Saudi Kills the Limit

Jim Brown
 
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After a couple of days of higher oil prices the Saudi foreign minister killed the bullish sentiment before it could spread.

Saudi Arabia's foreign minister Adel al-Jubier said "If other producers want to limit or agree to a freeze in terms of additional production that may have an impact on the market but Saudi Arabia is not prepared to cut production" Also, "The oil issue will be determined by supply and demand and by market forces. The kingdom of Saudi Arabia will protect its market share and we have said so." In a couple of sentences, he unraveled all the positive headlines created by Russia, Venezuela, Qatar and Iran over the past week. Prices spiked to $32 on Thursday morning and then collapsed back to near $30 as the day progressed.

I have written before that all the agreements between other OPEC producers and non OPEC countries like Russia were worthless unless Saudi Arabia also agreed. In his comments he clearly warned that Saudi was not going to give up market share and would do what it could to increase it and increase the pain on Iran and Russia. While he did not mention those countries in his statement that was the implied content.

Even if everyone agreed to limit production to the January levels at 32.6 mbpd that is still a 2.0 mbpd surplus and will continue to weigh on prices. Limiting production is not the answer and everyone is so starved for cash flow nobody is going to be the first country to cut production because somebody else will pick up the slack.

In theory, inventories should continue building until the end of April. However, that theory may have sprung a leak last week when levels actually fell by -800,000 barrels. Since storage is at record levels there may be a problem of nowhere to put the extra oil. Inventory levels did rise this week by 2.1 million barrels but compared to last year at this time that was a drop in the bucket. It will be interesting to see if the historical trend of inventory builds continues in this era of maximum storage capacity.

Record Oil Inventories

We did see a positive development in U.S. production trends. Since the January 15th high of 9.235 mbpd we have seen production decrease every week to total 9.135 mbpd for the week ending on the 12th. That 100,000 bpd drop may not seem like much over a five week period but it is the first real drop in production in three months. Apparently low oil prices are finally having an impact on producers.

Active rigs have declined by 111 rigs over the last four weeks. With oil dipping under $30 only a couple of producers can maintain a positive cash flow and those are in the Permian. Everyone else is losing money on every barrel they produce. They are slashing capex on a weekly basis and it will get worse before it gets better.

Back when oil prices were in the $60-$75 range or higher it made sense for refiners to transport ultra light Bakken crude by rail to the eastern refineries. With crude at $30 that no longer works. Bakken producers and refiners had built out 1.2 mbpd of rail export capacity from the Bakken over the prior three years. In early 2015 shipments had declined to 600,000 bpd and today those shipments are less than 350,000 bpd.

The problem is the transportation costs. It actually costs $7-$8 to ship the oil but by the time you add the fees and fuel surcharges the cost rises to $12 to $14 a barrel. With crude at $30 almost nobody in the Bakken can afford to take a $14 hit per barrel. That is the equivalent of giving away their oil. For eastern refiners it is cheaper to buy waterborne crude from northern Africa at $33 than go through the hassle of shipping by rail from North Dakota. The imported oil comes in by tanker and pipeline in large quantities instead of 100-car railroad shipments.

When refiners shifted purchases back to imported oil that caused the remaining Bakken producers even more problems. Now they have very few takers for their oil and that creates a bidding war, which lowers prices even more.

Crude prices are down to $30.40 tonight and the current March futures contract expires on Monday. This could create even more volatility in the price. Currently the April futures contract is $32.57 but that price is likely to shrink once the contract becomes the front month on Tuesday.

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  Active Rigs

Active drilling rigs declined -30 to 541 for the week ended on Friday 2/12 and that is an 18 year low. Oil rigs fell -28 for the week to 439. Active gas rigs declined -2 to 102. Active rigs have now declined -1,390 since the high of 1,931 in September 2014. Active offshore rigs fell -1 to 25.


Oil Inventories Week Ended 2/12/16

Crude inventories rose +2.1 million barrels to 504.1 million and a new record high.

Refinery utilization rose sharply from 86.1% to 88.3%.

U.S. production declined -51,000 bpd from 9.186 to 9.135 mbpd.

Cushing inventories were flat at 64.7 million and a record high. Cushing only has 3.0 million barrels of available capacity at that level.

Gasoline inventories rose +3.0 million barrels to 258.7.

Distillate inventories rose -1.4 million barrels to 162.4 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

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