Hold Back the barrels and we’ll have a barrel of fun. Hold back the barrels and we will get crude on the run. Zing boom tararrel, the breakout in oil is clear, now when you hold back the barrels the short fall is here.
Oil prices tried to back off after the Energy Information Administration reported that U.S. refiners are getting deep into refinery maintenance and that U.S. crude production hit a record 11.1 million barrels per day. Yet, a report that the U.S. will not tap the U.S. Strategic Petroleum Reserve (SPR) to make up for lost Iranian barrels changed the dynamic. That pushed oil back up to near 4-year highs on Brent crude and 4-month highs on the old reliable WTI. Energy Secretary Rick Perry in an interview said that the Trump Administration is not going to use oil from the SPR mainly because he knows that if they do, it will probably backfire. Perry was quoted as saying that “If you look at the Strategic Petroleum Reserve and you were to introduce it into the market, it has a minor and short-term impact. The numbers I’ve seen do anyway.”
Perry is right. While the oil price will trade higher and the market will become extremely tight without a SPR release, that is a good thing. A release from the SPR will give the market a false sense of security and the demand side of the equation would be slow to adjust to less barrels. The SPR release would cool prices but also cool incentive to bring more barrels onto the market quickly. We have already seen U.S. oil producers try to speed up projects to try to capture the expected increase in price. If the SPR dampers that enthusiasm, the market will become even more structurally under-supplied. Many Shale oil producers are still struggling to make profits and they really do not need more competition from the government when they have a chance to rake in some money. Pioneer, for example, had to lower their guidance yesterday because of at higher day rates on oil rig contracts.
International drilling utilization estimated to be approximately 76% to 80% versus previous guidance of 85% to 87% primarily due to higher than anticipated unpaid standby time and one rig released in mid-September due to a change in an operator’s drilling program. This rig is currently being bid to several operators for reactivation in the fourth quarter. They also said that production services revenues are estimated to be down 5% to 7% sequentially versus previous guidance of down 3% to 5%. In addition, gross margin as a percentage of revenue is estimated to be approximately 21% to 23% versus previous guidance of 23% to 25%. Both revenue and gross margin percentages are down due to softer than expected activity in wireline.
