oil prices finished lower for the eighth week out of the last nine this past week, but the real oil price story this week was what happened on Monday, when oil prices went to zero and then turned significantly negative, closing down $55.90 at -$37.63 a barrel, the largest price drop in history and the lowest closing price in history, both by a long shot...to set the stage, the last time we talked about oil prices, the contract price of US light sweet crude for May delivery had fallen 19.7% to end the week before Easter at $22.76 per barrel, despite a just completed agreement between OPEC & Russia to cut their oil production by a record amount....then last week, the price of that same May oil contract fell every day to end down an additional 19.7% at an 18 year low of $18.27 a barrel, as fears that the building global oil glut would lead to full storage space with no place to put new oil, which was a prelude to what happened this week..
now, to comprehend what happened Monday, one needs to first understand what we mean when we talk about "the price of oil"...when you see an oil price quote in the business press, that price is referring to the price per barrel of a contract to have 1000 barrels of a light sweet crude oil called West Texas Intermediate (WTI) delivered to Cushing Oklahoma in the "front" month, with the price determined in electronic trading at the New York Mercantile Exchange, or NYMEX...while trading at NYMEX includes monthly contracts at least as far as 20 years into the future, the "front month" is the nearest month to the present for which oil contracts are still trading, or in the case of Monday's "oil price", it was WTI oil for delivery in May...now, for the most part, what’s traded at NYMEX is hypothetical oil; as we've pointed out previously, the amount of oil referenced by trading at NYMEX in any given day is often 100 times the amount of oil that actually exists in the country at the same time, and the number of oil contracts outstanding is usually far more than could ever be physically delivered...however, most of those who are buying and selling oil at NYMEX have no intention of receiving oil nor any intention of delivering oil; they are just speculating on the direction that the price of oil will take, and planning to reverse their position with a profit (or loss) at some time in the future...the problem is that these are still real contracts for real oil, for which trading expires on the 3rd business day prior to the 25th calendar day of the month prior to the contract month, at which time 1000 barrels of oil per contract must be either delivered or accepted at Cushing, Oklahoma, depending on whether one is a seller or a buyer..
what precipitated the price drop in the May contract on Monday was that as the expiration of trading in May oil approached on Tuesday, there was no uncommitted storage space left at the Cushing oil depot, the designated place where such WTI oil contracts are settled...that meant that even if there were potential buyers of oil as its price was falling, there was no place to put the oil when they were expected to take delivery in May...so as those who had bought oil contracts as a speculation with no intention to actually take possession of oil came to the market to close out their positions before the contract expired on Tuesday, there were few potential buyers of that contract who could take possession of the oil those contracts represented....hence, as those who didn't want oil delivered attempted to sell, the price of that benchmark oil contract fell rapidly throughout the day, falling to $4 a barrel by noon, and then turning negative by one o'clock, at which time buying completely evaporated as the price plummeted to minus $40.32 a barrel... while some buyers came back in later in the day and pushed prices back up to around -$16, prices faded again towards the close and finished the session at minus $37.63 a barrel...
so just what does a negative oil price of $37.63 a barrel actually mean? with the main US oil storage depot full, it implies that oil producers with new oil coming out of ground would have to pay someone $37.63 a barrel to haul away and dispose of any excess crude that they had not yet already contracted to deliver to a customer in May....with -$37.63 a barrel as a contract price, it means the seller of an oil contract not only has to supply the buyer 1000 barrels of oil, he also has to pay the buyer $37,630 for taking it....it also means that a hypothetical oil trader who thought he was getting a real bargain by buying 1000 barrels of oil at $1 a barrel in the noon hour probably got a call from their broker later Monday afternoon telling them that they had to put up another $37,630 just to get out of that contract...
however, the real losers Monday were not the oil companies or the professional traders, but those who bought into an ETF (exchange traded fund) or other financial product that purports to track the price of oil...those funds buy the current front month contract, or in this case May, and hold it for a month or less, and then sell that contract as it approaches expiration to then buy into the next month's contract, in this case June...many of those funds were stuck holding May oil when it turned negative, had to take a loss to get out of that contract, then had to buy into June oil at a positive price...in the case of the United States Oil Fund, the largest ETF, their losses were so great they had to execute a one-for-eight reverse share split to ensure their shares would trade high enough to meet the requirements for continued exchange listings; in the case of some Chinese investors in similar financial products based on US oil, they were left owing money to their banks when the price of US crude fell below $0...
however, those negative oil prices only lasted one day, which probably limited the damage, as the May oil contract opened at minus $14 on Tuesday and later turned positive, rising as high as $13.86 before expiring at $10.01 a barrel, $47.64 higher on the day, ironically the largest oil price jump in history....oil prices for the rest of the week were just a denouement...the contract price of the US benchmark crude for June delivery, which had fallen $4.60 to $20.43 a barrel on Monday and then dropped another $8.86 to $11.57 a barrel on Tuesday, rebounded $2.21 to $13.78 a barrel on Wednesday after Trump tweeted that he'd “instructed the United States Navy to shoot down and destroy any and all Iranian gunboats if they harass our ships at sea.” and then rose another $2.72 to $16.50 a barrel on Thursday after the commander of Iran's Islamic Revolutionary Guards responded that he had ordered his forces in the Gulf to destroy any vessel or combat unit that threatened the safety of Iranian ships, an exchange of threats which might have been more about boosting the price of oil rather than any real belligerence...June oil then added another 44 cents finish the week at $16.94 a barrel on Friday, still down more than 32% from the previous Friday's close, despite a nearly 50% price rise over the the prior three days...
The Latest US Oil Supply and Disposition Data from the EIA
US oil data from the US Energy Information Administration for the week ending April 17th indicated that a big decrease in our oil exports and another pullback in our oil refining were major contributors to another big surplus of oil being added to our stored commercial supplies, the twenty-fourth addition of oil to storage in the past thirty-two weeks....our imports of crude oil fell by an average of 743,000 barrels per day to an average of 4,937,000 barrels per day, after falling by an average of 194,000 barrels per day during the prior week, while our exports of crude oil fell by an average of 546,000 barrels per day to 2,890,000 barrels per day during the week, which meant that our effective trade in oil worked out to a net import average of 2,047,000 barrels of per day during the week ending April 17th, 197,000 fewer barrels per day than the net of our imports minus our exports during the prior week...over the same period, the production of crude oil from US wells fell by 100,000 barrels per day to 12,200,000 barrels per day, and hence our daily supply of oil from the net of our trade in oil and from well production totaled an average of 14,247,000 barrels per day during this reporting week..
meanwhile, US oil refineries reported they were processing 12,456,000 barrels of crude per day during the week ending Aprilp;[ 17th, 209,000 fewer barrels per day than the amount of oil they used during the prior week, while over the same period the EIA's surveys indicated that 2,146,000 barrels of oil per day were being added to the supplies of oil stored in the US....so looking at that data, this week's crude oil figures from the EIA appear to indicate that our total working supply of oil from net imports and from oilfield production was 354,000 barrels per day less than what what was added to storage plus what our oil refineries reported they used during the week....to account for that disparity between the apparent supply of oil and the apparent disposition of it, the EIA just plugged a (+354,000) barrel per day figure onto line 13 of the weekly U.S. Petroleum Balance Sheet to make the reported data for the daily supply of oil and the consumption of it balance out, essentially a fudge factor that they label in their footnotes as "unaccounted for crude oil", thus suggesting an error or errors of that magnitude in the oil supply & demand figures we have just transcribed....however, since the media treats these figures as gospel and since they drive oil pricing and hence decisions to drill for oil, we'll continue to report them, just as they're watched & believed as accurate by most everyone in the industry...(for more on how this weekly oil data is gathered, and the possible reasons for that "unaccounted for" oil, see this EIA explainer)....
further details from the weekly Petroleum Status Report (pdf) indicate that the 4 week average of our oil imports fell to an average of 5,635,000 barrels per day last week, now 15.0% less than the 6,626,000 barrel per day average that we were importing over the same four-week period last year....the 2,146,000 barrel per day addition to our total crude inventories was all added to our commercially available stocks of crude oil, while the quantity of oil stored in our Strategic Petroleum Reserve remained unchanged....this week's crude oil production was reported to be down by 100,000 barrels per day to 12,200,000 barrels per day because the rounded estimate of the output from wells in the lower 48 states was down by 100,000 barrels per day to 11,700,000 barrels per day, while a 10,000 barrel per day decrease in Alaska's oil production to 467,000 barrels per day did not impact the rounded national total....last year's US crude oil production for the week ending April 19th was rounded to 12,200,000 barrels per day, so this reporting week's rounded oil production figure was still roughly the same as that of a year ago, and 44.8% more than the interim low of 8,428,000 barrels per day that US oil production fell to during the last week of June of 2016...
meanwhile, US oil refineries were operating at 67.6% of their capacity in using 12,456,000 barrels of crude per day during the week ending April 17th, down from 69.1% of capacity during the prior week, and the lowest capacity utilization rate since September 2008, when the aftermath of Hurricane Ike shut down Texas Gulf Coast refining....hence, the 12,456,000 barrels per day of oil that were refined this week were the fewest barrels refined in any week since September 26th 2008, and 24.9% fewer barrels than the 16,583,000 barrels of crude that were being processed daily during the week ending April 19th, 2019, when US refineries were operating at 90.1% of capacity....
even with the decrease in the amount of oil being refined, gasoline output from our refineries was somewhat higher, increasing by 290,000 barrels per day to 6,205,000 barrels per day during the week ending April 10th, after our refineries' gasoline output had increased by 97,000 barrels per day over the prior week....but since the increases of the past two weeks followed two near record drops in gasoline output, our gasoline production this week was still 36.6% lower than the 9,781,000 barrels of gasoline that were being produced daily over the same week of last year....in addition, our refineries' production of distillate fuels (diesel fuel and heat oil) increased by 80,000 barrels per day to 5,007,000 barrels per day, after our distillates output had decreased by 55,000 barrels per day over the prior week...but even after this week's increase in distillates output, our distillates' production for the week was still 1.1% less than the 5,064,000 barrels of distillates per day that were being produced during the week ending April 19th, 2019....
with the increase in our gasoline production, our supply of gasoline in storage at the end of the week rose for the 4th week in a row, following 8 weeks of decreases, rising by 1,017,000 barrels to a record 263,234,000 barrels during the week ending April 17th, after our gasoline supplies had increased by 4,914,000 barrels over the prior week...our gasoline supplies increased by less this week because the amount of gasoline supplied to US markets increased by 230,000 barrels per day to 5,331,000 barrels per day, while our exports of gasoline rose by 29,000 barrels per day to 784,000 barrels per day and our imports of gasoline fell by 34,000 barrels per day to 368,000 barrels per day....after this week's inventory increase, our gasoline supplies were 16.6% higher than last April 19th's gasoline inventories of 225,826,000 barrels, and roughly 12% above the five year average of our gasoline supplies for this time of the year...
with the increase in our distillates production, our supplies of distillate fuels increased for the third time in 14 weeks and for the 8th time in 29 weeks, rising by 7,876,000 barrels to 136,880,000 barrels during the week ending April 17th, after our distillates supplies had increased by 6,280,000 barrels over the prior week....our distillates supplies rose by more this week because our exports of distillates fell by 725,000 barrels per day to 860,000 barrels per day and while our imports of distillates fell by 207,000 barrels per day to 106,000 barrels per day, and while the amount of distillates supplied to US markets, an indicator of our domestic demand, rose by 371,000 barrels per day to 3,128,000 barrels per day....after this week's big inventory increase, our distillate supplies at the end of the week were 7.8% above the 127,029,000 barrels of distillates that we had stored on April 19th, 2019, but still about 1% below the five year average of distillates stocks for this time of the year...
finally, with lower oil exports and depressed oil refining, our commercial supplies of crude oil in storage rose for the twenty-fifth time in forty-two weeks and for the thirty-third time in the past 52 weeks, increasing by 15,022,000 barrels, from 518,640,000 barrels on April 17th to 503,618,000 barrels on April 10th, the 3rd largest increase on record, beaten only by the increases of the prior two weeks....but even after 13 straight increases and three straight record level increases, our crude oil inventories were just 9% above the five-year average of crude oil supplies for this time of year, but more than 48.8% higher than the prior 5 year (2010 - 2014) average of crude oil stocks as of the third Friday in April, with the disparity between those comparisons arising because it wasn't until early 2015 that our oil inventories first rose above 400 million barrels, and continued rising from there....since our crude oil inventories have generally been rising over the past year and a half, except for during this past summer, after generally falling until then through most of the prior year and a half, our crude oil supplies as of April 17th were 12.6% above the 460,633,000 barrels of oil we had in commercial storage on April 19th of 2019, and 20.7% above the 429,737,000 barrels of oil that we had in storage on April 20th of 2018, while at the same time remaining 1.9% below the 528,702,000 barrels of oil we had in commercial storage on April 21st of 2017...
This Week's (and Last Week's) Rig Count
the US rig count fell by 10% or more for the 3rd week in a row during the week ending April 24th, and is now down 57.1% from its interim high at end of 2018....Baker Hughes reported that the total count of rotary rigs running in the US decreased by 64 rigs to 465 rigs this past week, which was the least rigs deployed since August 8, 2016, and hence is a 44 month low for the US rig count...that total was also down by 420 rigs from the 1022 rigs that were in use as of the April 12th report of 2019, and 1,464 fewer rigs than the shale era high of 1,929 drilling rigs that were deployed on November 21st of 2014, the week before OPEC began to flood the global oil market in an attempt to put US shale out of business....during the previous week ending April 17th, which we did not cover, the US rig count fell by 73 rigs, from 602 rigs to 529 rigs, the largest percentage rig drop on record....
the number of rigs drilling for oil decreased by 60 rigs to 378 oil rigs this week, after falling by 66 rigs the prior week, leaving oil rig activity at its lowest in 44 months, 427 fewer oil rigs than were running a year ago, and less than a quarter of the recent high of 1609 rigs that were drilling for oil on October 10th, 2014....at the same time, the number of drilling rigs targeting natural gas bearing formations decreased by 4 to 85 natural gas rigs, after falling by 7 rigs the prior week, leaving the fewest natural gas rigs active since August 26th of 2016, and hence also a new 44 month low for natural gas drilling, down by 101 natural gas rigs from the 186 natural gas rigs that were drilling a year ago, and way down from the modern era high of 1,606 rigs targeting natural gas that were deployed on September 7th, 2008...in addition to those rigs drilling for oil & gas, two rigs classified as 'miscellaneous' continued to drill this week; one on the big island of Hawaii, and one in Lake County, California... a year ago, there were no such "miscellaneous" rigs deployed..
the Gulf of Mexico rig count was unchanged at 17 rigs this week, with 16 of those rigs drilling for oil in Louisiana's offshore waters and one drilling for oil offshore from Texas...that's four less than the rig count in the Gulf a year ago, when 18 rigs were drilling offshore from Louisiana and three rigs were operating in Texas waters...there are no rigs operating offshore elsewhere at this time, nor were there a year ago, so the Gulf rig count is equivalent to the national rig count, just as it has been since the onset of winter...
the count of active horizontal drilling rigs decreased by 57 rigs to 426 horizontal rigs this week, which was the fewest horizontal rigs active since October 7th, 2016, and hence is a 42 month low for horizontal drilling...it was also 447 fewer horizontal rigs than the 873 horizontal rigs that were in use in the US on April 26th of last year, and less than a third of the record of 1372 horizontal rigs that were deployed on November 21st of 2014...at the same time, the directional rig count was down by five to 23 directional rigs this week, and those were also down by 48 from the 71 directional rigs that were operating during the same week of last year....in addition, the vertical rig count was down by 2 to 16 vertical rigs this week, and those were down by 31 from the 47 vertical rigs that were in use on April 16th of 2019...
since we missed last week's report, we'll include herein screenshots from both week's rig count summaries pdf from Baker Hughes that give us the details on the weekly changes in drilling activity by state and by major shale basin...
the tables above are for the week ending April 17th, while the tables below are for the week ending 24th, with each set of tables showing first the weekly and year over year rig count changes for the major oil & gas producing states, and then the weekly and year over year rig count changes for the major US geological oil and gas basins...in each of those tables, the first column shows the active rig count as of the given reporting week, the second column shows the change in the number of working rigs between the prior week's count and the current week's count, the third column shows the prior week's active rig count, the 4th column shows the change between the number of rigs running at the end of the reporting week and the number running before the same weekend of 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 for the tables above was the 19th of April, 2019 and for the tables below was the rig count as of April 26th, 2019..
as you can see from the tables from both weeks, the shutdown of drilling activity has been widespread across the major producing states and basins, with no major basin unscathed...the majority of the oil targeting rigs have been pulled out of the Permian basin of western Texas and New Mexico, the Williston shale of North Dakota, and the Eagle Ford shale of southeastern Texas, while the natural gas rig reductions have come from the Haynesville of northwestern Louisiana and adjacent Texas and the Marcellus in West Virginia...with both oil and natural gas prices well below the price needed to even break even, we can expect the rig count to continue falling in the weeks ahead, possibly to record low levels before stabilizing ....
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note: there’s more here…