Contango crude markets

April 9, 2015 09:39 AM

Increasing our reliance on foreign crude oil?

Is the United States increasing its reliance on foreign crude oil? Well it seems last week did. Despite the glut of crude oil in the United States we decided to import the most oil we have all year leading to a stunning 10.9 million barrel increase in crude oil supply leading to the most oil in inventory since about 1930. Oil Imports rose 869,000 barrels a day to 8.22 million last week. Most of that oil is going to the Gulf Coast where refiners are ramping up production as runs soared to 90.1% of the new expanded refining capacity.

With crude price differentials still favorable the market is saying send us you’re tired, your poor, your huddled masses and your extra barrels of crude. U.S. oil production also came back 9.404 million barrels per day as the market continues to look for U.S. peak production which is being created in part by record Saudi production and those rising U.S. imports.     

The news not only brought down crude prices but gasoline and distillate fuel as well. Even as the build in gasoline came in 800,000 barrels less than expected it seems the expectations that supply that is already high for this time of year will surge in the coming weeks. Then those crude imports will go to gasoline and diesel exports not to mention feed what should be a jump in U.S. gasoline demand.

But despite all this oil prices are rebounding back today as there are signs that U.S. production will soon start to fall and global demand should start to rise. The contango in the futures market is paying people to store oil for a reason. The reason most likely is that demand is about to explode or that supply is going to become constrained.

Genscape, is saying in a new report that there is a contango-driven incentive for operators to defer well completions in anticipation of a more rewarding forward curve. Genscape says that already six producers alone have announced 845 well completion deferrals in Eagle Ford, Bakken, Wattenberg, and Permian. The impact of these 845 wells would be about 373 million barrels per day of oil and 528 million metric cubic feet per day of gas. 

They say they have been factoring in expectations of lower service costs due to lower oil prices and the need to meet drilling rig and lease drilling commitments, while also conserving capital, by doing one thing: drilling wells but deferring completions. Cabot, Chesapeake, EOG, SM Energy, Apache, and Anadarko alone have announced completion deferrals. In addition, Continental has stated they have the ability to “defer a significant amount of activity to await a better commodity price environment and lower oil field service cost,” and, after Q!, deferred 25% vs. previously planned levels of completion activity in Bakken.  So put that oil away for a rainy day.      


About the Author

Phil Flynn is a senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. Phil is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets.