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Last Updated: March 21, 2016
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This is the first edition of the "Oil Industry Insider Report" which is planned to be produced in a weekly basis to share oil and gas industry insights, recent trends and important events taking place.

 

We start our weekly oil industry insider's report with the most important oil market event where oil prices' rally reversed course as a result of Iran's resistance to join other producers in freezing oil production as well as a continuous build of U.S. crude stockpiles.


On Monday, following the news of Iran's declaration not to cap its oil output, and the continuous build of U.S. crude stockpiles, Brent crude dropped down 86 cents, or 2.13 percent, at $39.53, while WTI lost $1.32, or 3.43 percent, at $37.18.


Although speculators are optimistic about the short term of oil prices, and expecting the rally to gain momentum, oil producers on the other hand are not trusting that prices will hold up over the medium-term. According to Morgan Stanley, oil producers are hedging against the volatility in prices after prices have surged by about 40 percent in recent weeks, and this means they are limiting how far oil prices can go.

 

In hedging against volatility, oil producers sell futures contract at the current oil prices, usually with the intention to buy those contract back prior to their expire. In this case, producers would earn a net gain if the settlement prices are lower than what they sold the contracts for. If prices are higher, producers lose because they have to buy the contract at higher prices than the hedged price.

 

The increase in hedging against volatility at $40-a-barrel range tells us that producers are incentivized to sell and produce more oil for a long period of time in order for oil prices to remain below their prevailing hedges.

 

Rig Count: Continuous fall in the U.S. and elsewhere

 

According to Baker Hughes rig count service, U.S. rotary rig count dropped 9 last week to 480, with 386 oil rigs and 94 natural gas rigs. The number of rig count is down 645 from 1,125 last year, and it seems the rig count will continue declining as the oil market is locked between financial volatility and fundamental volatility.

 

Regardless of the continuous decline in U.S. rig count, its production has shown a huge resistance due to the role advanced technology played in offsetting the effect of rig count decline. However, as time goes, the effect of low rig count starts to take place, and this is what is happening right now. The of resilience of U.S. is weakening and production continues to decline.

 

At the international level, the rig count is also experiencing a downturn trend. According to a report by Houston-based Simmons & Co. International, the international rig count is down by 30 to 43 percent since 2014. While in the Middle East drilling and exploration is maintained, in Africa and Latin America it is not so.

 

Low oil prices have led many producers in Africa and Latin America to reduce their rig count. The consequences of such  fall in the international rig count will be obvious in the medium-term in terms of a reduction in oil supply. 

 

Oil Production: Freeze and fall taking place

 

U.S. oil production has been showing a great deal of resilience since the beginning of oil prices crash. This seems not to be the case anymore as production drop started to accelerate over the past few weeks.

 

According to the weekly U.S. oil production data by EIA, the U.S. oil production is about 9,078,000 million barrel a during the first week of March. U.S. production has dropped to this level on October last year before it starts increasing again, but this time the production is likely to drop further.

 

U.S. crude production is expected to decline to 8.19 million barrels a day next year according to the EIA's Short-Term Energy Outlook on March 8.

 

In terms of the global oil production, according to the IEA's OIl Market Report on March 11, the global supply eased by 180 kb/d in February, to 96.5 md/d, due to lower oil production from both OPEC and non-OPEC producers. Production stood around 1.8 mb/d above a year earlier as non-OPEC decline was offset by gains in OPEC output.


According to IEA, OPEC crude oil production eased by 90 kb/d in February to 32.61 mb/d as a result of production losses from UAE, Iraq and Nigeria. OPEC output was supposed to decline more however the rise in flows from post-sanctions Iran offset the output losses from other cartel's members.  Production from non-OPEC is estimated to decline by 750 kb/d, to 57.0 mb/d in 2016.


Currently the main focus is on non-OPEC countries to see if high-cost output is falling. In fact, that is currently happening right now, with U.S. oil output falling continuously, and according to EIA, U.S. production is expected to fall by 530 kb/d.

 

Besides that, the oil market is putting much hope for a recovery on the proposed new producers talk on coordinated output action even-though Iran has already rejected the idea of cooperating in production freeze. However, the effect of Iran's decision not to cooperate in the production freeze might amount to nothing as it canbe offset by OPEC's members who increased their production to compensate for the partial loss of Iran's oil supply when it was under sanctions.

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OPEC And The Current State of Oil Fundamentals

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