April 13, 2018

April 13, 2018

13th April 2018

Oil Drilling Activity

Onshore US drilling activity increased by 1 to reach a total of 988 rigs; those targeting oil increased by 7 to 815. Total year-on-year change is an increase of 19% but incremental rig growth in 2018 has slowed relative to the same period in 2017.

The EIA reported this week that US production continued its trend, up by 65,000 barrels a day to 10.525 million barrels a day—another fresh weekly record.

Source: EIA Weekly Update and GCA Analysis

Natural Gas – Surplus or no surplus...that is the question

During 2017, there was one theme that dominated global gas conferences and trade articles, and it was the anticipated surplus of LNG arising from the plethora of US and Australian LNG projects coming on-stream over the next few years, coupled with somewhat sluggish demand.

The recovery in the LNG spot market that took many by surprise at the end of last year was the first sign that perhaps the market was a little tighter than many had predicted, and the anticipated surplus might be smaller, and not last as long as some had originally thought.

The long-term offtake that Cheniere announced a few weeks ago with Petrochina, and the news this week that one of the Gulf Coast projects had signed up supply with a number of other non-disclosed Chinese companies suggests that the age of the long-term contract is still alive and kicking.  The big question, of course, is price.

The way gas markets work in North America, and now most of Continental Europe too, is that, at the right price, you can move as much gas as you like.  Buyers will take a volume commitment, as long as it is at a market-clearing price, and they will make a price commitment, as long as they have the option to turn back volume.

In general, many of the emerging buyers for natural gas, such as those from China and India, have shown themselves to be very price sensitive.  With Henry Hub puttering along at sub-US$3/MMBtu and with the forward curve suggesting it will be a while before that changes, even in price sensitive markets there is the potential for gas to back out oil-derived products across the customer spectrum.

To put things into perspective, it is sometimes helpful to turn gas prices into oil prices, using the approximate energy-equivalence conversion of six.  So, gas at US$3/MMBtu equates to oil at US$18 a barrel.  With actual oil up at around US$66 a barrel, gas, at least onshore USA, represents a discount of around 73% in pure energy terms.

Even accounting for liquefaction, fuel and freight, gas is starting to represent a significantly cheaper form of energy globally than distilled products, and this may yet prove to be the catalyst that soaks up that perceived oversupply very quickly indeed.

Crude Oil – Permian production growth clogs pipelines

There are forecasts that pipeline capacity out of the Permian will be completely full by mid-2018. According to market intelligence firm Genscape, pipeline utilization from the Permian to the Gulf Coast averaged about 89% this year and 96% in the past four weeks.

With limited new pipeline capacity scheduled for 2018 completion, producers may temporarily have to slow production growth targets, resume rail tanker export or even shut in some of their current production. The problem illustrates the delicate balance between rapid production expansion and timely sanction of capacity in transporting crude to the Gulf Coast as operators' margins improve with higher oil prices and reduced costs in the Permian. 

Production in the Permian is estimated to have hit a record 3.08 million barrels per day in March, nearly a third of overall US production of 10.4 million barrels per day. Permian drillers continue to expand their exploitation in the basin triggering a suite of proposed expansion plans for evacuation pipelines to Cushing or the Gulf Coast.

As of March 2018, the Permian had an estimated total outgoing pipeline capacity of 2.725 million barrels per day, according to Genscape. By mid-to-late 2019, projects including the Cactus Pipeline 2 will add more than 1.5 million barrels per day of additional capacity. A significant increase of over 50% of current outgoing pipeline capacity.

The IEA estimates that as of end February 2018, global oil stocks were just 30 million barrels above the 5-year average; hence, the OPEC/Russia production curtailments were close to achieving their stated goal of eliminating the stock overhang.  The IEA stresses it is not a given that the overall mission has been achieved, further meetings later this year will clearly have to define the longer term options.

Even with growing non-OPEC supply, especially in North American tight oil, the argument for oversupply hurting oil prices in late 2018 appears to be under pressure.  With heightened political risks in the Middle East in the short term, plus a failed rocket attack on a tanker in the Red Sea, Brent spot price has exceeded US$70 a barrel this week, raising the prospect of new Middle East pipeline/export infrastructure construction to mitigate against risks to export volumes.

Weekly Recap

Drilling Activity

Total US rig count (including the Gulf of Mexico) stands at 1008, up 5 this week. The horizontal rig count stands at 883, up 1 this week.

Compared to a November 2014 figure of 1,876 active rigs, the current level is marginally above 50% of the 2014 high.

Across the three major unconventional oil basins, the oil rig total increased 4; stands at 569, with Permian up 1, Eagle Ford up 3 and Williston flat.   

Source: BHGE Rotary Rig Count

Crude Oil Price

Brent, the global benchmark for oil, increased US$3.94 to US$72.21 a barrel, reflecting a gain of 5.77% on the week.

WTI crude rose US$3.93 to US$67.23 a barrel, up 6.21% on the week.

US Crude Oil Supply and Demand 

Sources: EIA Weekly Update and GCA Analysis

US crude oil refinery inputs averaged 17 million barrels per day, with refineries at 93% of their operating capacity last week. This is 83,000 barrels per day more than the previous week’s average.

US gasoline demand over the past four weeks was 9.3 million barrels, up 0.6% from a year ago. Total commercial petroleum inventories deceased by 6.0 million barrels last week.

On the supply side, EIA data indicated that total domestic crude production increased 65,000 barrels to 10,525 million barrels a day. The Lower 48 crude production now stands at 10,027 million barrels per day, an increase of 85,000 barrels this week.

US crude imports averaged 8.7 million barrels per day last week, a decrease of 752,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 7.9 million barrels per day, 1.5% less than the same four-week period last year.

US crude exports averaged 1.205 million barrels per day last week, a decrease of 970,000 barrels per day from the previous week. Over the last four weeks, crude oil exports averaged 1.633 million barrels per day, 131.3% more than the same four-week period last year.

Crude oil inventories increased 3.3 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) increased 1.1 million barrels; total stored is 36.0 million barrels (~40% utilization).

Authors

April 13, 2018

P. Kevin Galvin

Principal Advisor - Sr. Manager Facilities/Cost Engineering Advisor - kevin.galvin@gaffney-cline.com
April 13, 2018

Nick Fulford

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

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