a report from the Department of Transportation this week indicated that Americans put 283.7 billion miles on their vehicles in July, 4.2% more than they did last July...on a seasonally adjusted basis, that was 0.8% more miles than we drove in June, and the 12 month average thus set another new record for any 12 month period in US history...prior to this year, our miles driven had stayed below the previous peak for 85 months, but with lower gas prices starting last fall, we broke out of the downward trend in January and have been setting records for miles driven ever since...
also this week, an Energy Information Administration report showed that US gasoline sales had surged 5% in July, the fastest growth in US gasoline consumption in a decade...note that the reason that our gasoline consumption is rising faster than our miles driven is that we're buying and driving larger vehicles; recall that just 3 weeks ago, we reported on car sales for August, which showed that 57.3% of August light vehicle sales were built on a truck frame...those big vehicles typically use nearly 40 percent more fuel to cover the same mileage than smaller passenger cars...
other than that, i haven't seen any news out of the ordinary enough this week that would be worth exploring any further than what the links below provide (see here), nor do i have any particular insights to share, so today we'll just review the weekly oil stats from the EIA and the rig count data from Baker Hughes and wrap it up...
this week's report showed that US field production of crude oil rose for the first time in 8 weeks, from 9,117,000 barrels per day during the week ending September 11th to 9,136,000 barrels per day for the week ending September 18th...putting that production into perspective, that's about 4.9% below the modern record production of 9,610,000 barrels per day that was set in the first week of June this year, a bit more than 3% above our production rate of 8,867,000 barrels per day in the 3rd week of September a year ago, and roughly 64.4% higher than our 5,556,000 barrel per day production of 5 years ago...to help you visualize how our output of oil has changed, we'll include a copy of the EIA graph that accompanies the production data that we cite every week, from which we have excised the not particularly relevant period between 1990 and 2003 so the graph would better fit on the page…
from that graph we can see how our domestic production of crude generally declined from the 90s till it bottomed out over the 2006 to 2008 span, before it started rising as hydraulic fracking technology, which had been used earlier in shale gas basins, was extended to be used in oil bearing shale...then, from the period starting in 2012, US production of crude began to increase exponentially, as fracking activity spread across several basins, fed by low interest rates and high oil prices...also note that although the number of active oil drilling rigs started to decrease late last year, it wasn't until June that our oil production seriously turned down..
our other main source of oil supply is from imports, which have remained stubbornly high over the past two years even as US oil production had been rising....in the week ending September 18th, our imports of crude oil were little changed, falling from 7,189,000 barrels per day in the week ending September 11th to 7,176,000 barrels per day in this week's report...while that's 4.5% higher than the same week a year ago, weekly oil imports are volatile, so we check the 4 week average of imports carried in the weekly Petroleum Status Report (62 pp pdf), which indicates U.S. crude oil imports averaged 7.4 million barrels per day over the last 4 weeks, 2.0% below the same 4 weeks last year...
so, with oil imports down a bit and oil production up a bit, domestic supplies of crude were little changed this week...however, refinery operations slowed from last week, as they typically do once the summer driving peak is past, as U.S. crude oil refinery inputs averaged 16,203,000 barrels per day in the week ending September 18, down from 16,513,000 barrels per day in the prior week...the refinery utilization rate dropped to 90.9%, from 93.1% of capacity last week, with no news as to why; that kind of drop is typical for the end of September and the beginning of October, however, so perhaps they're downshifting refinery operations a bit early this year...
users still took oil out of storage this week, however, although less so than last week...in the week ending September 18th, our commercial crude oil inventories in storage fell to 453,969,000 barrels, down from the 455,894,000 barrels we had stored as of the 11th...however, that still leaves us with 26.8% more oil in storage than the 357,998,000 barrels of oil that we had stored in the same week last year, and it’s also the most oil stored in the 3rd week in September in the 80 years that such records have been kept, which had never seen more than 400 million barrels stored before this year...we made a copy of the EIA graph that accompanies the inventory data too, so we can all get a look at what that looks like historically...and like we did above, we have excised the period between 1990 and 2003 so the graph would better fit on the page…(full graph here)
here we can see that our oil inventories (excluding the Strategic Petroleum Reserve) had remained in the same range, somewhat below 400 million barrels, over the entire past three decades, only gradually approaching that 400 million barrel mark in 2013, before suddenly spiking at the end of January of this year...what we see on this chart also belies the analysis of Reuters energy analyst Jack Kemp, who has been claiming that inventories are tighter than they look, because much more of our inventory is now in transit in railcars, pipelines and barges, or in in situ storage in the oil fields, than it was previous to widespread fracking...it's clear from both the chart and from the weekly data that our inventories spiked during the same weeks when oil prices fell the most, leaving contracts for oil to be delivered in the future at a price somewhat higher than the spot price, setting up the contango trade we've talked about previously, wherein speculators bought oil on the cheap and paid for its storage, and simultaneously entered into a contract to sell it back at a higher price in the future...if there had been a structural change in the amount of oil stored occurring, it would have happened gradually over a period of several years, not in a quick spike when oil prices fell...
oilfield drilling activity slowed again this week, but not by as much as it had in the past four weeks, as the total active rig count fell by just 4 to 838 rigs for the week ending September 25th...Baker Hughes reported that rigs drilling for oil in the US decreased from 644 last week to 640 this week, that rigs drilling for gas fell from 198 to 197, and drillers added one miscellaneous rig for the first time in two months....active oil rigs are still above the 5 year low of 628 which they fell to on June 26th, but down 952 from the year ago count of 1592 and down 969 from the high of 1609 hit on October 10th of last year, while active gas rigs are down from 338 a year ago and down by 159 from the recent peak of 356 gas rigs that were operating during the week of November 11th, 2014....
there were two drilling operations started in the Gulf of Mexico this week, so the Gulf rig count is up to 31, and with rigs off Alaska and California, the offshore count is up to 33, but that's still down from 62 in the same week last year....horizontal drillers took a big hit this week, as the net count for that type of rig was down 11 to 629, and down from 1347 horizontal rigs in the same week last year...active vertical rigs, on the other hand, increased by 4 to 123, which was still well off the 373 vertical rigs that were drilling a year ago...and directional rigs increased also, up by 3 to 86, but are still down from the 211 directional rigs that were deployed last year at this time..
the major shale basins saw an even greater reduction in rigs; both the Permian and Eagle Ford shale of Texas, as well as the Haynesville shale of the Louisiana-Texas border, each saw 3 rigs stacked...in addition, single rigs were shut down in the Ardmore Woodford of Oklahoma, the Barnett shale of the Dallas Fort Worth region, the Fayetteville of Arkansas, the Granite Wash of the Oklahoma-Texas border and the Williston of North Dakota...those decreases left the Permian with 250 rigs, down from 556 a year ago, the Eagle Ford with 85, down from 207 a year earlier, the Haynesville with 26, down from 46 a year ago, the Ardmore Woodford with 4, down from 5 last year, the Barnett shale with 6, down from 22 a year ago, the Fayetteville with 3, down from 9 a year ago, the Granite Wash with 12, down from 66 a year ago, and the Williston with 67, down from 198 a year ago...
even with all the rigs removed from Texas shale plays, the state rig count only fell by 2 to 363, as apparently most of the vertical and directional rigs added were in that state...that number was still down by 534 rigs from the 897 rigs that were active in Texas on the 4th weekend of September last year...other states that saw less rigs this week corresponded with the basin decreases; Arkansas was down a rig to 3, and down from 12 rigs a year ago, North Dakota was down 1 rig to 66 and down from 189 a year ago, and the Oklahoma rig count was also down by 1 to 105, which was down from 213 rigs a year earlier...the only state to see an increase in active rigs was New Mexico, which was up 1 rig to 50 this week, but down from 101 rigs a year earlier...net rigs counts for all other states remained unchanged this week, although as we've noted previously, that does not preclude that rigs may have been stacked in one area of a state and started up in another....
Another failure by US & her satraps being spun as a compromise.Deal to end #Syrian bloodbath to allow Assad to stay. http://t.co/1j5ihBe7TT
— Tony McK ll*ll (@oakroyd) September 26, 2015
Our count as of this afternoon. Know of a person killed by police this year? Send a tip to http://t.co/JTs0FAIYZE pic.twitter.com/3dwIyrl7vg
— The Counted (@thecounted) September 24, 2015
America's bees are dying and we need your help. Tell @Bayer to stop killing our bees! http://t.co/fyTMGJWgQf pic.twitter.com/4RyRtr3eFf
— NRDC (@NRDC) September 23, 2015in a decision on Wednesday, the Ohio supreme court ruled the charter county ballot initiatives of Athens, Fulton and Medina counties off the November ballot in those counties....yet in a ruling the next day, they unanimously ruled a fracking ban initiative back on to the November ballot in Youngstown, overturning the Mahoning County Board of Elections...while those two decisions may seem incongruent, their explanations for both seemed fairly rational, so we'll start today by taking a look at how they were arrived at...
in the case of Walker et al vs Husted (pdf) on Wednesday, the Ohio Supremes ruled 6-1 against complainants in Athens, Fulton and Medina county who wanted their county charter/community bill of rights amendments returned to their November ballots...you should recall that in mid-August, the oil industry funded Ohio Secretary of State Jon Husted ruled that charter government proposals in Athens, Fulton and Medina counties could not appear on the November ballot, citing the common refrain that regulation of fracking is the sole province of the ODNR...shortly after that ruling, citizens from those 3 counties sued Husted in his official capacity as secretary of state, charging that he couldn't invalidate legitimate petitions residents had signed because of his personal quibbles over their content....that dispute headed to the Supreme Court, and is what was decided in this ruling, which in some ways was decided for both sides....in paragraph {¶ 15} of the ruling the Court held that "authority to determine whether a ballot measure falls within the scope of the constitutional power of referendum (or initiative) does not permit election officials to sit as arbiters of the legality or constitutionality of a ballot measure’s substantive terms." meaning that Husted's authority as Secretary of State was to rule on the form of the ballot initiatives, and that he had overstepped his authority in ruling on the substance of them...but the court ruled in favor of Husted's other objection, that the county referendums "did not set forth the form of (alternate) government, which is the sine qua non (necessary requirement) of a valid charter initiative.” or, as noted in paragraph {¶ 22} "the charters do not satisfy the threshold requirements that define a charter initiative. Specifically, Article X, Section 3 of the Ohio Constitution requires that every county charter “shall provide the form of government of the county and shall determine which of its officers shall be elected and the manner of their election.” .{and}..“shall include either an elective county executive or an appointive county executive.”
so it's pretty clear from a reading of the Justice's opinion that the initiatives were ruled off the ballot because they didn't go into the proper degree of detail on what new form of county government that would result should they pass, and not because of Husted's objection that they were designed to circumvent state laws regarding fracking...it seems clear that the Justices felt Husted overstepped his authority on that part of his ruling, and that had the county referendums followed the letter of the law on changing the county's form of government, they would have been allowed to go before the voters...
then, in the second fracking related decision on Thursday, the Ohio Supreme Court decided by a 7-0 vote that a Youngstown fracking ban referendum that the Mahoning County Board of Elections had ruled off the ballot should be reinstated...we had not discussed this case, but what had happened there was that FrackFree Mahoning Valley had circulated a petition to amend Youngstown's charter to prohibit any kind of oil and gas activity, just as they had 3 times previously in the past 2 years, got the required signatures, only to have the Mahoning County Board of Elections vote unanimously not to certify their petition, again citing the previous rulings that fracking regulation was the sole of the ODNR, and complaining that the same initiative had been defeated in both 2013 and 2014...in this case, it was Youngstown officials who filed the complaint to get the anti-fracking referendum back on the ballot, apparently not so much because they favored the initiative, but because they felt the Board of Elections had acted illegally against an otherwise legal petition...the Supreme Court logic that put the Youngstown initiative back on the ballot was quite similar to the ruling against Husted in the county charter initiatives; again, neither the state nor the county election officials are allowed to rule whether a referendum is legal or constitutional; that kind of decision rests solely with the courts...in effect, the court is saying that only if the Youngstown anti-fracking initiative should pass could it then be challenged on legal or constitutional grounds...
the Wednesday reports from the Energy Information Administration showed that both crude production and oil imports fell in the week ending September 11th, and refineries runs increased, so the industry had to pull oil out of storage for the first time in 3 weeks to meet that demand....our field production of crude oil fell from 9,135,000 barrels per day in the week ending September 4th to 9,117,000 barrels per day in the week ending September 11th; that now leaves us almost 5.1% below the modern production record of 9,610,000 barrels per day in the first week of June this year, and only 3.2% higher than our 8,838,000 barrels per day production during the 2nd week of September last year, when the growing global glut of oil had already started driving down oil prices...our imports of crude oil also fell, from 7,439,000 barrels per day in the week ending September 4th to 7,189,000 barrels per day in this week's report, enough to bring the 4 week average of imports carried in the weekly Petroleum Status Report (62 pp pdf) down to 7.4 million barrels per day, 4.3% below the same four-week period last year...
while this week's supply of crude oil was thus lower, the amount of oil required by refineries rose, as crude oil refinery inputs averaged 16,513,000 barrels per day in the 2nd week of September, in contrast to refinery inputs of 16,110,000 barrels per day in the prior week...with the Whiting refinery back online, our refinery utilization rate rose from a 5 month low of 90.9% of operable capacity in the 1st week of September to 93.1% in the current week....while it's still down from 96.1% utilization and 17,075,000 barrels a day record pace of 6 weeks ago, refinery operations are now back above the summer average and heading into the time of year when demand and refinery output typically decline anyhow...so with this week's demand for oil exceeding supply, users took oil out of storage, and hence our commercial inventories of crude oil fell by almost half a percent, from 457,998,000 barrels in the 1st week of September to 455,894,000 barrels this week...that left us with still more than 25.8% crude in storage at the end of the week than the amount of crude we had stored in the same week last year, and as you know, the highest for this time of years in the 80 years that such records have been kept...however, while we imported less crude, our imports of refined products rose, and hence motor gasoline inventories increased by roughly 2.8 million barrels and distillate fuel inventories increased by 3.1 million barrels in the current reporting week...
the most interesting report from the EIA this week came in their Friday release of "Today in Energy", which as the title suggests is a daily blog-like posting from the Energy Department which covers the whole gamut of energy related topics...the Friday report was titled "Debt service uses a rising share of U.S. onshore oil producers’ operating cash flow" and even without reading the report we could see from the first graph, which we'll include below, just how tight the situation had become for US oil producers...what the bar graph below shows is the annualized debt service of US oil producers as a percentage of their cash flow from operations stated quarterly, from the beginning of 2012 through the 2nd quarter of this year...what that means, stated more plainly, is that each bar represents the average oil producer's debt service to cash flow ratio over the preceding year, such that the bar for the 2nd quarter represents the average ratio over the year starting with the preceding 3rd quarter...so while we can see that for the industry as a whole, debt service has long been above 50% of their operating cash flow, once oil prices started collapsing in the 4th quarter of last year, that percentage quickly climbed to over 70%, and as of the 2nd quarter of 2015 it had reached 83% of cash flow, or as the EIA explains "from July 1, 2014 to June 30, 2015, 83% of these companies' operating cash was being devoted to debt repayments"...thus, that 83% figure includes an extended period of time when oil prices had averaged above $80 a barrel, and almost no time in the current price $44.68 per barrel range, almost a deliberate obfuscation...since this is an industry wide average, it includes the vertically integrated major oil companies with lower debt levels and greater than average cash flow from operations, which probably means that for a high percentage of independent exploitation companies, their debt service has exceeded their cash flow all year and will only get worse, illustrating the ponzi-scheme nature of the fracking business, where new suckers with fresh cash are continually being sought to pay off the original creditors...but it's now getting close to game over for the frackers; when their economically recoverable reserves are reevaluated by the banks in their semi-annual review on October 1st, the driller’s banks lines of credit will almost certainly get cut off...and since their cash flow wont pay the 11% interest now demanded for new energy bonds, we expect many more will be forced into bankruptcy by Thanksgiving, roughly one year after the Saudis declared war on their scheme...
there was another modest reduction in rigs drilling for oil this week, while rigs drilling for gas increased by 2 to 198...Baker Hughes reported that their total rig count fell by 6 rigs to 842 in the week ending September 18th, with oil rigs down by 8 to 644 and down by 957 from last years 1,601, while the 198 gas rigs running this week are down 131 from the 329 gas rigs that were working in the same week last year..a net of 8 horizontal rigs were stacked, leaving 640, and two directional rigs were added, bring those to 83, while the count of vertical rigs remained unchanged at 119, down from 378 a year ago...
while the overall rig count didn't change as much as last week, there were quite a few more changes in where they were working this week...the Mississippian basin of northern Oklahoma and southern Kansas saw the largest rig reduction, as they stacked 5 rigs, leaving 14 now working there, down from 78 rigs a year ago...3 rigs were pulled from the Williston basin of North Dakota, which now has 68, down from 198 a year earlier...2 rigs were pulled from both the Eagle Ford shale of Texas and the Marcellus of Pennsylvania, leaving the former with 88, down from 205 a year ago, and the later with 49, down from last year's 81...on the other side of Texas, 3 additional rigs were set up in the Permian basin, which now has 253 rigs working there, down from 560 a year ago, while one rig was added in the north central Texas Barnett shale, which now has 7 rigs, down from 25 last year at this time...2 rigs were added in Oklahoma's Cana Woodford, which now has 40, up from 38 a year ago, while there was also a rig added in the Arkoma Woodford, which again now has 8, the same count as a year ago..in addition, a single additional rig was set up in the Utica shale, which now has 20 rigs working it, down from 44 a year ago..
statewise, Louisiana and North Dakota both got rid of three rigs, leaving 70 in Louisiana , down from 113 a year ago, and 67 in North Dakota, down from 189 a year ago...Pennsylvania was down by two to 33, and down from 58 last year, while Kansas was down by 1 to 9, and down from 25 a year ago...states adding one rig included Colorado, now with 33, down from 76 last year, New Mexico, now with 49, down from 99, Ohio with 19, down from 42 last year, and Utah with 5, down from 23 a year ago...finally, the Texas rig count was down by 1 to 365, down from 900 a year ago, but with state oil and gas district totals we can see that these aggregate totals obscure a lot of activity....to arrive at that one rig change, Texas drillers pulled 3 rigs out of district 1, added 3 rigs in district 3, pulled 2 rigs out of district 4, added a rig in district 5, added 2 rigs in district 7C, pulled 3 rigs out of district 10, and added one rig on an inland lake...we suspect other state totals would reveal the same level of activity if they were similarly divided...
(more here)
our crude oil inventories, which normally fall during the summer months, rose for the 2nd week in a row this week, but unlike last week, where we saw the glut was driven by increase in imports, this week saw a larger drop in refinery throughput than we've seen anytime this summer....our commercial inventories of crude oil, which are watched closely by oil traders and hence influence oil prices, increased by almost 2.6 million barrels in the week ending September 4th, from 455,428,000 barrels at the end of the last week in August, to 457,998,000 in the current report, following a jump of 4.7 million barrels last week, giving us the largest increase 2 week increase in inventories in 5 months....those increases lifted our crude oil in storage to a level 27.7% higher than the 358,598,000 barrels we had stored the first reporting week in September the last year, and the highest for any September in the 80 years that such records have been kept, which had never seen the 400 million barrel level breached before this year...news of that inventory build sent oil prices tumbling, with the near term contract for US crude oil closing the week at $44.63 a barrel, down from $46.05 a barrel last Friday...
underlying this week's inventory building was a further slowdown in refinery operations....although the Whiting Indiana refinery was restarted last week, it may not have hit full stride for this week's report, which showed that refinery inputs of crude oil averaged 16,110,000 barrels per day during the week ending September 4th, 279,000 barrels per day less than the previous week, and the 5th weekly drop in a row...over that 5 weeks, US refinery throughput of crude has dropped by nearly 6%, while our refinery utilization rate has dropped from 96.1% of capacity to 90.9% of operable capacity in the 1st week of September, the lowest refinery usage rate since April 3rd....while production of both gasoline and distillate fuel oils thus both fell, inventories of both major products rose, as our exports of gasoline fell from 835,000 barrels per day last week to 589,000 barrels per day this week, also the lowest level since April 3rd...
while both output of US wells and our imports of crude fell, neither really fell enough to impact that inventory buildup....our field production of crude oil fell from to 9,218,000 barrels per day in the week ending August 28th to 9,135,000 barrels per day in this week's report, which was almost 4.9% below the modern record production of 9,610,000 barrels per day set in the first week of June this year...nonetheless, that was still 6.3% higher than our 8,590 ,000 barrels per day production during the first week of September last year, when the growing global glut had already precipitated a drop in oil prices...meanwhile, our imports of crude oil fell by 396,000 barrels per day to 7,459,000 barrels per day during the week ending September 4th, but the weekly Petroleum Status Report (62 pp pdf) shows our 4 week average of imports still at 7.6 million barrels per day, which is now 0.5% above the same four-week period last year...
lower oil prices are apparently starting to bite, because frackers were again pulling rigs from the field last week, leading to the second week of double digit decreases in the rig count for the first time since the beginning of May...Baker Hughes reported that the total rig count fell by 16 rigs to 848 in the week ending September 11th, the largest drop since May 1st, with oil rigs down by 10 to 652 and gas rigs down by 6 to 196; that's now down from the 1592 oil rigs and 338 gas rigs that were operating in the US during the 2nd week of September last year...of those rigs shut down this week, a net 11 were horizontal rigs, 4 were directional rigs, and one was vertical, leaving the total count at 648 horizontal, down from 1342 a year ago, 81 directional, down from 217 a year ago, and 119 vertical, down from 372 a year ago...of vertical rigs idled this week, 2 were platforms in the Gulf of Mexico, leaving 29 working in the Gulf, and one each offshore of Alaska and California, for an offshore total of 31, down from 66 a year earlier...
once again, more than half of the rigs stacked this week had been operating in Texas, which saw a net of 9 rigs idled, leaving 366 in the field, down from the 905 rigs that were working Texas fields the same week last year...both the Permian basin in the west and the Eagle Ford in the southeast part of the state saw 3 rigs go, while one was also shut down in the Barnett shale of north central Texas...that left the Permian with 250 rigs, down from 566 a year ago, the Eagle Ford with 90, down from 203 a year ago, and the Barnett with 6, down from 25 a year ago....4 other major basins saw a reduction by one rig this week: the Williston of North Dakota, now with 71 rigs running, down from 194 a year earlier; the Niobrara of Colorado, down to 29 rigs from 62 a year ago, the Mississippian of Kansas, now down to 19 rigs from 77 a year ago, and the Cana Woodford of Oklahoma, which was reduced to 38 rigs this week, still up from 36 a year ago, and the only shale basin to have seen an increase in rigs since last year...other changes not accounted for by the shale basin counts included the loss of 2 offshore rigs from the Louisiana count, where the state now has 73 rigs, down from 115 a year ago, Wyoming, where the rig count was down 1 to 24 and down from 57 in the same week of 2014, Colorado, which was down 2 to 32 and down from 75 a year ago, and Alaska, which saw an additional rig this week and now has 13, up from 10 a year ago, and is the only state with a year over year increase....
Baker Hughes also released the international rig count with the regional averages for August, which showed the global rig count at 2,226, up 59 rigs from 2,167 in July but down 1,416 from the 3,642 rigs that were operating a year earlier, with most of those year over year reductions in North America...the August gain included an increase of 23 rigs in Canada, which was largely due to rig additions in late July, which boosted the August average over that of July...likewise, all other regions saw increases in their active rig averages; the Middle East netted an increase of two rigs for an average of 393 in August, which was down from 406 in August of 2014...changes in the region included Iraq, which was up 4 rigs to 48, Kuwait, which was up 2 rigs to 46, Qatar, which was up 2 rigs to 9, and Saudi Arabia, which was down 3 rigs to 120...Latin American countries added 6 rigs in August and now total 319, down from 410 a year ago; notable changes there include Columbia, up 5 rigs to 30, and Mexico, down 4 rigs to 41...the Asia-Pacific region added 8 rigs in August and at 220 are down 35 from 255 last year; that included an addition of 3 rigs in Indonesia, which now has 25, 3 more rigs in Malaysia, which is now running 9, and a reduction by 3 to 15 in Thailand...Europe saw a net increase of 1 rig to 109, down from 143 a year earlier; August changes in Europe included an addition of two rigs in the Netherlands, which now has 7, and a reduction by 4 rigs to 16 in Norway...lastly, African nations increased their August count by 2 to 96, which was still down from 125 a year earlier; Algeria, adding 2 rigs to 52, was the only nation on the continent to see a rig count change greater than 1…
when we first started tracking US rigs counts weekly in December of last year, it was because those counts were the only obvious, if imperfect, way to estimate if the extent of the environmental damage being done by the oil & gas industry was changing from week to week; ie, there are no weekly spill counts, no weekly air and water pollution measurements, no weekly count of tanker truck runs...one of the rather simplistic assumptions we made early on, as the oil rig count specifically quickly crashed from a high of 1609 in early October to half that by early April, was that we would soon see a corresponding reduction in oil output, knowing that it is the nature of the wells now being drilled for fracking is that there is an initial burst of gas or oil production in the first weeks after a well is fracked, which quickly falls off over the first couple of years, such that output of a typical shale well 2 years after the well is fracked is around 80% lower than it was in the initial months, and gradually tapers off thereafter...however, a number of minor nuances about production that we overlooked have conspired to turn this simplistic rig count to oil output calculus that we once felt was logical on its head...
first and most obviously, the rigs that were pulled out and stacked early on were those drilling in the less productive areas of the respective basins anyway, so their removal had a correspondingly minor impact on the output of the basins from which they were being pulled....then there's the delays to production resulting from the increasingly common practice of drilling multiple wells from a single pad; it's usually not until the drilling is complete on the last of those wells that the rig is taken down that the fracking begins; that meant that a large portion of the record number of wells that had been drilled in early 2014 when prices were high had not yet been fracked when prices began to fall, and a result, many operators delayed the expensive fracking, hoping for higher prices for that initial burst of output, resulting in what came to be called "the fracklog", wherein by early March over 3,000 wells had been drilled but not fracked when oil prices first fell below $50 a barrel, a count which quickly grew to more than 4,700 uncompleted wells by late April...in addition, over the period of lower prices for oil, drillers laid off their slowest rig crews, cut costs, developed enhanced drilling and fracking procedures, such that they're now getting more wells drilled by each rig they're operating; by earlier this year, the average time to complete a well fell from 21 days to 17 days in the Eagle Ford, while drill times in the Bakken dropped from 15 days per well late last year to 13 days per well by the second quarter...more recently we've read of the introduction of walking rigs, which move around on hydraulic legs, greatly reducing the time & expense of dismantling a rig and trucking it to a nearby site...other are developing “supersize” fracking techniques, whereby multiple laterals are extended by thousands of feet more than usual to frack a much larger area from the same well; if lateral lengths can be doubled, output per well can be quadrupled...the August Drilling Productivity Report (pdf) from the EIA has complete details for the current productivity changes in 7 major basins which are being drilled horizontally, including the Marcellus and the Utica, for both oil and gas in each, based on drilling data through July and projected production through September...so there's been quite a decoupling between the number of rigs drilling and the output of oil, something we can best illustrate with a few graphs..
the first graph below, which comes from Zero Hedge, includes the US oil rig count and US crude production over the last 30 years on the same graph; the rig count is in red and is noted by the first column of figures on the right, while our crude oil production in thousands of barrels per day is in dark blue and is shown in the farthest right column on graph...note that because EIA production figures are for the week prior to their release and that rig count figures from Baker Hughes are for the current week, the latest change in the rig count is not shown, so that the end date of both graphs reflect data as of September 4th...also note that although the rig count graph shows zero, the production figures begin at 4 million barrels per day so that the two graphs line up over the years prior to 2005...since then, we can see that the rig count has actually been relatively elevated as compared to production, with the 2009 to 2014 period representing an eight-fold increase in drilling activity which was only accompanied by a doubling of our oil output...clearly, despite all the hype accompanying the shale revolution, the ultimate production per drilling rig was much greater in the prefracking era that it was at the height of the fracking boom...
the second graph from this week that we found relevant comes from a widely distributed article by petrogeologist and oil market analyst Arthur Berman titled The Biggest Red Herring In U.S. Shale...the graph clearly shows oil production per drilling rig in tan, in barrels of oil per day as shown on the left margin, and oil production per well, also in barrels of oil per day, as shown on the right margin...Berman is accurately showing, with a slight degree of deception, that despite that fact that production per rig is going up (his red herring), production per well (and hence profits per well) has been declining...that production per rig would increase while the rig count in dropping should be intuitively obvious; it's a simple fraction wherein the denominator is shrinking...that production per well would shrink is what we already knew about fracking; since production is all in a rush in the early months, and tapers quickly thereafter, the only way to increase production would be to drill increasingly more wells to replace the production from those wells that are being depleted...if you look at that blue line, it appears that production per well is declining rapidly; however, if we look closely at the barrel counts on the right margin, you see they're from 110 to 135 in increments of 5; whereas the production per rig metrics on the left are in increments of 100...what the graph shows is accurate, of course, as long as you're aware of the optical distortion resulting from the different scales..but the bottom line to all this is that the rigs drilling for oil today have nothing to do with the amount of oil being produced during the same time frame, and those that are bragging that production per rig is climbing are telling you nothing more than that the rig count is falling...
(from Focus on Fracking, where there’s more…)
the wild swings in oil prices that we saw last week continued into early this week, fed by rumors and relatively small changes in the weekly metrics, with really no fundamental change to drive the gyrations...after jumping more than 17% on Thursday and Friday of last week due to the unwinding of wrong sided bets that oil prices would fall, US oil prices rose another 8.8% on Monday to close the day at $49.20 a barrel...then on Tuesday, after a rumor that OPEC was "willing to talk" to other oil producers proved to be unfounded, oil prices fell nearly 7.8% to close at $45.41...prices then rose slowly over Wednesday and Thursday to $46.75 a barrel, despite reports of higher oil inventories, before falling back to $46.05 on Friday, a drop attributed to an improving vote count on lifting Iran sanctions and a Chinese loan to Venezuela...
the latest EIA reports did show a larger than usual drop in oil production, which when coupled with a large jump in imports and lower refinery throughput, led to the aforementioned increase in oil inventories...US field production of crude oil fell nearly 1.3%, from 9,337,000 barrels per day in the week ending August 21st to 9,218,000 barrels per day in the week ending August 28th...while that leaves us almost 4.1% below the modern record production of 9,610,000 barrels per day in the first week of June this year, it was still 6.8% higher than our 8,630,000 barrels per day production during the last week of August last year, a level high enough at the time to contribute to the growing global glut that precipitated the drop in oil prices...more than offsetting that production decrease, our imports of crude oil rose by 656,000 barrels per day to 7,855,000 barrels per day in the week ending August 28, enough to bring the 4 week average of imports carried in the weekly Petroleum Status Report (62 pp pdf) up to 7.7 million barrels per day, which is now 0.2% above the same four-week period last year...
although the Whiting Indiana refinery was restarted this past week, it wasn't operating during the last week in August covered by this Wednesday's report, so reported total US refinery usage of crude oil continued to slide, falling for the 4th week in a row, from 16,658,000 barrels per day as of last week's report to 16,389,000 barrels per day in the last week of August covered here...so from four weeks ago, when we reported that our refineries were using oil at a record pace of 17,075,000 barrels a day, US refinery throughput of crude has dropped by over 4%, while our refinery utilization rate has dropped from 96.1% of capacity to 92.8% of operable capacity in the week reported on here...still, that should be temporary, as refinery usage should increase with Whiting back online...Midwest gasoline prices fell 38 cents a gallon on the announcement that they'd again be producing...
with gasoline prices now lower than $2 a gallon in some parts of the country, Americans are replacing their gas-stingy compact cars and hybrids with pickup trucks and SUVs at a record pace...according to this week's report on light vehicle sales for August from Wards Automotive, light vehicles were selling at a 17.72 million annual rate in August, the highest monthly rate of auto sales since July 2005....moreover, August was the fourth consecutive month the seasonally adjusted annual rate of U.S. light-vehicle sales topped the 17 million-unit mark, the first time that’s happened since 2000...breaking out the unadjusted details on August vehicle sales, we find that 725,012 units sold were light domestic trucks, 8.7% higher than the year ago period (which included Labor Day weekend), while 496,097 were US built automobiles, down 6.6% from a year ago...another 174,485 units of August sales were imported cars, down 7.3% from last year, while imported light truck sales rose by 30.3% to 173,613 units...hence, 57.3% of August light vehicle sales were built on a truck frame....the domestic ratios from Ward's are consistent with the Commerce Department's Full Report on Manufacturers' Shipments, Inventories and Orders for July, which indicated that manufacturers shipped light trucks and utility vehicles worth $14,670 million in July, a 9.5% increase, vs just $8,998 million worth of automobiles, 0.2% lower than June...the commerce department data also shows shipments of heavy duty trucks valued at $3,206 million, up 22.1% from a year ago...also note that a much larger proportion of the auto sales are now the larger CUVs, or crossover utility vehicles, which are station wagon type SUVs built on an automobile platform...
with refinery throughput down more than crude oil production and oil imports higher, there was nothing else to do with the surplus glut of crude than to store it for usage later...in the week ending August 28th, our commercial crude oil inventories in storage rose to 455,428,000 barrels, up more than 1% from the 450,761,000 barrels we had stored as of August 21st...that means our crude oil in storage is now 26.7% higher than the 359,570,000 barrels we had stored the last week of August last year, and of course the highest for this time of years in the 80 years that such records have been kept...we should note, though, that these weekly changes in the quantity of oil we have stored, which are widely watched by oil traders and hence move prices almost every week, are really a function of volatile weekly imports...with the largest oil tankers now hauling 2,000,000 or more barrels of oil, that means unloading two extra VLCCs in the same week would almost certainly mean that our imports and hence our inventories would rise for that week...so the oil traders who sit by their screens waiting for the weekly EIA inventory report would really be better informed if they got a ringside seat at the source of that action, at the deepwater Louisiana Offshore Oil Port (LOOP) off the coast of Louisiana in the Gulf of Mexico, where those VLCCs would be unloading....
we're finally starting to see some impact from the lower oil prices on the number of oil rigs the frackers have been operating....for the week ending September 4th, Baker Hughes reported that 13 fewer oil rigs were operating than in the prior week, as rigs drilling for oil fell from 675 to 662 and rigs drilling for gas were unchanged at 202, down from 1584 oil rigs and 340 gas rigs a year ago...3 offshore rigs were added this week, after 8 offshore platforms had been idled in the 3 prior weeks, bringing the offshore count back up to 33, down from 65 a year earlier...a net of 13 horizontal rigs were stacked this week, bringing the fracking rig total down to 672, down from 1333 a year ago....there were also 5 less vertical rigs operating, leaving 120, down from last years 368, while 5 directional rigs were added, bringing that total to 85, down from 224 directional rigs operating during the same week last year...
while last week saw rigs added in Texas while the big cutback was in Louisiana, this week those changes were reversed, as drillers in the South having been moving rigs around like chickens in a barnyard...11 rigs were pulled out of Texas oil fields this week, including 4 that had been operating in the Eagle Ford, 2 that had been fracking the Permian basin, and likely the 2 from the Granite Wash, since Oklahoma added a rig this week...that left Texas with 375 active rigs, down from 907 in the first week of September last year, with rigs in the Eagle Ford at 93, down from 202, rigs in the Granite Wash at 15, down from last year's 68, while 253 rigs were still working in the Permian, down from 563 a year earlier...meanwhile, 4 rigs were added in Louisiana, which now has 75, including 31 offshore, down from 117 last year, and since the Haynesville shale count was down 2 to 29, it's a fair guess those were pulled from the Texas side of the basin...Oklahoma's count, meanwhile was up 1 to 106, which was down from 213 a year ago, as a rig was added in the Arkoma Woodford while one was pulled from the Cana Woodford, which at 39 rigs, up from 37 last year, remains the only shale play to have seen increased activity from a year ago...
the only other shale basins to see changes this week were the Williston, down 1 rig to 72 and down from 192 a year ago, and the Utica, which was also down 1 to 19, and down from 43 a year ago...as a result of those changes, the North Dakota rig count was down 1 to 71 while Ohio rig count was down 1 to 18...the other states that saw changes in their rig counts this week were Alaska, which was down 1 rig to 12, but up from 7 rigs a year ago, Colorado, which was down 2 rigs to 34 and down from 74 a year ago, Kansas, also down 2 rigs to 11, and down from 23 last year, and New Mexico, which was down 2 rigs to 48 and down by half from 96 a year ago...the only other state to see a rig added this week was California, where there are now 14 rigs active, down from 46 the same week a year ago...
we're gonna wrap this up this week with two charts that show the recent history of oil and gas prices and the number of rigs drilling for each as a result of those prices...the first graph immediately below, is from a Yahoo finance article at midweek, so it's missing the Friday data which we have just reviewed, so you can imagine that if you'd like, but we're looking at it for the longer term trends here...on the graph below, the count of active oil rigs since August 2007 is shown in blue and is noted by the numbers on the left margin, while the track of the oil price per barrel is shown in yellow as indicated on the right margin....we can see that before the recession, and before fracking for oil really got serious, the oil rig count had topped 400 in late 2008, less than half of today's count, before the recession and attendant collapse of oil prices from $145 to $30 caused drillers to pull more than half their rigs out of the fields...the number of rigs drilling for oil then increased steadily, from a low of 179 in June of 2009 till they topped 1400 in June of 2012, and stayed in that range until early 2014, when additional oil rigs were added until the peak of 1609 rigs was reached on October 10th...but notice that both times oil prices collapsed, in 2008 and again last year, it took several months before drillers started pulling their rigs in earnest....so since it's only been a little over 2 months into this new downturn in oil prices, we may just be seeing the first signs of an oil rig pullback..
the 2nd graph we have below comes from the Natural Gas Weekly Update from the EIA (Energy Information Administration), a summary which is useful reading by itself...the metrics aren't as clear as i'd like, but there's a lot of information packed into that small graph, which like the one above, shows the number of rigs drilling for natural gas and the benchmark price for that gas for each week going back to the beginning of 2007, with the gas rig count again shown on the left margin and the oil prices shown on the right...there are 3 colored bands across the graph, representing the number of each type of rig drilling for gas in any given week...the width of the green band represents the number of conventional vertical rigs drilling for gas weekly; the width of the brown band indicates the number of horizontal rigs drilling thru shale for fracking, while the blue band represents the number of directional rigs drilling diagonally into a gas field...as a result of the way they're stacked on the graph, then, the top of the green colored band is in effect the total rig count for each week, while the price of natural gas over that span is shown by the track of the heavy black graph's path...
so here we see that the big bust of the natural gas market occurred with the onset of the recession, when gas prices dropped from near $13.50 per mmBTU in the spring of 2008 to $3.00 per MMBTU by the summer of 2009...but note once again that the total gas rig count continued to rise through much of 2008, reaching a peak with 1,606 rigs drilling for natural gas in the last week of August 2008, only to see that count follow the price down to hit 665 gas rigs by July 17, 2009, when the rig count start rising again...then gas drillers, mostly frackers in the Marcellus and the Haynesville, continued to overproduce even in the face of falling prices until natural gas prices collapsed to near $2 per mmBTU in early 2012....gas rigs then began a slow decline that we could say lasts until this day...so it's taken years for natural gas drillers to wash out; oil drillers could just be in the first innings of their losing game....and although it's not entirely clear on this graph, natural gas prices have recently broken out of their 3 month trading range, between $2.75 and $2.95 per mmBTU, that had persisted since June, and for the last two weeks have seen the benchmark gas price stay in a $2.65 to $2.70 per mmBTU range...if that persists, we'd expect to see more attrition in the gas patch as well...
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