US oil production continues to climb and hits an all-time high
Energy services giant Baker Hughes publishes weekly rig count data which gets a lot of attention in the energy markets. The latest figures shows the total number of rigs in North America fell to 1597, down from 2395 rigs in February of last year. A lower rig count should theoretically be positive for crude oil prices, since this should eventually spur a decline in crude oil production. But that hasn't actually been happening, or at least not yet.
US domestic crude oil production continues to climb week over week, ending February at a record 9.29 million barrels/day. US crude oil production is now higher than it was in 1985, when production peaked at almost 9 million barrels/day. Even though crude oil prices collapsed in late 1985, it wasn't until one year later that meaningful declines were observed in domestic production.
So why the disconnect between the rig count and oil production? Partially because there's a difference between an exploratory well (where a company is looking for new oil) and a producing oil well. It is likely that energy companies are cutting back on their exploratory wells which likely won't affect short term oil production. Some analysts are also speculating that the rig count isn't falling fast enough to support any meaningful recovery in oil prices. The most recent data from the US Energy Information Agency estimates the world crude oil markets are still oversupplied by 2.3 million barrels per day.
So where is all this extra oil going?
Although there has been a meaningful increase in US crude oil exports, a majority of the surplus is going to storage.
Stockpiles levels have been rising sharply for the past few months, on account of two major factors:
- The on-going strike of crude oil refinery employees in the US, which began in early February.
- Oil traders and producers are choosing to store crude oil for sale at a later date, when prices are expected to recover.
The bottom line is that it doesn't appear to be any breaks on the supply/demand curve for crude oil, at least not in the short term.