Oil or Water?

Jim Brown
 
Printer Friendly Version

How far can you go on a bottle of water? If you do not have any water, your travel distance on foot is pretty limited. On a gallon of water, the average individual should be able to walk 25 miles in one day or about the same distance as you can travel on a gallon of gas in 30 minutes today in a modern car.

A gallon of bottled water costs about $1.20 assuming you are not buying Evian or some pricey brand at 7/11. That means a "barrel" of water would cost about $50. There are 42 gallons in a comparable barrel of oil. With light crude at $32.88 today, that barrel of water is far more expensive and the spread between the two liquids is only going to widen. The operational value of a barrel of oil is far greater than a barrel of water but we are not seeing that in current prices.

WTI closed at $32.88 on Friday and a -10% decline for the week. Analysts believe the dispute between Iran and Saudi Arabia could force both to produce even more oil. Saudi will produce it to force prices lower to hurt Iran and Iran will produce more in order to make up for the lower prices. Also, there were rumblings out of Washington last week that the sanctions on Iran could be lifted by the end of January. That means an almost immediate 500,000 bpd of additional oil on the market plus the 30 million barrels Iran has stored on tankers in the Persian Gulf. This will immediately push prices lower.

Most people see the price of WTI at $32.88 and think, wow that is low. Unfortunately, for some producers they only wish they could get that price. In the Bakken shale, the ultra light oil is discounted even further because there is limited pipeline capacity and transportation out of the Bakken is expensive. Last week there was an $8 discount to WTI for Bakken crude. As of Friday that would mean Bakken producers would get roughly $25 a barrel.

This is even worse for Canadian producers. Western Canadian Select traded under $20 last week. This crude is now being priced at a $14 discount to WTI because there is nowhere to store it. All the storage tanks in the Midwest are nearing capacity and there is limited pipeline capacity to take it south to the Gulf of Mexico. This is what the Keystone XL pipeline was supposed to solve. The Keystone would take oil from the Bakken and Canada and send it south to Cushing and the Gulf refineries.

If you really want to see how badly the low oil prices are impacting E&P companies you only need to look at the rig counts. For the week ended on Friday the rig count declined by -34 rigs to 664. Twenty of those rigs were oil rigs and 14 were natural gas. Active rigs have now declined -1,267 from the peak last year or almost two-thirds.

Despite the drop in active rigs, U.S. production rose again to a three-month high at 9.219 million barrels per day. Producers are squeezing out every last drop because they know prices are about to collapse even further. This is going to eventually decrease production significantly, probably by July, as the number of new wells shrinks significantly.

Analysts keep talking about a 2 handle on WTI, meaning anything under $30. Over the last week, people started talking about oil in the teens because of the lack of storage. Cushing Oklahoma, the delivery point for crude futures saw inventories rise to 63.9 million barrels and a record high. Cushing has a working capacity of about 73 million but they need to keep some of that available for mixing and blending the various crude grades they get to the required density for sending through the pipelines to the Gulf refiners. If you are good at math you see the problem. They are nearing their operational capacity threshold and soon nobody can deliver crude to Cushing unless an equal amount is shipped out.

I cannot visualize oil in the teens, although it was in single digits in 1998 because of an internal OPEC war similar to this one that created a glut. I can see it in the high $20s over the next few weeks. Inventories normally peak at the end of April so the next three months are going to be tense for oil producers.

The EIA says the U.S. has working capacity to store about 550 million barrels of oil at refineries, in pipelines and at storage facilities. Over the next three weeks, we could see inventories hit a record 500 million barrels. The prior high in 2014 was 490.9 million. Storage capacity over the entire U.S. may have available capacity but since most of the oil is produced in the Midwest and Texas it is the tanks near the production areas that count the most. Tanks in the Midwest are at crisis capacity and having available space in Louisiana does Midwest producers no good.

Inventory levels normally peak in April and begin to decline in May. That means the next three months are going to see some real volatility in oil prices as operational storage capacity is tested.

Energy investors have a buying opportunity ahead! Meanwhile drivers are enjoying average pump prices under $2 for regular gasoline. Those prices are likely to go even lower as crude prices collapse over the next couple months.


The weekly OilSlick Newsletter is a publication of OptionInvestor.com. Please visit OilSlick.com to sign up for the free email newsletter that comes out weekly.

This is a publication of the Option Investor Newsletter. Learn how to profit with options on stocks and indexes. If you would like daily market commentary and option recommendations you can sign up for a free trial and have the daily plays and commentary delivered to your inbox. No credit card or phone number necessary.

Free Trial Now

  Active Rigs

Active drilling rigs declined -34 to 664 for the week ended on Friday 1/8 and that is a 10 year low. Oil rigs fell -20 for the week to 516. Active gas rigs declined -14 to 148. Active rigs have now declined -1,267 since the high of 1,931 in September 2014. Active offshore rigs rose +2 to 27.


Oil Inventories Week Ended 12/31/15

Crude inventories fell -5.1 million barrels to 482.3 million as refiners held off accepting new oil until after the property tax deadline on Dec 31st.

Refinery utilization declined slightly from 92.6% to 92.5%. That is up from the low of 86.0% on October 9th.

U.S. production rose +17,000 from 9.202 to 9.219 mbpd.

Cushing inventories rose from 63.0 million to 63.9 million and a record high.

Gasoline inventories rose +10.6 million barrels to 232.0 million as refiners converted as much oil as possible into refined products ahead of the tax deadline.

Distillate inventories rose +6.3 million barrels to 159.4 million.

Details in the graphic are for the prior week. All numbers are not available until the Friday of the following week.

In the graphic below green represents a recent high and yellow a recent low. The blue-green represents a record high.


The weekly OilSlick Newsletter is a publication of OptionInvestor.com. Please visit OilSlick.com to sign up for the free email newsletter that comes out weekly.

This is a publication of the Option Investor Newsletter. Learn how to profit with options on stocks and indexes. If you would like daily market commentary and option recommendations you can sign up for a free trial and have the daily plays and commentary delivered to your inbox. No credit card or phone number necessary.

Free Trial Now

Archives:200920102011201220132014201520162017