Decline in drilling, oil prices up

September 22
6:44 PM 2015

Oil prices rose following the indications that stockpiles are declining and drop in drilling activity. The global oil benchmark Brent was up three percent as expectations that less drilling may reduce future oil production and inventories as well. Gasoline futures also surged on renewed demand. US crude's front-month rose 4.5 percent or $2 to end at $46.68 a barrel. Brent rose 3.1 percent and closed at $48.92/barrel. It's learnt that US drillers have called off drilling activity for the past three weeks. It's estimated that the US crude production may drop by 250,000 barrels per day (bpd) the second and fourth quarters this year.

Genscape, a market intelligence firm, forecasts a draw of 810,000 barrels during the week ended 11 September from storage tanks at Cushing, Oklahoma. Cushing storage tanks are the main delivery point for the US crude futures. 

The week ending 11 September, Cushing stocks dropped to 2million barrels recorded the biggest draw since February 2014 as per the US government data. The latest data reveals that US crude inventories fell by 2.1mn barrels last week. 

Traders in crude turned keen on soon to expire front-month contract in the West Texas Intermediate (WTI). This serves as the US benchmark. WTI's October contract CLV5 will expire on NYMEX board as the settlement is due on Tuesday. Then November CLX5 will come into force as the front-month contract.

Market analysts say that there's some crackspread action as the market moving towards WTI expiration on Tuesday. This is all adding to the price rise. It's estimated that $1.5trillion of uncommitted spending on new conventional projects. The unconventional oil of the US is not viable even at a price of $50 per barrel.

Crude prices dropped by over 50 percent during the past one year owing to soaring oil production globally. The production levels have far exceeded the demand. The demand was further hit by the economy slowdown in China and other European nations. The present lower oil prices have started impacting the drilling activity more so in the US oil sector.

The operators suggest that the project reduction should be in the range of 20-30 percent just to make it operational. Energy consultancy firm Wood Mackenzie says that even supply chain savings through cost cutting in the service sector will result in reduction up to 15 percent in the project cost. 

According to Goldman Sachs, It's estimated that the US crude production may drop by 250,000 barrels per day (bpd) the second and fourth quarters this year. 

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