Oil Price Crash Update

In the fast moving oil market much of the fundamental data only becomes available for general consumption at least one month in arrears. But EIA oil price data and Baker Hughes rig counts are available weekly and with much action going on it is worthwhile updating.

The price plunge seems to have reversed, at least for the time being (more on that below). But the most stunning data is the free fall in US oil drilling rigs shown in Figure 1, down 553 (34%) from the October top. The IEA also published their Oil Market Report early this month, on 10th February, reporting oil supplies were down 235,000 bpd in January, mainly in OPEC countries Iraq and Libya.

Figure 1 The US oil rig count is down to 1056 rigs from a peak of 1609 in October last year. The gas rig count continues to inch downwards slowly. The collapse in US shale oil drilling, that looks set to continue, must lead to US oil production decline in the months ahead.

Figure 2 The bounce in the oil price is as sharp as the crash and is difficult to see at this scale. Hence, move on to Figure 3.

Figure 3 The low point in Brent of $45.13 was reached on 13th January. On Friday 13th February Brent closed at $61.52, up 36% in a month. Anyone who got lucky on timing investments will have made a killing.

Where there is smoke, there is usually fire. Here is the summary from the January OMR published on 10th February. Subscribers to the OMR already have the full data which may in part underpin the current rally.

  • Oil prices rebounded from near six-year lows touched in January as market participants took stock of declines in US rig counts and relatively positive US economic data. At the time of writing, ICE Brent was trading at $58.25/bbl – roughly 50% below its June 2014 peak. NYMEX WTI was at $52.55/bbl.
  • Global supplies fell by 235 kb/d in January to 94.1 mb/d on lower OPEC and non-OPEC production. Reductions in capital expenditures have cut projected 2015 non-OPEC supply growth to 800 kb/d. US 2015 production is seen 200 kb/d lower than in last month’s Report, at an average 12.4 mb/d, with most of the cuts in 2H15.
  • OPEC crude oil output fell by 240 kb/d in January to 30.31 mb/d, led by losses from Iraq and Libya. Output from Saudi Arabia, Kuwait, Angola and Nigeria edged up. Downward revisions to the non-OPEC supply growth forecast for 2H15 have raised the ‘call’ on OPEC to an average 30.2 mb/d – just above the group’s official target of 30 mb/d.
  • The forecast of global oil demand growth for 2015 is unchanged from last month’s Report, at 0.9 mb/d, bringing average demand for the year to 93.4 mb/d.Growth is expected to gain momentum from a modest 0.6 mb/d gain in 2014, on a slightly improved macroeconomic outlook.
  • OECD industry stocks slipped by 5.3 mb in December, roughly one tenth of the five-year average draw for the month. Consequently, inventories’ surplus to average levels ballooned to 65 mb from 16 mb in November, its widest since October 2010. Preliminary data point to a seasonal 22.7 mb stock build in January.
  • Global refinery crude throughputs rose by 1.1 mb/d in December, to 79.1 mb/d,before maintenance curbed activity in January. An unexpected dip in Saudi Arabian runs in November underpins a 140 kb/d downward revision to last month’s assessment of 4Q14 runs, to 78.1 mb/d. Throughputs are projected to fall to 77.6 mb/d in 1Q15.

So does this mean the crisis is over? I don’t think so, but the price bottom might be in and recent action may mark the end of the plunge. Supply – demand differential movement needs to be of the order 2 to 4 million barrels per day to underpin a strong recovery in price and the half cycle normally takes about 18 months to work through the economy. So I’d expect prices to bump along bottom for a few months, perhaps testing recent lows before the long climb back begins.

It looks as though the US shale oil industry is falling on its face. This will inevitably lead to a fall in US production and that country dipping more deeply once again into international markets. This will be the main driver for a full oil price recovery. But what then? The oil industry needs a stable price environment to make long term and very large investment decisions. If higher price sends the shale drillers back into business then this will surely lead to another collapse. For many years The Texas Railroad Commission controlled Texas oil production providing price stability a role subsequently assumed by OPEC and Saudi Arabia who for many years exercised that control with great skill to the benefit of all. The oil industry, a raw symbol of capitalism, may have to accept that it cannot survive in a free market environment. It hasn’t done so in the past.

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13 Responses to Oil Price Crash Update

  1. Sam Taylor says:


    The one thing that might stop US production crashing fairly quickly is the backlog of wells awaiting fracking and completion. There’s about 750 of them in the Bakken alone, I think, which might mean that reduced drilling doesn’t lead to a reduction in output for a while. It’s only, what, $2 million a pop to frack them, so that does provide a buffer of sorts. Annual finanaicls are due out at the end of the month, and their assets will be calculated with December oil prices. That should be interesting reading.

    I do wonder how much of an effect the resumption of hostilities in Libya is having/could continue to have on the price. 200kbpd is not insignificant.

    • Euan Mearns says:

      With 1600 rigs drilling a few months ago, how long would it take the shale drilling industry to drill 750 wells? Its a good point and this sounds like a big number but its maybe 4 to 6 weeks drilling on Bakken?

      • Sam Taylor says:

        I think the Bakken’s been adding around 200 wells a month recently, maybe needs 120 to hold production steady, so with a reduced drilling rate there’s potentially quite a pool to draw down from and not decline. I guess it depends on whether there’s similar backlogs elsewhere in the US or if the Bakken is unique.

  2. Retired Dave says:

    Wasn’t the whole price drop strategy (well lack of support for the price) of OPEC designed to make US Shale economically non-viable. BUT what price did it fall on its face Euan? Surely that is the price (plus a margin) it might level at – with US Shale production as the valve.

    OR is that far too simplistic??

  3. Ralph says:

    Libyan production is looking likely to fall further, back towards zero, as Islamic rebels are increasingly targeting oil production.

    Brent is back over $62. $9 above WTI price.

    When considering global crude and condensate, the entire increase in global production since 2006 (from 74 to 78 Mbpd) Is covered by increase USA production. Most of that increase has been shale oil, and most of the shale oil is condensate.
    Condensate is too light (short hydrocarbon chain) to produce much except petrol. It produces very little diesel or other middle distillate products. In the USA today, oil stocks are at record highs, yet they still import nearly 7Mbpd of oil. The USA does not allow the export of ‘oil’.

    This apparent imbalance has an obvious cause.

    The USA has a massive glut of condensate. They are not allowed to export it, and the global market for it is not there anyway. This , combined with economic woes in Chana, Europe, etc., has allowed the imbalance in the markets.

    When the price collapsed, there was much discussion about which part of the oil industry would be hardest hit. The answer of course is US shale production. It is a classic investment bubble, funded on cheap credit chasing unrealistic returns, and flooded the local market with a product that can’t be exported.

    Of course, with the collapse of shale production, we will also have the (secondary) peak of US oil production, and the global peak of crude and condensate production.

    • sayer says:

      The US doesn’t have a complete ban on oil exports. For example, they have always been allowed to export to Canada and while that doesn’t seem sensible on the surface their high volume of condensate is exactly what the oil sands need as diluent. Several hundred thousand barrels a day are shipped for this purpose. In addition, the US has recently confirmed that condensate that has made a trip through a distillation tower is processed enough to side step the ban. The net result is something near a million barrels a day of condensate are expected to be exported in 2015.

  4. Dave Rutledge says:


    “Saudi Arabia who for many years exercised that control with great skill to the benefit of all.”

    Debatable. The Saudi era dates from 1970. There were major price spikes in 1974, 1980, 2008, and 2011 and the inflation-adjusted price from 1974 till now in the BP Statistical Review has varied by more than a factor of six. The Saudis also used boycotts as a weapon.

    In the TRC era from 1930 to 1970, the price varied from $10 to $20.


  5. Sean Rush says:

    Could the US be a new stabilising influence and impose import taxes on non US crude production?

  6. Pingback: Oil Price Crash Update – Posted on February 16, 2015 by Euan Meams | angelloaguello

  7. 1mjanus says:

    Hi Euan. I’m new to this blog. Its very interesting- thank you. I’d like to add to your point above that improved prospects for US economic growth, fuelled in part by cheap gas feedstock, bolsters the USD which is a contributor to oil price decline as well.

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  9. plaksivaya_tryapka says:

    Hi, Euan! Some information about US oil and gas EROEI: http://world-around-us.org/2015/01/us-eroei/
    I thought it would be interesting because there were no information about it for years. Excuse me for offtopic.

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