Libya Supply Back Online, Wildcatters Drill On

Newsclips — May 1, 2017

By Pete Forbes

Bloomberg – Oil Price Optimism Wears Off as Texas Wildcatters Drill On Money managers slash WTI net-long position by most in 6 weeks The relentless drilling ramp-up in America’s top shale plays is making investors more skeptical that an oil price rebound is on the horizon. After increasing their bets on rising West Texas Intermediate crude… Continue reading Libya Supply Back Online, Wildcatters Drill On

  • Bloomberg – Oil Price Optimism Wears Off as Texas Wildcatters Drill On
    Money managers slash WTI net-long position by most in 6 weeks
    The relentless drilling ramp-up in America’s top shale plays is making investors more skeptical that an oil price rebound is on the horizon. After increasing their bets on rising West Texas Intermediate crude for three straight weeks, money managers slashed the wagers by 21 percent, according to U.S. Commodity Futures Trading Commission data. Producers in Texas are leading the longest shale revival since 2011, making OPEC-led efforts to rebalance the market increasingly difficult.
  • Bloomberg – Oil Falls as U.S. Drillers Boost Rigs and Libya Expands Output
    U.S. rigs drilling for crude increase for 15th straight week
    Oil declined as rigs targeting crude in the U.S. rose for a fifteenth week and output from Libya rebounded. Futures in New York lost as much as 0.6 percent after gaining 0.7 percent Friday. The number of oil rigs operating in U.S. fields advanced to the most since April 2015, according to Baker Hughes Inc. Libya’s crude production rebounded to more than 700,000 barrels a day as the OPEC member’s biggest oil field and another deposit in its western region resumed pumping after a halt.
  • Bloomberg Gadfly – Oil’s Big American Glut Is Resting Elsewhere
    In the most recent week’s data, the volume of gasoline and middle distillates in storage rose, more than offsetting the draw down in crude stockpiles. Gasoline stores have been increasing for the last two weeks, bucking seasonal trends. Excluding the SPR, total U.S. oil inventories, including crude and refined products, rose by more than 6.6 million barrels in last week’s data — their biggest increase since early February. Hardly evidence of a rebalancing.

Comment

The latest update of our Interactive COT report shows that money managers have trimmed long positions. The chart below shows the net positions of different groups as z-scores, or standard deviations from the long term average. Money managers are nearly flat for the first time in about a month. The last extreme long position peaked at the end of February, just before excess supply concerns came into focus.

Meanwhile, Baker Hughes rig count data shows continued growth in the key U.S. shale oil regions. We’ve highlighted the growing significance of U.S. tight oil in the global supply picture many times, last on April 21. The next chart highlights just how much of the growth in drilling activity has been concentrated in the Permian Basin of western Texas and eastern New Mexico. The Permian region has added 208 rigs in the past year, well more than all other regions combined. Oil production per rig has increased during that time as well. We have yet to see the supply impacts of all of this activity.

Restarted shipments from Libya will be yet another source of supply helping keep a lid on prices. The EIA reports unplanned production outages monthly and estimated 710,000 barrels per day of outages in Libya. With the Sharara and El Feel fields coming back online, about one third of that will be back on the market. The chart below is from the EIA’s April update and shows March data.

Conclusion

With medium-term production increasingly hedged and breakeven rates for both new wells and existing wells below current market prices, wildcat drillers in the Permian region have all the incentive to keep their foot on the gas.

Renewed production from Libya comes just weeks before OPEC must try to circle the wagons again and defend their market share. While they struggle to maintain their leverage on the global market, west Texas drillers will be working to take away whatever market share they will yield.