April 20, 2018

April 20, 2018

20th April 2018

Oil Drilling Activity

Onshore US drilling activity increased by 3 to reach a total of 991 rigs; those targeting oil increased by 5 to 820. Year-on-year change is an increase of 18% 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 15,000 barrels a day to 10.540 million barrels a day—another fresh weekly record. 

Source: EIA Weekly Update and GCA Analysis

As highlighted last week, pipeline oil export constraints from the Permian Basin are likely having an impact on oil production, which should spur responses to Open Season offering of future capacity expansion in the coming months, potentially adding 1-2 million barrels a day of additional capacity.

Natural Gas – How many LNG carriers can you squeeze through one canal...?

With the growth in US Gulf Coast LNG exports and over 60 MTPA capacity on its way, either under construction or approved, less attention has been given to how that much gas will find its way to the rest of the world.  In terms of the average vessel, of say 180,000 cubic meters, we are looking at around 75,000 tonnes of LNG per vessel, after considering boil off and heel, or around 800 liftings per annum.

That equates to more than two ships a day leaving the US for re-gas terminals and FSRUs around the world.  As things stand, this is likely to remain the case for some time, with around two thirds of the demand coming from Asia.  Given that the vast majority of US terminals are on the Gulf Coast or East Coast, we have a problem...

Right now, the most economical way to get that gas to Asian ports is through the recently widened Panama Canal, which even in its enlarged state is just a foot or two short of being able to accept the wide beam Q-flex ships, let alone the huge Q-max class. 

For the canal operators, LNG has been a major source of excitement, and a growing revenue stream.  Only this week, a record three vessels passed through the canal, all of them on a ballast leg, returning empty from deliveries either in Mexico, or in Asian ports.

The question arises then, at what point will the Panama Canal become a bottleneck for US exports to Asia.  Opinions vary on how many ships the canal can accept, but an average of one loaded and one ballast crossing per day seems to be a widely accepted view, in which case, a bit like a game of musical chairs, it looks likely that some of that gas will have to go the long way to Asia.

With LNG freight rates on the increase, the freight charges from the Gulf Coast to Asia, currently in the region of US$1/MMBtu are already under strain.  Comparatively, the long-term full life costing of a new build LNG carrier is approximately twice that rate.  Add on a detour around South America, and that freight charge starts to look quite challenging in the context of delivered LNG to Asia.

We may see a point where LNG from Alaska or British Columbia starts to look a lot more attractive than Gulf Coast LNG, simply because the canal is topped out, and freight has recovered to a level that reflects new build costs.  Time will tell.

Crude Oil – Global growth supports oil consumption

Oil prices kept rising to their highest since late 2014 as US crude inventories declined, moving closer to five-year averages, and top exporter Saudi Arabia rumored to support even higher prices.

Since the start of the supply cuts, crude inventories have declined gradually from record highs towards long-term average levels. In the United States, the EIA indicated on Wednesday that commercial crude stocks fell close to the five-year average of about 420 million barrels.

Also supporting prices is the possibility that the United States may once again impose sanctions on Iran, OPEC’s third-largest producer, which could result in further supply reductions from the Middle East.

The state of the global economy is one of the most important drivers for oil consumption and prices, so the economic outlook is crucial to the calculations of OPEC and other oil suppliers. The current cyclical expansion has considerable momentum in the short term, which should ensure that it continues in the short term, but there is increased anxiety about whether it will be sustained in 2019 and 2020. Both the WTO and the IMF have warned about potential downside risks arising from increasing trade tensions between the United States and China.

Major economies are flirting with a trade war at a time of widespread economic expansion may seem odd—especially when the expansion is so reliant on investment and trade. Particularly in advanced economies, however, public optimism about the benefits of economic integration has been eroded over time by long-standing trends of job and wage polarization, coupled with persistent sub-par growth in median wages. Many households have seen little or no benefit from growth. The IMF have been saying for a while that the current cyclical upswing offers an ideal opportunity to make longer-term growth stronger, more resilient, and more inclusive. The present good times will not last for long, but sound policies can extend the upswing while reducing the risks of a disruptive unwinding.

The world economy continues to show broad-based momentum. Against that positive backdrop, the prospect of a similarly broad-based conflict over trade presents a jarring picture. Despite the good near-term news, longer-term prospects are more sobering. Advanced economies—facing aging populations, falling rates of labor force participation, and low productivity growth—will likely not regain the per capita growth rates they enjoyed before the global financial crisis.

Weekly Recap

Drilling Activity

Source: BHGE Rotary Rig Count

Total US rig count (including the Gulf of Mexico) stands at 1013, up 5 this week. The horizontal rig count stands at 889, up 6 this week.

Compared to a November 2014 figure of 1,876 active rigs, the current level is marginally above 50% of the 2014 high. The rig market is tighter than it appears because many older rigs have been scrapped, cannibalized for spare parts, or are simply unsuitable for drilling the very long wells now favored by shale producers.

Across the three major unconventional oil basins, the oil rig total increased 5; stands at 574, with Permian up 8, Eagle Ford down 1 and Williston down 2.   

Crude Oil Price

Brent, the global benchmark for oil, increased US$1.12 to US$73.33 a barrel, reflecting a gain of 1.55% on the week.

WTI crude rose US$0.68 to US$67.91 a barrel, up 1.01% on the week.

US Crude Oil Supply and Demand

Sources: EIA Weekly Update and GCA Analysis

US crude oil refinery inputs averaged 16.9 million barrels per day, with refineries at 92.4% of their operating capacity last week. This is 70,000 barrels per day less than the previous week’s average.

US gasoline demand over the past four weeks was 9.4 million barrels, up 0.7% from a year ago. Total commercial petroleum inventories reversed and decreased by 10.6 million barrels last week.

On the supply side, EIA data indicated that total domestic crude production increased 15,000 barrels to 10,540 million barrels a day. The Lower 48 crude production now stands at 10,052 million barrels per day, an increase of 25,000 barrels this week.

US crude imports averaged 7.9 million barrels per day last week, down by 720,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 8.2 million barrels per day, 2.7% more than the same four-week period last year.

US crude exports averaged 1.749 million barrels per day last week, an increase of 544,000 barrels per day from the previous week. Over the last four weeks, crude oil exports averaged 1.677 million barrels per day, 136.2% more than the same four-week period last year.

Crude oil inventories decreased 1.1 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) decreased 1.1 million barrels; total stored is 34.9 million barrels (~38% utilization).

Authors

April 20, 2018

P. Kevin Galvin

Principal Advisor - Sr. Manager Facilities/Cost Engineering Advisor - kevin.galvin@gaffney-cline.com
April 20, 2018

Nick Fulford

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

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