Brexit Bounce - The Energy Report 06/30/16

While global stock markets rebounded on the post Brexit vote under the assumption that this will be a long drawn out process, it is clear no one has a clue how this Brexit thing is going to unfold. No one has a plan, not even the leave camp. What is clear is that it will be a long drawn out political game of charades and the markets think that this will have very little bearing on the short term world. At the same time, it will make it hard to be too comfortable in a position due to significant headline risk. So with central bankers across the globe adding or ready to add more stimulus or even, heaven forbid, lower interest rates or negative rates even more, perhaps we should take a look at fundamentals. Fundamentals that will be clouded by whatever the heck comes next. 

Oil prices rose, inspired in part by the stock market rebound but also because the Energy Information Administration (EIA) reported that U.S. crude supply fell for the 6th week in a row along with U.S. production falling once again. The EIA reported a much larger than expected 4.053-million-barrel drop in crude supply that was probably catch up from last week when they seemed to report more supply than was reported by the American Petroleum Institute. In the all-important Cushing, Oklahoma delivery point, we saw a drop of 951,000 barrels that was less than what private estimates were calling for. Though we saw a significant 2.68-million-barrel drop in Mid-west crude supply that will continue through September as the continuing impact from the Canadian wildfires will be felt. On top of that U.S. oil production fell to 8.622 million barrels a day down 951,000 barrels a day from year ago levels.

In the meantime, U.S. refiners out did themselves ramping production up to 93 percent of capacity, a new high this year, to meet record gasoline demand. Refiner efforts allowed gasoline supply to rise by 1.4 million barrels even as demand hit another record of 9.7 million barrels a day. Refiners will be moving a lot of gas on the rack as we should see the Fourth of July holiday gas demand record shattered. Can we hit a consumption rate of over 10 million barrels of gas a day? Come on motorists! We can do it!

The focus on gasoline led to a 1.8-million-barrel drop in distillates supply as week over week demand was up slightly but down 2.9% on the four week moving average. Perhaps due in part to farmer plantings that are for the most part ahead of schedule. Ethanol and grain watchers will take note of today’s USDA report. This report could be a big mover that may even influence movement in some other markets.

For crude oil long term we are still very bullish but there is no doubt that oil above $50.00 has been a tough sell. The bearish argument is that even with improving supply and demand fundamentals, we still have 543.3 million barrels of oil in storage, the highest in 86 years. But we may need that supply as global production has most likely peaked. Unless the fallout from the Brexit hurt demand growth forecasts, we should see a global supply versus demand deficit by the end of this year that will more than likely grow as major oil projects continue to get canceled. Projects that won’t get replaced by shale alone. Big oil is canceling projects and little oil has no cash or credit.

The small producer has been the hero of the U.S. energy revolution. The EIA reports, “Stripper wells, or wells that produce small volumes, represent an important but decreasing share of total U.S. oil and natural gas production. These wells are characterized as producing no more than 15 barrels of oil equivalent per day (boe/d) over a 12-month period. EIA estimates that there were about 380,000 stripper oil wells (so called because they are stripping the remaining oil out of the ground) in the United States operating at the end of 2015, compared to about 90,000 nonstripper oil wells. Wells become stripper wells through the normal decline of producing wells, some of which may have at one time been very prolific. These wells usually have low ongoing maintenance costs and relatively low transportation costs to move their products to distribution systems. As long as these wells are economically feasible, they are kept active and may continue to produce for many years.

The well counts in this analysis include oil wells that may also produce some natural gas. Wells producing less than 6,000 cubic feet of natural gas per barrel of oil are considered oil wells, while wells producing 6,000 cubic feet or more of natural gas per barrel of oil are considered gas wells. Stripper gas wells produce no more than 90,000 cubic feet per day of natural gas over 12 months.

Despite each stripper well's small individual production, their large number ensures a significant contribution to total oil production. The production share of oil stripper wells has fallen from a high of 19% in 2008 to an estimated 10% in 2015. This decrease in share reflects the large increase of production volume from very prolific wells drilled in shale and tight oil formations with enhanced completion techniques. These wells, as well as non-shale onshore and offshore wells in Alaska, the Gulf of Mexico, and other areas, produce at a much higher rate than stripper wells, and thus account for a much larger percentage of total U.S. oil production.

Natural gas continues to look strong as record natural gas burn rates raise questions of just what constitutes an abundance of supply. Nat gas prices up a whopping 30% this month could go even higher. Today we get the EIA injection that we predict will come in at 44bcf. Way below the five year average and will once again cut in the supply cushion. Get ready for fireworks.



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