This week’s EIA report had several data points that were bearish, most notably three-year highs for crude oil and distillate stocks. The fact that crude stocks at the Gulf Coast increased 10.25 million barrels from the previous week suggests that a good portion of the increase in total US stocks came from imports and not from an increase in US production.
In contrast, crude stocks at the Cushing, Oklahoma hub have fallen by nearly 12 million barrels in just three weeks. They were more than 10.5 million barrels below their capacity of 76.093 million. Declining US production has been one of the key supportive factors for crude oil prices over the past few weeks. This situation could get more dramatic as domestic demand improves.
US crude oil production had been in an uptrend since autumn of 2016, reaching a record 13.1 million barrels per day (bpd) in late February, but when coronavirus restrictions started to take hold in March, there was a dramatic decline in output. Over the past eight weeks, US crude production has fallen from 13.0 million to 11.4 million bpd, the lowest since October 2018.
While demand is widely expected to improve during the second of the year, it may be some time before US crude oil production recovers. The latest Baker Hughes US oil rig count showed in at 222 rigs in operation, the lowest reading since June 2009. This was 455 rigs below the levels from mid-March and is only 44 rigs away from a new low for the 21st century.
The latest reading for Permian basin oil rigs was 148, the lowest since June 2016. At this point, the Permian basin holds 67% of all US rigs. Between late 2011 and early 2016, that the percentage was less than 40%. Oil drillers are clearly stepping away from other US locations. This suggests could indicate that it may be some time before US crude oil production retests its highs.
Originally Published on May 29, 2020
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