U.S. Crude Oil Production Frustrates OPEC Plans
- Bulls look toward $70 objective
- U.S. production continues to climb
- Permian Basin itself could reach 5.5 million barrels daily by 2020
- Growth in Permian natural gas output is entirely associated with crude oil production
Sincerely, Alan Levine, Chairman of Powerhouse
Projections by some in the banking community regarding crude oil prices would have the Brent market at $65 or even $70 in 2017. Analysts expect these prices to trade between $50 and $70 through 2022. These forecasts rely on bullish elements in the oil picture. They include:
- Belief that the OPEC-non-OPEC production cut agreement could be extended
- Belief that the current “rebalancing” is actually working, but supporting data are lagging
- Belief that compliance is near 100%
- Belief that expanding production in the Gulf of Mexico and new oil rigs could stagnate, contributing to emerging tightness in supply
Bullish price expectations are based on arguably rational decision-making among producers. The current agreement has been operative for only three months. Any success it may have achieved has yet to stand the test of time. Crude oil’s challenge to top $53 for Brent (and $50 for WTI) has run into the reality of expanding U.S. production and demand that has been lackluster at best.
Even more challenging to the case for sustained higher crude oil prices are developments in domestic crude oil supply. Current production continues to recover, reaching 9.147 million barrels daily for the week ending March 24, 2017.
Expectations for supply from the Permian Basin could, according to some analysts, ultimately exceed both Iraq and Iran. Iraq produces 4.5 million barrels daily and Iran brings 3.9 million barrels per day to market.
Focus is on the Permian because oil from the Basin is believed to be the least expensive to produce among American shale plays. Growth in the region reportedly represents about two-thirds of domestic production gains through 2020, with about 400,000 daily barrels of growth in 2017 and 500,000 – 600,000 barrels per day until 2020. Permian production could reach 5.5 million barrels daily by 2020.
Supply/demand data in the United States for the week ending March 24, 2017, were released by the Energy Information Administration (EIA).
Total commercial stocks of petroleum decreased 3.9 million barrels during the week ending March 24, 2017.
Draws were reported in stocks of gasoline, distillates and propane. There were builds in stocks of fuel ethanol, K-jet fuel, residual fuel oil and other oils.
Commercial crude oil supplies in the United States increased to 534.0 million barrels, a build of 0.9 million barrels.
Crude oil supplies increased in three of the five PAD Districts. PAD District 3 (Gulf Coast) crude oil stocks grew 2.0 million barrels, PADD 4 (Rocky Mountains) stocks expanded 0.1 million barrels and PADD 5 (West Coast) stocks increased 1.4 million barrels. PAD District 1 (East Coast) crude oil stocks decreased 1.9 million barrels and PADD 2 (Midwest) stocks fell 0.9 million barrels.
Cushing, Oklahoma, inventories decreased 0.3 million barrels from the previous report week to 67.7 million barrels.
Domestic crude oil production increased 18,000 barrels daily to 9.147 million barrels per day.
Crude oil imports averaged 8.224 million barrels per day, a daily decrease of 83,000 barrels. Exports grew 460,000 barrels daily to 1.010 million barrels per day.
Refineries used 89.3% of capacity, an increase of 1.9 percentage points from the previous report week.
Crude oil inputs to refineries increased 425,000 barrels daily. There were 16.226 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, grew 337,000 barrels daily to 16.520 million barrels daily.
Total petroleum product inventories saw a decrease of 4.0 million barrels from the previous report week.
Gasoline stocks decreased 3.7 million barrels; total stocks are 239.7 million barrels.
Demand for gasoline grew 324,000 barrels per day to 9.524 million barrels daily.
Total product demand increased 619,000 barrels daily to 19.874 million barrels per day.
Distillate fuel oil supply fell 2.5 million barrels to 152.9 million barrels. National distillate demand was reported at 4.222 million barrels per day during the report week. This was a weekly increase of 210,000 barrels daily.
Propane stocks fell 1.5 million barrels to 42.8 million barrels. Current demand is estimated at 1.169 million barrels per day, an increase of 59,000 barrels daily from the previous report week.
According to the EIA:
Despite warming temperatures during the storage week in most of the Lower 48 states, net withdrawals exceeded the five-year average on the week. Net withdrawals from storage totaled 43 Bcf, compared with the five-year (2012 – 2016) average net withdrawal of 27 Bcf and last year’s net withdrawals of 19 Bcf during the same week. Withdrawals from working gas totaled 150 Bcf during the previous storage week, as most of the Lower 48 states were significantly colder than normal. Working gas stocks totaled 2,049 Bcf, which is 250 Bcf more than the five-year average and 423 Bcf less than last year at this time.
If working gas stock changes follow the five-year average for the remainder of the heating season, they will total 2,036 Bcf on March 31. Working gas levels topped this threshold at the end of the heating season only two other times, in 2012 and 2016, when working gas totaled 2,473 Bcf and 2,470 Bcf, respectively…So far in 2017, net withdrawals are 19% lower than the five-year average.
An interesting fallout from the expansion of Permian Basin crude oil fracking has been the impact on natural gas production. The EIA has reported that Permian natural gas output has risen 1 Bcf per day since May 2016. At the same time, the regional gas rig count has fallen to zero. The gain is attributable to gas output associated with crude oil production. Crude oil rigs have more than doubled in this period.
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