PDF skapad: 2017-06-18 02:03
Bjarne Schieldrop Crude oil comment Short specs
caught in the corner by freeze talks but watch out for
«Countdown 42» : 2016-08-19
• Crude oil comment – Short specs caught in the corner by freeze talks but watch out for «Countdown
42»
• Ch1: US gasoline stocks declines solidly last 3 weeks relieves some of the bearish sentiment
• Ch2: EU forward refining margins rebound into positive territory
• Ch3: US shale oil legacy loss is easing
Crude oil comment – Short specs caught in the corner by freeze talks but watch out for «Countdown 42»
Caught in the corner - Final capitulation probably still ahead
Brent crude has experienced a +20% bull rally since the start of August as short specs built during June and July were
caught in the corner by OPEC freeze talks. As of Tuesday last week those WTI short specs had not yet pulled back. Actually
they rose slightly that week. Most likely they have been reduced somewhat since then. Buy how much we don’t know but
looking at price developments which have been fairly linear it seems likely that the last and final capitulation and and
th
“popping” of the short spec position is not yet in. We thus view it as highly plausible that the ytd high of $52.86/b from 9
of June (1mth Brent intraday high) will be taken out in the final round of short spec capitulation. The rally since the start of
August has also been supported by a 3 week in a row of solid declines in US gasoline stocks. They moved sideways to higher
for a full 6 weeks ahead of that which created considerable concerns for US gasoline demand and inventories. Not the least it
helped to drive down the refinery margins as the gasoline crack tanked. This helped to drive down the overall margin for
refineries with European forward cracks for Q4-16 and Q1-17 dumping down into negative territory. With a revival in both
gasoline cracks and middle distillate (diesel) cracks the European forward cracks are again back in positive territory for
Q4-16 and Q1-17. Even though they are just half a dollar in the money it still creates some optimism that refinery
throughputs of crude could hold up. As such the 1.3% w/w gain in US refinery utilization last week was supportive. Fact is
still however that oil product inventories are high which necessarily implies cautious refinery throughput ahead.
Countdown 42 – Baker Hughes rig count tonight at 19.00 CET
(Looking here only at US shale oil production and not total US crude oil production as was addressed in the Monday
comment)
While the oil market is getting excited by OPEC – freeze and oil market stabilization talk (whatever that means), things
continue to move in the US shale sector. On Monday the US EIA published its monthly Drilling productivity report. According
to their calculations the volume productivity increased m/m to August by 2.2% and m/m to Sep by 3.2%. That’s an average
annualized productivity growth rate of 38%. Year on year to September we estimate that the volume productivity growth
rate was 16% which is significant and substantial in our view and according to the EIA on Monday the volume productivity
growth continues at a strong pace. On the back of yesterday’s report we estimate that in order to halt the current decline in
US shale oil production by the end of the year, there is only a need for an additional 42 shale oil rigs in the Eagle Ford
region. Assumption is that each rig adds 1000 barrels of new crude production each month. In our view this is the
“Countdown 42”. Since mid-May there has been added 78 oil rigs in the US of which 63 are implied shale oil rigs. Just over
the last two weeks the number of implied shale oil rigs grew by 25 rigs. Given that there is a continuous easing in the US
shale oil legacy loss (monthly decline in existing production) it becomes easier and easier to counter it by adding rigs and
drilling. US shale oil legacy loss is currently standing at minus 264 kb/d per month. This is countered by a gain of 172 kb/d
in newly initiated production leaving a net monthly decline of 92 kb/d m/m. If you want to counter this as of today by using
the average rig productivity in operation today (August: 560 b/d per rig per month) one would need to add 165 additional
shale oil rigs on top of the current 300 in operation today (according to US EIA). However, if we move towards the end of
the year the gap to close is likely to decline from 92 kb/d m/m to only 67 kb/d m/m. If one in addition assumes that the new
rigs being added will be in the Eagle Ford with a productivity of 1000 b/d per rig per month, then there is only a need for an
additional 42 rigs on top of the current 300 in operation and the 25 implied shale oil rigs which were added the latest two
weeks. Thus watch out for the US oil rig count this evening at 19.00 CET.
Ch1: US gasoline stocks declines solidly last 3 weeks relieves some of the bearish sentiment
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