Oil prices sold off ahead of expiration as traders had their eyes on the skies and not their trading screens. Oil was eclipsed in a day where stock market volumes dried up and it seemed that traders ran for cover ahead of expiration. OPEC punted at their technical meeting and put off a decision to extend until their November meeting. Today is the September expiration and we are bouncing off support as we look to the heart of the shoulder season when gasoline demand dips and refineries go into maintenance. Yet a drop in US oil rig counts and reports that BHP Billiton is getting out of the US shale business is raising questions about the level of US oil production going forward. The oil market most likely will have to prepare for another big drop in US crude supply that will come after the September contract is history.

The market should be expecting a big drop in crude oil supply. Genscape, the private forecasting firm, reported that crude supply in the Cushing, Oklahoma delivery point had fallen by over 1.0 million barrels last week. Cushing, Oklahoma was the one bright spot for oil bears as it had seen some increases even as the US Gulf coast inventories fell at a record pace.

Refiner demand for oil is still at a record high and a lot of oil that is in storage is too light for many refiners to run. That suggests that supply of ready to use oil is tighter and it is one reason the bull oil spread should continue to work.

We are feeling the weight of OPEC production cuts especially the heavy oil from Saudi Arabia and Venezuela. U.S. commercial crude inventories have fallen by almost 13 percent from their March peaks, to 466.5 million barrels according to EIA data. 

Shale dump. BHP Billiton Ltd, after pressure from activist investors, are selling its onshore U.S. oil-and-gas operations as they have been losing big money in the US shale play. The company spent big on shale but it has not yielded a return as the conglomerate was just too big and clunky to squeeze profits out of an increasing difficult and complicated shale oil play. The company claimed that the US was not its core play and after earnings that came in shy of expectations, were forced to admit that the shale play is better left to someone else. They were under pressure from New York hedge fund Elliott Management Corp. who slammed the company for wasting billions of dollars in the US shale patch. The company got caught up in the shale hype and overspent for assets and is now pulling back from the shale space.

This should be a warning for other shale producers. Years ago we talked about the upside of the US shale market long before most people understood how dynamic it could be. Yet the rush to jump in at any price was a mistake because one must consider shale limitations. With deep decline rates and the need to keep on drilling, it is imperative that you keep your well head economics in a realistic place. Shale will be explosive again in the next decade and BHP might miss out when it comes back.

In the meantime we are starting to see more signs that US oil output from shale may be peaking. Not only do we see the rig count topping out, the production of oil per well continues to fall. The best shale play areas have been picked over and shale players may have to drill more to keep production levels rising. We have been warning about this for months and now others are starting to see the evidence that this is happening.