Upwards and Onwards

Upwards and Onwards

27th March 2017

Déjà vu; up 22 this week, the onshore rig count has now gained 53 rigs in the first three weeks of March, bringing the total to 787 - 82% up from last year’s 432.  This is the 37th increase in 39 weeks.  It appears that shale producers are committed to increasing US crude production across all major basins. 

Natural Gas – Buyers flex their muscles

In the “old days”, arrangements governing regular deliveries from a particular LNG export facility to the buyers’ import facility was based on long term, take or pay contracts, its value dependent on the oil indexation, and based on a fixed export and import location.  While many LNG buyers, and some sellers, would like to find an alternative, there has been a lack of other reliable mechanisms and models.

This week, two future-thinking developments helped underline the rapid erosion of the outdated interaction style between buyers and the now beleaguered LNG sellers struggling to sell their gas in an increasingly saturated market.

Representing one-third of the gas buying community by volume, key buyers from Japan, Korea and China announced a new cooperative alliance with one of their main objectives being the removal of the destination clauses from some of these classical contracts.  If successful, gas that has been “overbought” could be sold on to other LNG buyers without the consent of the seller …… effectively putting the gas back into the market to compete against the sellers who are supplying the gas in the first place.  

This change in thinking has been a long drawn out debate.  Japan took the lead with sellers about the legal validity of these destination restrictions, and now with the added weight of Korean and Chinese buyers, those longstanding restrictive terms are feeling the pressure.

In another signal of the turning tide, the other stalwart of the LNG contract, oil indexation, had another setback this week when Intercontinental Exchange Inc. (ICE) announced plans to start trading LNG futures based on Platts LNG Gulf Coast Marker. 

This latest move from ICE is one of many over the last year adding confidence to those who are looking for mechanisms to support a market clearing price for LNG that doesn’t depend on oil.

Crude Oil – US crude oil imports rise

Weekly data shows record high US crude inventories rising faster than expected, which is beginning to raise doubts over the viability of OPEC-led production cuts. US inventories climbed almost 5 million barrels to 533.1 million barrels last week, a new high and far outpacing market expectations.

The fact that inventories have increased almost 55 million barrels this year in the face of significant OPEC production cuts is evolving as a major bearish development that poses a significant threat to the viability of the OPEC agreement.  Could we see OPEC reverse their strategy and defend market share again?

A deal between The OPEC and some non-OPEC producers to reduce output by 1.8 million barrels per day in the first half of 2017 has done little to reduce bulging US oil stockpiles. OPEC has broadly delivered on pledged reductions, but non-OPEC states have yet to cut fully in line with their commitments.

US shale oil producers have been adding rigs since May 2016, boosting weekly oil production to 9.13 million barrels per day for the week ended March 17 from an average 8.8 million barrels per day for 2016.

OPEC's market intervention has not yet resulted in significant visible inventory drawdowns, and US crude production is expected to grow by 360,000 barrels per day in 2017 and 1 million barrel per day in 2018, and any price increase could spur more US shale activity.

OPEC and US shale producers continue to fight in the global oil market. The battle has been recently defined by OPEC’s production cuts, but increase in US shale production has started to counter that movement.

Sources: EIA Weekly Update and GCA analysis

Weekly Recaps

Oil Drilling Activity

The total number of active onshore rigs increased to 787.  When compared to a November 2014 figure of 1,876 active rigs, the current level remains 58% below the 2014 high.

Across the three major unconventional oil basins, the oil rig total increased to 423 (up 10 last week), with Permian up 7, Eagle Ford up 2 and Williston up 1.

Total US rig count (including the Gulf of Mexico) stands at 809, up 20 last week, with rigs targeting oil up 21. The horizontal rig count increased to 673, up 15 last week.

Crude Oil Price

Brent, the global benchmark for oil, dropped $1.08 to US$50.66 a barrel, reflecting a loss of 2.09% on the week.

WTI crude fell $0.94 to US$47.82 a barrel, down 1.93% on the week.

US Crude Oil Supply and Demand

Sources: EIA Weekly Update and GCA analysis

US crude oil refinery inputs averaged 15.8 million barrels per day, with refineries at 87.4% of their operating capacity last week. This is 329,000 barrels per day more than the previous week’s average.

US gasoline demand over past four weeks was at 9.1 million, down 2.9% from a year ago. Total commercial petroleum inventories increased by 1.3 million barrels last week.

On the supply side, EIA data indicated that total domestic crude production increased 20,000 barrels to 9.129 million barrels a day. The Lower 48 crude production now stands at 8.601 million barrels per day, up 20,000 this week.

US crude imports averaged about 8.3 million barrels per day last week, an increase of 0.902 million barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 7.9 million barrels per day, 3.0% below the same four-week period last year.

Crude oil inventories increased 5.0 million barrels from the previous week and persist at historically high levels. The crude stored at Cushing (the main price point for WTI) was up 1.5 million barrels; total storage is 68 million barrels (~75.6% utilization).

Authors

Upwards and Onwards

Nick Fulford

Global Head of Gas and LNG - nick.fulford@gaffney-cline.com
Upwards and Onwards

P Kevin Galvin

Principal Advisor, Field Development Planning - kevin.galvin@gaffney-cline.com

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