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Oil Production: Low And Heading Lower

Oil Production: Low And Heading Lower thumbnail


Oil prices have been generally higher recently, driven by a number of factors, including a drop in crude and overall inventories.

In addition, oil production is still seeing declines week after week and demand, while taking a small dip, is still very strong.

Add to all of this the fact that the rig count has begun to fall again and investors have a lot to look forward to.

Oil prices continue to move higher and have been hovering around $50 per barrel after the EIA (Energy Information Administration) came out with a weekly report showing some mixed, but generally very positive, data regarding inventories, production and demand. In response to this, I’ve decided to look into the picture and discuss what it means for investors in companies like Memorial Production Partners (NASDAQ:MEMP), Approach Resources (NASDAQ:AREX), and Legacy Reserves (NASDAQ:LGCY), as well as for those in the United States Oil ETF (NYSEARCA:USO) and other oil-related ETFs.

Mixed but positive inventory data

The single most celebrated piece of data reported by the EIA for the week was the fact that crude inventories fell week-over-week. According to the organization, crude stocks came in at 537.1 million barrels for the period, down by 4.2 million barrels from the 541.3 million seen a week earlier. This is great news but markets initially reacted negatively (only to move higher again) because this was actually a smaller amount than the 5.1 million barrels estimated by the API (American Petroleum Institute) a day earlier. In the graph below, you can see the past 52 weeks of crude inventories.

(click to enlarge)

Fortunately, crude stocks weren’t the only category to report a draw. According to the EIA, distillate fuel dropped by 1.3 million barrels for the week, falling from 152.2 million barrels to 150.9 million. Fuel ethanol managed to dip by 0.3 million barrels from 21.1 million barrels to 20.8 million. Meanwhile, kerosene-type jet fuel, residual fuel, and propane/propylene all managed to fall a very modest 0.1 million barrels for the week.

While this is good news, there were a couple of dim spots in the EIA’s report. If their estimates are accurate, motor gasoline inventories grew by 2 million barrels from 238.1 million to 240.1 million. This is a major negative in my mind since motor gasoline is probably the most important supply category outside of crude itself. The only other category to increase during the week was the “other” category of petroleum products, which grew by 3.1 million barrels from 256.8 million to 259.9 million. Because of these two, total crude plus petroleum products declined by a paltry 0.9 million barrels from 1.3687 billion barrels to 1.3678 billion. Any drop is important but I would have liked to see the decline here be larger.

Production is falling and demand is staying strong

One very positive indicator, in my mind, was the weekly production number provided by the EIA. According to the data provided by the organization, domestic output came in at 8.767 million barrels per day. While this is still higher than it needs to be, it represents a decline of 24 thousand barrels per day (or 168 thousand barrels for the week) compared to the 8.791 million barrels per day seen the same period a week earlier. In and of itself, this decline is not large but the overall trend, as pictured below, shows that the market is quickly rebalancing. It should be mentioned, however, that some of the drop (a larger portion than the production contribution) can be chalked up to falling imports, which dropped by 362 thousand barrels per day (or 2.534 million for the week) thanks to supply outages in Canada in light of the Fort McMurray wildfire.

(click to enlarge)

Demand also stayed firm but could have been better. During the week, motor gasoline demand averaged 9.516 million barrels per day. This is lower than what we saw a week earlier and is about 2.2% below last year’s number, but the important indicator here is the four-week average. According to this metric, motor gasoline has averaged 9.608 million barrels per day, an increase of 3.9% from the 9.245 million barrels per day seen during the same four-week period last year. Despite having made up some ground recently, the four-week average for distillate fuel demand is about 4.094 million barrels per day, a decrease of 0.9% from last year’s metric of 4.130 million barrels per day.

Rigs have resumed their fall

Although not significant, the number of rigs during the week resumed their fall after seeing a prior week where the count remained flat. According to Baker Hughes (NYSE:BHI), the number of oil rigs operating in the U.S. fell by 2 units to 316. This represents a decline of 51.1% compared to the 646 rigs that were operating the same time last year. Meanwhile, the number of rigs operating in Canada during the week fell by another 2 units to 14. This represents a decline of 68.2% from the 44 seen operating the same week a year earlier. Overall, these declines (especially for the U.S.) aren’t that great but it is positive to see units continue to come offline, which should only result in lower production in the long run.


At this moment, Mr. Market is looking in a more and more optimistic light at the oil market. While I am concerned that there’s a risk that oil prices are rising too quickly (which could, in theory, push production higher), the overall data is very attractive at this point in time. Eventually, we will need to see production fall further (something that is continuing to happen) and we will also need demand (domestic and foreign) to stay strong in order to rebalance, but I continue to remain bullish on crude for the foreseeable future.

Disclosure:I am/we are long MEMP, AREX.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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11 Comments on "Oil Production: Low And Heading Lower"

  1. makati1 on Sat, 28th May 2016 8:29 pm 

    Production is falling: Check!

    Demand is strong: Bullshit!

    China is storing all of those oily payments and keeping the “demand” level for the moment. When that changes, and it will, the demand will begin to fall and never stop.

    Alpha needs to keep seeking.

  2. JuanP on Sat, 28th May 2016 8:39 pm 

    Those graphs are horrible. This person should take a graphing class. If you ignore the numbers and dates, which seem chosen by an insane person, and just look at them from far away they are pretty clear, though! LOL! I hope nobody got paid for doing that.

  3. Northwest Resident on Sun, 29th May 2016 1:34 am 

    A significant portion of the current demand for oil comes from China, whether they can use that oil or not. Negotiated contracts previously made with oil producing countries for payment in oil is already leaving China with numerous oil tankers indefinitely floating in circles waiting to unload.

    In the meantime, Chinese production, import and export is swirling down the tubes, fast. The global economy will swirl down with it, as will demand for oil and oil production.

    How bad off is China? According to Andy Xie, Former Morgan Stanley Chief Asia Economist:

    “China’s overinvestment has pumped up commodity prices (including or perhaps most notably oil), which has led to another Ponzi scheme. As major central banks cut interest rates to zero, credit demand didn’t respond in general, as businesses didn’t see growing demand from people who were suffering income erosion. The commodity boom justified credit demand for the time being. Trillions of dollars were poured into the energy sector, and trillions more into other commodity industries. Businesses in emerging economies that were pumped up by rising commodity prices borrowed US $9 trillion. This mountain of debt is floating on a commodity Ponzi scheme that is floating on China’s investment Ponzi scheme. Its bursting is just the beginning. Its impact on the global financial system could be bigger than the 2008 financial crisis.”

    “Could be…”. More like, “will definitely be…”.

    What Andy Xie obviously doesn’t understand, if you read his article, is that coordinated global financial engineering, stock market manipulation, massive unpayable debt and all the fraud and deceit that has become widespread since 2008/9 was IN RESPONSE to the too-high cost of energy and subsequent deficit of energy required to keep the global economy growing.

    Oil production is definitely heading lower — and lower — and lower. There is no recovery from the trajectory that we are now on. Physical reality has taken over. Debt and propaganda have succeeded in obscuring THE devastating truth for many years, but the long drawn-out last leg of the Age of Oil is coming to an ignominious end, and that right soon.

  4. shortonoil on Sun, 29th May 2016 7:52 am 

    There is still this misconception that demand is strong. Demand is not strong, and has not been since 2005. Demand today is only 8% of what it has been historically. It has fallen from a 45 year historical average of 5.46% per year to 0.43% presently. That is hardly strong demand. It is closer to no demand at all!

    US oil production has fallen by 900,000 b/d or 6.3 mb per week, and last week total inventories fell by 0.9 mb. The author thinks that this is an indication that the market is rebalancing. With production falling 700% faster than inventories it could only be considered a very optimistic form of rebalancing. We agree, if production is completely shut down the inventory situation will improve?

    As long as oil is viewed as a volume producing process, rather than an energy producing process these misconceptions will endure. As long as to why oil is used to begin with is ignored glowing reports of market rebalancing can be scripted. Unfortunately for the petroleum industry, and the world the actual situation is much different. Because of the deterioration that occurs to any process over time, petroleum can no longer power enough economy to produce the demand needed to acquire all of it. Market rebalancing is an illusion that will never take place. It is like waiting for Santa Clause on December 24th.

    86% of profits go to servicing debt & maturing debt is going up 500% next year.

  5. Davy on Sun, 29th May 2016 8:04 am 

    Demand is strong but not real demand as in physical productive demand or it has been strong in the bubble sectors i.e pre-low price energy sector, Chinese property development, and excess Chinese industrial demand.

    China and the US have led this boom in the bubble sectors of finance and physical malinvestment. China had a huge property bubble that is now in deflation and huge associated industrial capacity like steel that supported it. These industrial sectors are now NPL that must be bailed out to maintain this false illusion of growth. IOW China is digging its hole deeper.

    The US had several years of its commercial property development fiasco with retail. The US also had the huge shale bubble which destabilized the energy sector. The US Fed provided the liquidity and China provided the factories and what resulted was the mother of all bubbles.

    This is the end game of a global Ponzi. Ponzi’s always end in tears as our global system will. China and the US had irresponsible policies that have wagged the global tail of all the rest. We are all in this together and about to take a plunge into the unknow of a quickening collapse process.

  6. Rick Bronson on Sun, 29th May 2016 5:55 pm 

    Yes, Shale is gradually going down and that’s 1 reason why the prices are heading higher. Probably there will be 20 – 25 % decline this year and will be completely wiped out in next 4 – 5 years. We should see what happens to the prices when all the Shale is gone.

    Even if the supply from OPEC increases, we need more Oil to meet the growing fleet of vehicles in the World.

  7. i1 on Sun, 29th May 2016 9:07 pm 

    We’re gonna frack asteroids. Fracteroids will supply enough oil to power Merica through 2050 at least.

  8. joe on Sun, 29th May 2016 10:10 pm 

    I wouldn’t worry about oil supplies for now. Clearly conventional easy oil has peaked, but we are in the era of tight oil where prices are supposed to fluctuate wildly over 12 to 18 month periods causing instability and slow decline. Man can access oil but as we see with China, the economic cost of growth has been to (to use an old term) overheat the economy. The US has grown and this is because of the unique positon of supplying most of the worlds exported food and tech and weapons. Domestic consumption is strong, maintained almost totally by low interest rates and massive cash injections which do not get reflected as inflation due mainly to the fact that the black economy is growing much faster and cash is still being used to pay 2008 debt and saved.
    Banksters have never been in a stronger position globally. Global dictators fear Christine Lagard more than Obama, in fact the IMF might be the most feared non military weapon ever concived. Thank our stars its a wholly owed arm of the US imperial power.
    It should be obvious to any observer of adult age circa 2005 to today that these crises have been intentionally designed to rock western populations from the pillar of the american dream of home ownership to the beggars post of debt to pay for that dream and now we are in mid-cycle reset. The 30 year generational business cycle which is a totally thought up and carried out planned economy designed to pay 30 year bonds which are supported by masses of 30 year mortgages which the rentier classes live off. Banksters litterally cause crashes to pick up cheap assets then sell them back at interest as well as adding their own fiat currency as ‘support’ as they live off the returns as people succumb to debt and interest payments.
    So oil in the context of the general economy is going to act as a destabilisi g commodity because its function to provide a stable energy source as a foundation stone in the debt system will become more difficult. As oil fluctuation causes inflation instability so interest rates must react to it, and interest rates changes upset consumers. The low rates of the last few years is about to end as it fuelled the Chineese boom, the next few years will be spent in currency wars as blocs try to hold on to megre gains they got since 2008.

  9. i1 on Sun, 29th May 2016 10:55 pm 

    Plus, fracteroids will be abiotic so we can just keep them in orbit till they replenish.

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