U.S. Drillers Continue to Strut Amidst OPEC Cuts

By: Jon Kalchthaler / February 23, 2017

The stats reported today were more on the bullish side than bearish, but not earth shattering. The stats showed that we are still in the upper limit of the average range in both crude and distillate inventories.  This is in spite of distillate fuel inventories drawing by 4.9 million barrels.  Crude inventories built by 600,000 and gasoline drew by 2.6 million.  We also saw refinery runs down 1.1% and U.S. production increased by 24,000 barrels per day.  Overall, commercial petroleum inventories dropped by 11 million barrels last week.  Imports of crude averaged 7.3 million barrels per day last week which was down 1.2 million barrels per day from the previous week.

Could it be that this is one of the first signs of OPEC cuts beginning to work their magic? With OPEC compliance continuing to seem promising we have another factor going into it as well.  Ole Hansen, head of commodity strategy at Saxo Bank, is saying that the cuts being reported in the Middle East will soon be felt.  Given how long it takes for a vessel to be loaded and on its way to the shores of the United States, these initial impacts of cuts are said to become more prevalent over the upcoming weeks.  One of the main reasons that people are still skeptical continues to be the growth of U.S. drilling.  The EIA predicted we could see an average of 9 million barrels a day in 2017 and an increase to 9.5 million barrels a day in 2018.  As of today we have eclipsed 9 million barrels a day, according to the stats, and there is no ceiling in sight given break-even prices for shale drillers are roughly $35-$40 per barrel.  Does the U.S. want to see prices back down to low 50’s or high 40’s?  At this pace it would appear so.

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Exxon was in the news today in regards to its 2016 reported cuts to oil and gas reserves. This is the second year in a row that Exxon has needed to make cuts in its reserves and attributes it to the low prices of 2016.  The reported cuts in Exxon’s reserves were said to be from 24.8 billion barrels of oil in 2015 to 20 billion at the end of 2016.  Exxon released a statement indicating that the cuts are “not expected to affect the operation of the underlying projects or to alter the company’s outlook for future production volumes.”  The Securities and Exchange Commission, or SEC, forces companies to report only reserves that are “economically producible.”  This is set on the first day of each month based on average oil and gas prices. 

The majority of this cut that Exxon has to endure is based in the western Canadian oil sands. Exxon may be able to recover these reserves but that all depends on the price per barrel.  Another statement released by Exxon said, “Management does not believe that lower prices are sustainable if energy is to be delivered with supply security to meet global demand over the long term.”  It was not all bad news though as Exxon was able to offset some of what was lost by adding roughly 1 billion boe (barrel of oil equivalent) in multiple acquisitions and new ventures.  The SEC makes its decisions on a month-to-month basis and most of the major oil and gas companies plan within a decade.  While these cuts for Exxon’s reserves may look like a negative now, the company says, “While near-term prices are subject to wide fluctuations, longer-term price views are more stable and meaningful for purposes of assessing future cash flows.”


Categories: Daily Market Update


Jon Kalchthaler

Written by

Jon Kalchthaler


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