Say Goodbye to Cheap Gasoline

Jim Brown
 
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The wildfire in Canada and production outages around the world has erased the recent glut in daily production. Oil and gasoline prices are going to rise.

U.S. crude inventories declined -3.4 million barrels last week as a result of the shutdown of production in Canada and increased refinery production in the USA.

This was the first major decline of the summer refining season and we will not likely see an inventory build again until the fall. This is what speculators have been waiting for and open interest on long futures contracts are at record highs. You have to wonder who is left to buy?

Crude closed the week at $46.25 after trading at a six month high of $47 on Thursday. With production outages around the world the year long glut of crude production has been erased.

The IEA said better than expected global demand grew at a 1.4 mbpd pace in Q1. That was led by strong demand from India, China and Russia. They still expect full year growth to be 1.2 mbpd. We are moving into the high demand season. May typically has the weakest demand of the year and August is the highest as Saudi Arabia burns an extra one million barrels of crude per day to generate electricity for air conditioning. Demand in August should be 2.0 mbpd higher than May.

Exxon declared force majeure for Qua Lboe crude after a drilling rig damaged an undersea pipeline. Production for May should have been 337,000 bpd. Chevron was hit with another attack by the MEND rebels (Niger Delta Avengers or NDA) when they blew up a well head on one of their pipelines. They now have two facilities down and the rebels warned them not to repair the damage of they could blow something else up. Nigeria production is down between 600,000 to 1.4 mbpd because of attacks and outages.

The NDA warned all oil companies to shutdown production or they would be attacked. Nigerian oil production has fallen to 1.3 mbpd and the lowest in 20 years. That is down from 2.7 mbpd.

On Wednesday Royal Dutch Shell declared force majeure on exports of Bonny Light crude from the Eja OML 79 production facility.

Libya warned that exports could go to zero within a month because the Hariga port remains under blockade because of an export dispute between rival governments. Fields will have to be shutdown within a month due to lack of storage. Production at the Messla and Sarir fields have declined from 240,000 bpd to only 90,000 bpd. The oil shipments through the Hariga port account for 75% of the country's exports.

The best estimate for the production halted from the Canadian fire is 1.3 mbpd. Enbridge expects to resume shipments from Alberta sometime late next week. They were forced to halt production because the fire closed the pipeline. While the two oil sands plants had no damage there were multiple locations along the pipeline route that had no power and the line was shutdown. They are trying to restart the operation at the Athabasca facility this weekend. Overall the Enbridge pipeline system saw a 900,000 bpd decline in throughput. The Enbridge pipeline system averaged a record 2.5 mbpd in the first quarter.

Nexen issued a force majeure all of its May production of 50,000 bpd of Long Lake Heavy crude. Shell has partly resumed operations at its 255,000 bpd Albian Sands mine. There is still no restart date on the Syncrude restart at the joint 350,000 bpd project with Suncor. Six Alberta thermal projects have cut production by 115,000 bpd due to lack of electricity. Conoco warned that the 30,000 bpd Surmont project restart could be delayed for months depending on what they find when they try to restart steam production. The steam assisted gravity drainage project has been offline for more than a week and the steam has turned to water and the cooling could have caused some wells to be redrilled because of buckled pipes.

Husky Energy shutdown the 30,000 bpd Sunrise joint venture with BP until infrastructure was restored.

Phillips 66, Suncor Energy and BP refineries warned their customers they might not be able to meet demand because of the reduction in Canadian production.

Freeport McMoran cancelled two drilling rig leases from Noble Corp and agreed to pay $600 million in termination penalties. This shows how depressed the offshore drilling sector has become. With oil prices in the $40s it is not profitable to drill in the deepwater and many companies have long term contracts for rigs.

The value of rigs is crashing. Ocean Rig (ORIG) bought the deepwater drillship Cerrado for $65 million at auction and that was only 10% of what it cost to build it just six years ago. The U.S. government just released some new rules for offshore drilling that is going to make it significantly more expensive to drill even if the prices rebound. According to Exxon, the rules will add $25 billion in expense over the next ten years. This is going to push the drillers out of U.S. waters and overseas to Africa or south to Brazil. The U.S. is going to lose a significant amount of new production from the Gulf of Mexico over the next ten years.

Consultancy Wood Mackenzie said that investments in the Gulf of Mexico will fall by 70% as a result of the new legislation and cost the Gulf 190,000 jobs.

Shell and Conoco have officially relinquished their drilling rights in the Arctic waters of the coast of Alaska. The companies originally paid about $2.5 billion for the leases that covered 2.8 million acres in the Chukchi Sea in a 2008 auction. About 80% of those leases have now been abandoned. Only one well was ever drilled and was never completed after numerous problems were encountered in drilling in the hostile environment. Shell abandoned 274 leases and Conoco releases 61 leases. Statoil also abandoned 16 leases and ENI gave back 4 leases. By abandoning the leases the companies do not have to pay the annual maintenance payments to the government.

Linn Energy (LINE) filed for bankruptcy last week claiming $10 billion in debt and daily production of 59,000 Bpd and 607 million cubic feet of gas. Penn Virginia (PVAH) also filed for bankruptcy. Sandridge Energy LLC is preparing to file after notifying the SEC it would not be able to file its quarterly results on time. Exco Resources (XCO) said it was considering strategic alternatives including bankruptcy.

When oil prices finally do recover we are going to see a much different production profile and a lot fewer producers. Continental Resources (CLR) said they would consider putting some rigs back to work once oil prices reached $60 and were sustained at that level. When they do decide to put rigs back to work CEP Harold Hamm said they would process their fraclog of drilled but not completed wells first.

Pioneer Resources (PXD) said they would add 5-10 rigs when oil reaches $50 a barrel for a sustained period.

A lot of damage is being done to the energy sector and there will be a lot more bankruptcies before the cycle is over. Despite the current glut and low prices of oil we will reach a point where demand exceeds production again and prices will return to triple digits. We will look back at 2015-2016 as the last period of cheap gasoline. Remember this when you are paying $4.50 a gallon in 2020.



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  Active Rigs

Active drilling rigs declined -9 to 406 for the week ended on Friday 5/13 and that is a historic low. Oil rigs fell -10 for the week to 318. Active gas rigs rose +1 to 87. Active rigs have now declined -1,525 since the high of 1,931 in September 2014. Active offshore rigs were down -2 at 22.


Oil Inventories Week Ended 5/6/16

Crude inventories fell -3.4 million barrels to 540.0 million. The prior week was a historic high at 543.4 million.

Refinery utilization declined slightly as a result of the Canadian fire from 89.7% to 89.1%.

U.S. production declined -23,000 bpd to 8.802 mbpd. That is a decline of 808,000 bpd from the peak in 2015.

Cushing inventories rose 1.5 million barrels to 67.8 million and a record high.

Gasoline inventories fell -1.2 million barrels to 240.6 million.

Distillate inventories fell -1.6 million barrels to 155.3 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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