CNBC.com - U.S. oil production continues
to defy forecasts that it is on the decline, and with refiners
processing as much of the stuff as they can, the glut of oil, gasoline
and diesel fuel keeps growing.
That should continue to pressure oil
prices, which rallied Wednesday because the large weekly build in supply
was not quite as gigantic as feared. The U.S. Energy Information
Administration reported that crude oil supplies grew by 8.4 million
barrels last week, well below the 11.4 million reported Tuesday by the
American Petroleum Institute.
The government's lower figure helped
trigger a relief rally in crude futures that erased steep losses and
were trading more than 2 percent higher for the front month futures
contract for West Texas Intermediate crude. Another factor was reports
that possible coordination between Russia and OPEC was discussed by
Russian companies. The market continues to speculate that OPEC members
may strike a deal on production, but most analysts dismiss that.
"It's a record amount of crude oil in
storage. It's a huge build in gasoline, but there was a little strength
in distillate demand, thanks to the weather. It's squarely bearish
again," said John Kilduff, partner with Again Capital.
One positive was a 4.1 million barrel
drop in distillates inventories, which includes heating oil and diesel
fuel. Gasoline supplies, however, grew by 3.5 million barrels.
The U.S. has now stockpiled 1.2 billion
barrels of crude, and the growing supply in Cushing, Oklahoma, and
elsewhere has analysts concerned that oil will start becoming difficult
to store, meaning its price on the cash market could get even cheaper.
While the industry has been reporting
rig shutdowns, the volume of oil pumped per day in the past week was
steady at 9.2 million, but below the high of 9.6 million barrels per day
in April.
"That is worrisome. The weekly number
has been steady at 9.2 million for some period of time, as the EIA says
shale oil production is coming off," said Andrew Lipow, president of
Lipow Oil Associates. "It means the industry must be producing more in
places like the Gulf of Mexico where the investments are coming to
fruition at the same time onshore rig count is going down."
Baker Hughes reported the oil rig count
dropped to 510 last week, the lowest number since April 2010, and about
800 fewer than the same period last year.
"For crude to start rebounding, the
market needs to see a significant reduction in U.S. production in the
face of declining rig counts, or else their interpretation will be the
oil producers have gotten so efficient that they're maintaining high
levels of production which will just add to supply this year and into
2017," Lipow said.
Michael Wittner, global head of oil
research at Societe Generale, said the market appeared to overreact to
the weekly U.S. inventory data.
But a clear negative remains the U.S.
production level. He is awaiting for the release of more reliable
monthly government data Friday, but that will be November data. In
October, the U.S. produced an average 9.3 million barrels a day,
according to the EIA.
"We're sitting here bouncing around $30,
give or take. … Right now it's about the big picture things, and the
biggest being how long can we continue around these levels? The answer
is a long time I have to think, especially with some of the reports
coming out in recent days. With some of the big shale producers cutting
their budgets, it does increase confidence that we are going to see a
big decline in U.S. crude production," Wittner said.
Platts' forecasting unit Bentek said
Wednesday it expects that overall production from the major formations
in North Dakota and Texas dropped slightly in December versus November.
Bentek said oil production from the
Eagle Ford shale basin in Texas actually increased slightly in December,
by about 11,000 barrels per day, nearly 1 percent, from November. But
production in the Bakken's Williston Basin fell by 9,000 barrels a day
in December, or little less than 1 percent from November levels. Bentek
said Eagle Ford was down 7 percent on an annual basis, and Bakken was
off by 6 percent.
The market has been pinning its hopes
this week on a deal between Saudi Arabia and other members of the
Organization of Petroleum Exporting Countries and non-OPEC producers.
That would mean making a pact with Russia, the largest energy producer.
The U.S. oil industry ranks in the top three but it is made up of dozens
of independent producing companies.
Wittner said an OPEC deal is unlikely,
given the fact that Iran is jut now returning to market, and he also
doubts any deal could be made with Russia. Genscape reports that a first
shipload of oil left Iran for South Korea as sanctions against Iran
were lifted.
Patti Domm
CNBC Executive News Editor
Patti Domm | @pattidomm
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