Crude rig rise and fall

While many are focused on the meteoric rise in the U.S. oil rig count, one must wonder why the Canadian oil rig count plummeted last week. There are headlines that read the increase in the U.S. rig count increased for the ninth time in a row by 14. Yet, in Canada the oil rig count fell by 31 rigs as it appears that Canada is abandoning its quest to capture oil from sand. So that means the increase in U.S. oil rigs will not only have to try to replace OPEC oil, it may have to replace lost Canadian oil production as well.

Like the United States, Canada was raising its oil rig count in anticipation of higher crude oil prices yet it seems that ground to a halt last week. The common mantra by oil watchers is that U.S. shale will replace OPEC cuts and that’s not true. U.S. oil output has risen to more than 9.1 million bpd from below 8.5 million bpd in June last year, impressive but not nearly enough to offset OPEC cuts. Bloomberg put OPEC cuts at around 1.2 million barrels a day. If translated barrel-for-barrel into exports, that means we ought to see the volume of oil in transit fall the same amount. So, in the first 70 days of this year, we ought to have seen it fall by about 84 million barrels, all other things being equal.

That does not factor in non-OPEC cuts, which will put more pressure on the shale producers who will keep production and must start to fight well production declines. That means shale producers may have to double the number of rigs to keep up with oil demand growth during the next few years and that is if they can find the capital. Still, the total rigs active in the United States are up to 789 from 768 last week and 476 last year, but need to go a lot higher. Most of the rigs were horizontal rig drilling for the low hanging fruit with a steep decline rate. Only two vertical rigs were brought online because for the longer-term projects, they are still too costly.

Despite the near term oil glut that the market is now fixated on, the global market is showing signs that we will soon be tightening. Data from U.K. research firm Oil Movements as reported by Bloomberg shows the volume of oil in transit is falling since the start of the year. The volume of oil in tankers fell around 9 million barrels from Dec. 31 to March 11, which equates to 123,000 barrels a day. The forecast is for volumes to drop another 7 million barrels by April 1. Still oil needs to repair technical damage as well. As refiners start to come out of maintenance we should see supply start to fall and we are head for a tighter market.

Trilby Lundberg, the highly-respected author of the Lundberg Survey, is driving down on the peak gasoline demand drop myth. Trilby points out that demand in 2016 was up 2.2% and up 5.1% during the last two years. This surge came despite our drive for energy efficiency and electric cars. Despite a drop this year, the outlook for demand rebound is strong. Lundberg cites Trump's easing of CAFÉ standards as well as a prediction by the Department of Transportation that we will set a record for miles driven.

Lundberg says that a string job growth as evidenced by the latest employment report numbers, bodes well for demand as well as record car sales and new drivers joining the ranks. We are also seeing a big rise in truck and SUV sales and bigger is better when it comes to gasoline demand expectations. In this extensive report you will be wondering why we are upgrading out gas demand numbers. It is because more than likely the demand drop was overstated.