...And a bullish New Year

Ring in the new year with a solid crude bull oil market. Happy Bull Year! Oil prices are on the rise as the draws in oil inventory are just too big to be ignored. The U.S. oil glut is now just a memory and now we are seeing inventories at key Gulf Coast and Cushing, Okla., areas at multi-year lows.

The Energy Information Administration (EIA) said that U.S. commercial crude oil inventories fell by 4.6 million barrels putting supply 431.9 million barrels, which is just average for this time of year. In the Gulf Coast, we saw supply fall by 5.6 million barrels, putting supply at the lowest levels since 2015. If you discount SPR and pipeline oil you see supply at the lowest levels since 2012. Cushing, Olka., saw supply fall by 1.58 million barrels. Oil supply has fallen six weeks in a row. What we are seeing is a continuation of the biggest yearly crude oil supply drain in history.  

Refining demand is strong to meet strong global demand that should hit over 100 million barrels of oil a day. Refinery runs increased by 1.6 to 95.7%, the highest in December since 1998.

We also saw U.S. oil production fall and that should happen again next week because of freeze offs and declining flush rates from wells. U.S. oil production fell to 9.754 million barrels per day (bpd), down from 9.789 million bpd from the week before. This drop-in production caught many by surprise and is another crack in the bearish arguments.

Gasoline and distillate demand increased, The EIA said that total motor gasoline inventories increased by 0.6 million barrels last week and distillate fuel inventories increased by 1.1 million barrels last week and are in the middle of the average range for this time of year. 

The EIA said that total products supplied over the last four-week period averaged 20.6 million barrels per day, up by 3.5% from the same period last year. During the last four weeks, motor gasoline product supplied averaged over 9.2 million barrels per day, up by 2.0% from the same period last year.  Distillate fuel product supplied averaged 4.1 million barrels per day over the last four weeks, up by 0.7% from the same period last year. Jet fuel product supplied is up 12.4% compared to the same four-week period last year.

Winter surge to big for natural gas to ignore. The EIA reported a net 112 Bcf withdrawal for the week ending Dec. 22, versus 233 Bcf withdrawn a year ago, and a five-year average withdrawal of 111 Bcf.  Last week, EIA reported a 182 Bcf withdrawal. Next week the record-breaking cold will cause demand to surge and production to fall. Next week we could see a draw of 276 bcf in supply.

From Glut to shortage? The Houston Chronicle reports that the global oil industry has discovered less than seven billion barrels of oil equivalent so far this year–a drop-off from the eight billion boe discovered last year. Last year’s total was the lowest since the 1940s. The 2017 figure is down by more than half from the 15 billion boe discovered in 2014-2015, and down sharply from the 30 billion boe discovered in 2012.

The plunge is the result of a third consecutive year of relatively low upstream exploration budgets. So many oil companies slashed their spending on exploration when the market downturn began in 2014, and they have yet to restore that spending to anything close to pre-2014 levels.

“We haven’t seen anything like this since the 1940s,” Sonia Mladá Passos, Senior Analyst at Rystad Energy, said in a statement. “The discovered volumes averaged at ~550 million barrels of oil equivalent per month. The most worrisome is the fact that the reserve replacement ratio in the current year reached only 11% (for oil and gas combined)–compared to over 50% in 2012.”

The reserve-replacement ratio measures the volume of oil that is discovered relative to what is produced in a given year. The idea being, the industry needs to discover 100% of what it produces in order to avoid a decline in reserves.

Rystad Energy says that 2006 was the last year in which the industry posted a reserve-replacement ratio above 100%. The implication is that the world is burning through oil at a faster rate than the industry is discovering new reserves.

Moreover, Rystad wrote that the volume of resources per discovered field also declined in 2017. For instance, the average offshore discovery in 2012 held roughly 150 million boe in 2012, a figure that fell significantly to just 100 million boe this year. That matters because smaller fields tend to be less economic, and may not be enticing enough to be developed at all. “Low resources per discovered field can influence its commerciality. Under our current base case price scenario, we estimate that over one billion boe discovered during 2017 might never be developed,” Rystad’s Passos wrote. A must read.