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The must-know relationship between oil rigs and crude prices
The previous parts of this series (parts 8 and 9) explained the counterintuitive relationship between low natural gas prices, falling rigs, and rising natural gas production. Oil rigs have a simpler relationship with crude oil prices and oil production.
Natural gas liquids (or NGLs) are hydrocarbons that are produced when “wet natural gas” (primarily methane and condensable heavier hydrocarbons) is processed in natural gas plants.
The U.S. Energy Information Administration (or EIA)—in its Short-Term Energy Outlook (or STEO) released in August 2014—reported that dry natural gas production is expected to total 69.6 billion cubic feet (or bcf) per day for 2Q14.
The U.S. natural rig count was up by eight rigs—from 330 to 338—during the week ended August 29. Most of the increase occurred in the Marcellus Shale, which added five rigs.
Last week, the Baker Hughes oil rig count increased by 11. It rose to 1,575 from 1,564. The addition was driven by the Mississippian (+3), Eagle Ford (+3), and Permian (+2) plays.
Out of the current 1,575 oil rigs at work, the majority—roughly 552—are in the Permian Basin. The Eagle Ford has 196 rigs, the Williston and Bakken have 192 rigs, and the Mississippian has 79 rigs.
For the week ending August 29, 2014, the number of horizontal rigs increased by nine to 1,330 compared to 1,321 a week ago. This is also the highest horizontal rig count on record.
Rig counts in the Gulf of Mexico (or GOM) in Louisiana indicate the offshore rig activity in the U.S. The GOM accounts for almost all offshore rigs.
The U.S. onshore or land-based rig count increased by 16 rigs—from 1,832 to 1,848—during the week ending August 29. Land-based rigs include ten inland water rigs.
According to Baker Hughes, the U.S. total rig count increased by 18 rigs—from 1,896 to 1,914—during the week ending August 29. Baker Hughes publishes rig counts every week.
Since the beginning of 2014, natural gas prices have averaged $4.48 million British thermal units (or MMBtu). This is significantly lower than the record high of ~$13.5 per MMBtu seen in March 2008.
Natural gas prices started inching towards $4 last week. There were doubts about injection levels being sufficient enough to build up natural gas inventories ahead of the winter months. On August 28, natural gas prices finally touched $4—after consistently staying near $3.70–$3.90 since July.
On August 28, the the U.S. Energy Information Administration (or EIA) reported a 75 billion cubic feet (or bcf) natural gas inventory build for the week ending August 22—to 2,630 bcf. Analysts expected a 77 bcf increase.
The U.S. Energy Information Administration (or EIA) reports figures on natural gas inventories weekly. Natural gas is used the most during the winter when heating demand is the highest. Storage levels decline during these months.
After touching a four-week low of $5.19 on August 18, WTI-Brent levels are now at ~$9. On August 28, WTI-Brent was $8.87 per barrel. Brent has steadily remained well above the $100 mark, even when WTI has been weaker over the past couple of weeks and has seen prices below $93.
West Texas Intermediate (or WTI) crude rose mildly despite the increase in Cushing inventories and a less-than-anticipated increase in gasoline demand. Prices rose $0.17 to settle at $94.05 per barrel on August 28.
While nationwide crude supplies fell, inventories at Cushing increased by 508,000 barrels to 20.7 million in the week ended August 22. This is the fourth weekly increase, and, according to Energy Information Administration (or EIA), the longest rising streak since January.
Distillate stocks, which include heating oil and diesel, increased 1.3 million barrels, compared to analysts’ expectation of practically no change. An increase in distillates inventories is likely due to the weak demand from developing countries that are seeing low levels of economic growth.
Last week, gasoline stocks decreased by just one million barrels (or mmbbls), compared to analysts’ expectation of a larger 1.6 mmbbls decline. Analysts overestimated the demand for gasoline, or underestimated supply, resulting in the draw in inventories being less than expected.
Crude inventories continued the previous week’s downward trend, dropping by 2.1 million barrels (or mmbbls), compared to analysts’ expectations of a ~2.5 mmbbls drop.