The latest data in US crude oil inventories is misleading for two reasons. There is a huge difference between the API and the EIA numbers. The former projected a build of 4.2 million bbls and the latter 762,000 bbls. This gap is indeed yawning but all that happened in reality was that the absolute stock figures inched close to one another. The API puts US crude oil inventories at 486 million bbls and the EIA at 489 million bbls. This 3 million bbls discrepancy was more than 6 million bbls last week. Secondly, crude oil stocks drew more than 3.8 million bbls west of the Rockies leaving PADD 1-3 with a combined build of 4.7 million bbls, according to the EIA. Inventories at the NYMEX delivery point grew 1.2 million bbls to 61.6 million bbls implying a tank capacity utilization rate of 81%, high by historic standards. Crude oil production edged up to 10.9 mbpd as output normalized after the hurricane-related shutdowns in the USGC.
The 2.6 million bbls gasoline build was also disappointing and so was the 600,000 bpd decline in weekly oil consumption, which stood at 19.6 mbpd. What saved the day was the massive drawdown in distillate and “other product” inventories. The former fell 5.2 million bbls, matching the API estimate. The latter was down by 8.3 million bbls on the week which is not surprising given the seasonal stock movements in this category. The net result was a decline of just over 10 million bbls in US commercial oil inventories. They have fallen more than 100 million bbls or 7% from the high in the middle of July and the surplus to the 5-year average has shrunk to 4.6%. At 1.356 billion bbls they imply that OECD inventories are just north of the 3 billion bbls mark, quite an achievement considering that they were above 3.2 billion bbls at the end of 2Q.
The fall in industrial inventories, especially in distillate stocks, helped oil prices climb higher and the daily gains would have been bigger had it not been for a retreat in US equities. Such retracements will remain part of the everyday life in coming months as rising infections rates and perceived and actual lockdowns battle with the potential roll-out of Covid vaccines. The underlying optimism, however, persists as vaccine trials are powering ahead. The BBC reported this morning that the Oxford coronavirus inoculation shows “encouraging” immune response in older patients.
US shale decline is close to bottoming out
The coronavirus has devastated not only global oil demand but production, too. The EIA predicts a contraction of 2.24 mbpd in non-OPEC supply in 2020 followed by a growth of 1.14 mbpd next year. In other words, the 2019 non-OPEC supply level will not be matched in 2021, this is how destructive the current pandemic is. More than one-third of this year’s supply contraction takes place in the US where domestic production is set to decline 860,000 bpd in 2020 – from 12.25 mbpd to 11.39 mbpd.
More than two-thirds of this deflation takes place in the seven shale producing regions. Shale oil output in the US will experience a year-on-year contraction of 606,000 bpd. Shale producers have suffered a double whammy this year. Even before the outbreak of the pandemic they struggled to increase output as the money tap has been closed by investors – they wanted to see returns after years of investment. The unprecedented price fall in April almost signed the death warrant of the industry. Shale output declined from 9.14 mbpd in February to 6.80 mbpd three months later.
Slowly improving demand outlook and the co-ordinated action of the OPEC+ group, however, helped the US shale industry recover. Production rose from the May low to 7.86 mbpd in September. The upward move came to a halt after October and the EIA, in its monthly drilling activity report, forecasts the third consecutive monthly decline in US shale output in December as oil prices fail to make significant advances and the rise in coronavirus infection rates acts as a break on demand recovery.
Every single region is set to register a monthly fall in December and output is to retreat to 7.51 mbpd, down another 139,000 bpd on the month. Shale production is clearly the biggest casualty of the pandemic because it now makes up only 68% of the total US crude oil production, down from 72% in March. The future, however, could look brighter than the present.
Firstly, the most prolific shale producing region, the Permian Basin, is actually recording a year-on-year increase in output. The EIA sees it at 4.42 mbpd this year, up from 4.34 mbpd in 2019. Production is declining in the rest. Secondly, US rig counts, that is a good barometer of future shale production has been on the rise for a while now. It has registered its eighth consecutive weekly rise last week and has increased from 179 to 236. Thirdly, albeit the EIA predicts US production decline year-on-year for 2021, the quarterly projections will hardly be below the 4Q 2020 level. The second quarter of next year will see a small dip of 10,000 bpd from the 11.07 mbpd pencilled in for the current quarter but the rest is around the current level with a 200,000 bpd jump expected in 4Q 2021. Lastly, the potential roll-out of Covid vaccines should help oil demand growth and tighten the oil balance. If, as it is anticipated, this supports oil prices next year US shale producers will feel motivated to step on the accelerator. There is a strong case for calling a bottom in US shale production for at least the next year or so.