For months I’ve been talking about the potential of falling prices and rig counts to lower production. Well, in last week’s Energy Information Administration weekly petroleum report we finally saw a significant drop in crude oil output of 2.8% below the week before.
Three weeks ago, I wrote about a small drop in production as the potential beginning of decline. But then the following week saw the year’s highest production at 5.481 million barrels per day (Mbd). So I waited to report the small fall in production that I read about last week (a 1.1% slide to 5.421) until after a second straight drop followed it. And that consecutive drop was reported this week as output slid further to 5.269 Mbd.
A Significant Drop in Production
While US crude production currently remains .25 Mbd above last year, the .21 Mbd (almost 4%) drop in production over two weeks could signal tighter supplies on the way. If such a rapid decrease continues for three more short weeks, output would fall below 5 Mbd again and require imports to rise.
High Fuel Inventories Prevent Short-Term Worry
Recessionary low demand has caused all fuel inventories to remain above average. While gasoline demand was only down .4% last week, demand for distillates (mainly diesel) and propane fell 16.8% and 8.5%, respectively. As a result, crude oil inventories are almost 15% higher than last year and the highest since 1990. So it will take many weeks of US production below 5 Mbd for supplies to feel tight again.
Rig Count Falling, But More Slowly
The number of rigs actively drilling for new oil and natural gas wells slid again this week to 945 (oil fell 6 to 196, natural gas fell 1 to 741, and miscellaneous fell 3 to 8). This weekly slide of 10 rigs (1%) is much slower than the ~40 rig drops of recent weeks. But the further slide means that oil output will probably continue to decline for several months. And natural gas, with its faster decline rates, will probably begin to show significant production decreases soon. With natural gas storage that is 34% above last year and 22.5% above the five-year average, this fuel carries no short-term worry either. But by late summer, output declines may catch up with the rate of recession-induced demand reduction and get the price back above $4 per MBtu.
Bottom Line: The falling rig count is finally translating into lower oil output and will soon show itself in natural gas production numbers. While supplies are ample for the short-term, more market tightness is on the way in the medium term. A continued focus on deploying efficiency and renewables can prevent a 2008-style price spike as output falls in late 2009 and 2010.
Onwards in the Sustainable Energy Transition-
Tags: 2009, Natural Gas, oil prices, renewable energy, rig count, US