Alexander Khurshudov: oil price is growing based on doubtful American statistics
The market correction lasted slightly over a month. Last Tuesday the Brent price surged up, exceeded $76 for a barrel only to break the average market downtrend next day (pic.1). Trading closed at $79.12.
The formal cause for the turn was the reduction in the US crude stocks by 9.9 mln barrels, first reported by the API and then by the EIA.
It doesn't seem to be a problem, doesn’t it? It's common knowledge that oil stocks decrease in the summer (the demand for petroleum products grows), while in the winter, when refineries are stopped for repair and maintenance, they grow up again. Such fluctuations within 40-50 mln barrels happen annually. However, the current commercial stock is 93 mln barrels less than last year. The price for Light oil grew 1.6 times (from $43 to $70) within the same period, oil production increased by 17.8%, but the stocks have decreased for some reason.
We have to keep in mind that the EIA’s figures aren’t really statistics, but rather calculations based on the available data with the error of 3-4%. A lot of questions arise in respect to such calculations, which are not easy to answer. We shall try to do it though.
May the oil traders and producers be expecting the oil price to go down and that’s the reason why they are decreasing their stocks? Yes, the stocks at the biggest terminal Cushing have decreased by 30 mln barrels and reached three years’ minimum. Producing companies are selling out their stocks; for instance in North Dakota in April (the most recent data available) they sold 2 mln barrels more than they had produced. Here comes the second question: why aren't they producing more?
The most recent reliable data from March and April both indicate 10.47 mln bpd. Production data for the last three weeks also show the same value of 10.900 mln bpd (note that the chance for coincidence is 0.000001). In the summer production decreases due to a number of causes, including multimillion evaporation losses. But why aren’t they drilling more wells? Let’s look at the dynamics of the rig count (pic.2).
It is barely changing. Even at the Permian Basin drilling activity stopped growing in May. Curiously the productivity of the rig there is 2.5 times less, while the number of drilling crews 6.5-9 times higher than that at the two other plays. The data is compared in the table:
A quick look at the table reveals the following:
- In 2016 the proved reserves at the Permian Basin increased 6.3 times clearly due to recalculation,
- The current proved reserves of the tree plays are close in value and estimated by the EIA at 4-5 bln barrels,
- With the current recovery rate the reserves should last for another 9.5-14 years, which is wonderful and would enable them to praise the shale revolution for years to come.
The last, but the trickiest question needs to be answered: how come that with equal reserves at the three fields half of the American drilling companies crowd at the Permian basin treading on each other's heels, even though the wells there are deeper, more expensive and less productive?
There are many ways to answer this question (one may say, for instance, that the Permian Basin is developed by successful companies with unlimited funds, while the other two – by bankrupt losers), but the most probable answer seems to be this one: there aren't as many reserves as they claim in the Bakken and the Eagle Ford. Most of the area is already drilled, now the producers are looking for small undeveloped areas (pillars). Most their efforts are focused on the latest field, the Permian, which will be facing the same trouble soon.
The stock exchange doesn’t go into such details, but doubts the American statistics very much, so it doesn’t really believe in the growth of shale production. Besides, the long-term trend remains growing at the weekly charts (pic.3).
In July Brent may reach $83 or even $85, but I expect it to decrease by September. The oil market is a constant struggle between different forces. The American President is urging the OPEC to increase oil production and the decision has actually been taken, though we'll wait and see how it will be implemented. The Saudi Arabia, Russia, Kuwait, the UAE, Oman and Algeria have the need capacity. Kuwait, for one, decreased production by 7% 18 months ago, but now it promises to add just 3%.