Following last night's across the board inventory builds reported by API, oil prices have bounced modestly but remain lower (below $48) ahead of DOE's data. However, for the 3rd week running, DOE data refuted API showing a smaller than expected 933k draw in crude inventories and a large draw in gasoline (-2.62mm vs API's +2.25mm). Distillates inventories rose for the 2nd week in a row and Cushing saw its biggest build in 5 weeks. However, oil prices are rising on the data as well as the fact that US production resumed its decline after last week's brief increase.
API:
- Crude +1.16mm (-2.33mm exp)
- Cushing +664k (-600k exp, +234k Genscape)
- Gasoline +2.254mm
- Distillates +3.725mm
DOE:
- Crude -933k (-2.33mm exp)
- Cushing +904k (-600k exp, +234k Genscape)
- Gasoline -2.62mm
- Distillates +786k
Once again DOE data opposes API data…though we note Cushing saw a large build…
Production resumed its decline to fresh multi-year lows after last week's brief rise…
And the reaction in crude is to erase the API losses…
In fact – very unusually – this was a huge gap higher intraday…
As Goldman explains, supply may be on the rise…
We further believe that at current prices, we can see a pick up in brownfield investment, consistent with our conversations with producers looking to maximize cash flow while limiting incremental spending. Importantly, this is a short-cycle investment which can drive large production rebounds, as was the case in 2009. Further, our European and US Energy equity analysts recently commented on how producers are guiding to even faster and larger cost declines than they had expected. Companies also appear ready to start sanctioning projects again after an 18-month hiatus, aggressively competing for capital and helped by governments ready to reduce tax take or local content requirements to attract investment.
Several US producers have also become explicit on reducing their drilled but uncompleted well backlog. Our estimate of the US oil backlog (in excess of normal drilling activity) suggests that it represents 0.5 mb/d of additional production over the next 18 months if brought online by year-end. Further, a few producers have been able to issue high-yield debt for the first time since last October, with the explicit target of increasing drilling, and we have seen over the past two weeks several producers raising guidance as well.
The oil rig count has also now increased for two consecutive weeks, the largest such recovery since last August. And while we don't believe that current prices allow for all producers to ramp up, better capitalized producers can at the forward curve. Admittedly, the rig recovery remains limited so far with a sustained 10 rig increase in the Permian only adding 25 kb/d of production in 2H16 on our estimates of the average Permian type curve.
Charts: Bloomberg
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