 barrels per day we were producing on February 3rd of last year, and 21.6% above the interim low of 8,428,000 barrels per day that our oil production fell to during the last week of June, 2016...

meanwhile, US oil refineries were operating at 92.5% of their capacity in using 16,797,000 barrels of crude per day, up from just 88.1% of capacity the prior week, but still down from the wintertime record 96.7% of capacity just five weeks earlier...the 16,797,000 barrels of oil that were refined this week were 4.6% less than the off-season record 17,608,000 barrels per day that were being refined during the last week of December 2017, but were 5.7% more than the 15,893,000 barrels of crude per day that were being processed during the week ending February 3rd, 2017, when refineries were operating at 87.7% of capacity....

with the big increase in the amount of oil being refined, gasoline production by our refineries was also much higher, increasing by 518,000 barrels per day to 10,085,000 barrels per day during the week ending February 2nd, after increasing by 209,000 barrels per day the prior week....as a result, our gasoline production was 2.9% higher than the 9,804,000 barrels of gasoline that were being produced daily during the week ending February 3rd of last year....at the same time, our refineries' production of distillate fuels (diesel fuel and heat oil) jumped by 516,000 barrels per day to 5,129,000 barrels per day, after falling by 979,000 barrels per day over the prior four weeks...after that big increase, the week's distillates production was 6.8% higher than the 4,802,000 barrels of distillates per day than were being produced during the the fifth week of 2017....  

with the big increase in our gasoline production, our gasoline inventories at the end of the week rose by 3,414,000 barrels to 245,474,000 barrels by February 2nd, their twelfth increase in 13 weeks...that was as our domestic consumption of gasoline rose by 66,000 barrels per day to 9,110,000 barrels per day, and as our imports of gasoline rose by 137,000 barrels per day to 746,000 barrels per day, while our exports of gasoline rose by 214,000 barrels per day to 829,000 barrels per day....but even after twelve increases in thirteen weeks, our gasoline inventories are still 4.2% lower than last February 3rd's level of 256,217,000 barrels, even as they are roughly 4.7% above the 10 year average of gasoline supplies for this time of the year...     

similarly, with the week's jump in distillates production, our supplies of distillate fuels rose by 3,926,000 barrels to 141,826,000 barrels over the week ending February 2nd, the sixth increase in distillates supplies in the past eight weeks...that was as the amount of distillates supplied to US markets, a proxy for our domestic consumption, fell by 692,000 barrels per day to 3,778,000 barrels per day, even as our imports of distillates fell by 271,000 barrels per day to 313,000 barrels per day, and as our exports of distillates rose by 99,000 barrels per day to 1,103,000 barrels per day...but even after this week’s inventory increase, our distillate supplies were still 16.9% lower at the end of the week than the 170,746,000 barrels that we had stored on February 3rd, 2017, and roughly 1.4% lower than the 10 year average of distillates stocks at this time of the year

finally, even with the big increase in the amount of oil used by our refineries, the jump in our weekly crude oil production meant that our commercial supplies of crude oil rose for the second time in 12 weeks and for the 12th time in the past 47 weeks, increasing by 1,895,000 barrels, from 418,359,000 barrels on January 26th to 420,254,000 barrels on February 2nd ....but even with back to back increases, our oil inventories as of that date were still 17.4% below the 508,592,000 barrels of oil we had stored on February 3rd of 2017, and 10.7% lower than the 470,676,000 barrels of oil that we had in storage on February 5th of 2016, even they were still 9.5% greater than the 383,800,000 barrels of oil we had in storage on February 6th of 2015, at a time when US supplies of oil had just begun to increase... 

A Note on US Oil Production Figures

before we move on, we should explain that big increase in our oil production, which quite obviously put our oil output at a new record high...as we've pointed out on several occasions, this weekly oil data from the EIA that we cover is preliminary, and it will typically be more than 2 months before the final confirmed figures, published monthly, are released...despite the likelihood of some inaccuracy in this this weekly data, we follow it because it's what the oil traders follow, and hence it moves oil prices and ultimately decisions on the part of exploitation companies to start drilling for oil...

so, last week the confirmed monthly oil production data for November was released, and it showed that US crude oil production had increased to 10.038 million barrels per day in November, a big jump from the confirmed 9,654,000 barrels per day of oil production they reported for October...the graph below shows that increase, and the US oil production record over the entire period that monthly records of US oil production have been kept:

February 1 2108 oil production monthly

the above graph comes from the February 1st post on the EIA's blog "Today in Energy" and it obviously shows US crude production over the period from January of 1920 to November of 2017....the big increase in our November output meant we had topped 10 million barrels per day for just the third time in our history, coming in just a fraction below the 10.044 million barrels per day record production of November 1970...

now, here's the issue; each week of the past several we've stated that our oil production was at a new high, right up until last week when we said "the 9,919,000 barrels of crude per day that were produced by US wells during the week ending January 26th was the highest week on records going back to 1983"....and that has been accurate; up until this week, the preliminary weekly data had never showed our production higher...so along came the monthly report last week, which showed that the previously published weekly oil production data for November, which we have been quoting, was seriously off the mark...so this week, when the EIA came to estimating the new oil production data for the week ending February 2nd, they incorporated what they learned from the monthly report for November...the result of that is illustrated quite well in the following graph showing both monthly and weekly oil production:

February 9  2018 oil production as of February 2

the above graph, from the weekly OilPrice Intelligence Report, shows the history of confirmed monthly oil data from January 2015 to November 2017 in blue, and then the weekly estimates up until the current week in yellow after that period...we can see that up until the November report was released, the yellow line had been nearly contiguous with the blue one, or at least not different enough by a magnitude that would matter...however, after the publication of the monthly report for November, it became clear that the weekly estimates in yellow have been too low...hence, this week the EIA rebenchmarked their weekly production data to the newly released November data to estimate that for the week ending February 2nd, our crude oil production rose to a new record high of 10,251,000 barrels per day, suddenly 332,000 barrels per day more than they reported the prior week....so our production did not really "jump" by that much; rather it was just recomputed to reflect the new, confirmed data.....for more on how this weekly data is gathered and estimated, here's the fact sheet titled "Estimated domestic crude oil production in EIA’s Weekly Petroleum Status Report (WPSR)" (pdf)

This Week's Rig Count

US drilling activity increased for just the twelfth time in the past 28 weeks during the week ending February 9th, but this week's increase was the most in over a year and brought the total rig deployment to the highest level since April 10th, 2015....Baker Hughes reported that the total count of active rotary rigs running in the US was up by 29 rigs to 975 rigs in the week ending on Friday, which was also 234 more rigs than the 741 rigs that were deployed as of the February 10th report of 2017, while it was still down by nearly half from the recent high of 1929 drilling rigs that  were in use on November 21st of 2014...

the number of rigs drilling for oil rose by 26 rigs to 791 rigs this week, which was also 200 more oil rigs than were running a year ago, while the week's oil rig count still remained well below the recent high of 1609 rigs that were drilling for oil on October 10, 2014...at the same time, the number of drilling rigs targeting natural gas formations rose by 3 rigs to 184 rigs this week, which was only 35 more gas rigs than the 149 natural gas rigs that were drilling a year ago, and way down from the recent high of 1,606 natural gas rigs that were deployed on August 29th, 2008...

drilling activity from platforms in the Gulf of Mexico was unchanged at 16 rigs this week, which was down from the 20 rigs deployed in the Gulf of Mexico a year ago and the total of 21 rigs offshore nationally a year ago....the week's count of active horizontal drilling rigs was up by 24 rigs to 832 horizontal rigs this week, which was also up by 225 rigs from the 607 horizontal rigs that were in use in the US on February 10th of last year, but down from the record of 1372 horizontal rigs that were deployed on November 21st of 2014...at the same time, the vertical rig was up by 4 rigs to 70 vertical rigs this week, which was 2 more than the 68 vertical rigs that were in use during the same week of last year....in addition, the directional rig count was up by 1 rig to 73 directional rigs this week, which was also up from the 66 directional rigs that were deployed on February 10th of 2017...

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 pdf from Baker Hughes that 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 the 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 February 9th, the second column shows the change in the number of working rigs between last week's count (February 2nd) and this week's (February 9th) count, the third column shows last week's February 2nd active rig count, the 4th column shows the change between the number of rigs running on Friday and 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 week’s case was for the 10th of February, 2017...             

February 9 2019 rig count summary

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note: there’s more here

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