Wednesday Night Meanderings On The Movement Of The Price Of Oil -- June 22, 2016

John Kemp says gasoline supplies, in the US, seasonally adjusted are down to 24 days. That's about what it was before the Saudi Surge. The US driving season has not yet begun.

Everybody tells me and the tea leaves suggest we will continue to see $50 - $60 oil through the end of the year, and pretty much $60 oil through 2017.

But, I just get that "feeling" that maybe we might be surprised.

What little I know suggests Saudi Arabia, OPEC, Russia, are pumping about as much as they can pump. The US production has come down quickly; everyone suggests that if the price starts to move upward, US production can respond quickly. I'm not so sure. It would not surprise me to see oil spike before independent oil companies in the US caught the spike.

In North Dakota, this is the way things will play out.

Think of a pyramid of sorts. At the base are an unknown number of wells, measured in the thousands, that are producing oil but are not being produced at maximum rates.

At the next tier, there are 1,500 inactive wells. These are wells that could be brought back into production very, very quickly. Some have been taken off-line for operational reasons, e.g., neighboring fracking, but most are probably inactive due to low price oil.

Then we have the DUCs. Everyone and his brother or sister has a different opinion on how fast these wells can be fracked. I think it's a non-story. They will be fracked faster than folks think possible if the economics drive it.

Finally, we have the active rig count. The major independents won't change the number of active rigs they have by very much -- they can do with one rig what they used to be able to do with five rigs. It's the smaller independents that will bring on a new rig. And it will only be one rig for most small independent operators.

As "good" as everything is, including an incredibly robust infrastructure, I don't think that much production will be brought on as fast as some folks think ...

... we hit a new record for gasoline demand last week. Don is correct: some of that demand is for export (Venezuela may need gasoline; France may need gasoline). But it's still a record.

So my hunch is that the analysts are correct and interpretation of the tea leaves are correct: that the price of oil will range between the low $50s and get into the $60s next year, but a little bit of me things that things could move more quickly than mainstream pundits suggest.

But then again, I'm always looking through oily-covered glasses. I posted this graphic just a few days ago. Up or down, the price moves are not small. There's a lot more green than red. Throw out the outliers on both sides (outliers both green and red) and one is pretty much left with green.

Earlier, a reader sent me this note, posted elsewhere, with some thoughts on how things might play out:

Currently there are only 25 large rigs capable of drilling drilling to TD in North Dakota.

Three listed rigs are only drilling surface holes to about 2000 feet (Noble 1 & 2, AES 36). Capstar 311 is drilling a saltwater disposal well in southeast McKenzie County.

State/national drilling rig counts are normally inflated when these smaller support rigs are added to the total of large rigs which can drill through the payzone and potentially increase production.

I believe it is very important to note, there were nearly 3600 rigs operating worldwide in late 2014 when oil prices started to fall. According to Baker-Hughes, there are only 1450 rigs operating somewhere in the world today.

It is estimated about 2800 to 3000 rigs are necessary to resupply the normal depletion of the world's producing wells.

If reports of world production and consumption are "in balance" and we are beginning to burn-down the over supply from the past year, the current rig count should be causing flashing red lights in the coming months.

The nearly 1,000 "drilled-uncompleted" wells in ND are significant but with less than 10 fracking teams active it's going to take many months to get these DUCs on line. Any gearing-up is going to be slow with prices under $60 per barrel.