August 10, 2018

August 10, 2018

10th August 2018

Oil Drilling Activity

Onshore US drilling activity increasing by 10 with a total active count of 1035 rigs; those targeting oil increased 10, with the total at 869. Across the three major unconventional oil basins, the oil rig count increased by 5 to 610, with Permian up 6 and Eagle Ford down 1 and Williston flat.  

EIA reported last week’s total domestic crude output at 10.8 million barrels a day, another decrease of 100,000 barrels from the previous week. EIA estimates that US crude oil production averaged 10.8 million barrels per day in July, up 47,000 barrels per day from June. EIA forecasts that US crude oil production will average 10.7 million barrels per day in 2018, up from 9.4 million barrels per day in 2017.

Sources: EIA Weekly Update and GCA Analysis

The number of Americans filing for unemployment benefits unexpectedly fell last week, suggesting that a strong economy was helping the labor market weather ongoing trade tensions between the United States and a host of other countries.

Natural Gas – Can LNG take lessons from its farming cousins?

In a significant raising of the stakes, in terms of international trade spats, China has taken the step of including imported US LNG among the products on which a potential 25% tariff could be applied.  This comes at a time when an EU team will be descending on Washington DC on August 20 to put some substance around the talks highlighted in this bulletin two weeks ago, following a visit by the EU commission president, in which great hopes were expressed for increasing soybean and LNG exports to Europe.

The links between LNG and Soybean exports from the US do not stop there.  In 2016, China was by far the largest importer of US Soybeans, at over 35 million tonnes, with a Gulf of Mexico FOB price of around US$400 to US$430 per tonne.  The FOB cost of LNG leaving the gulf is a little lower, at around US$320 per tonne, based on the current Henry Hub curve and the fuel and liquefaction charges typically levied by the terminal operator.  Last year China imported about 33 million tonnes of LNG (albeit only 13% of it from the US). 

From April through June, after the tariff announcement but before they came into effect, US Soybean exports to China fell by 21%, but were more than substituted by increased exports to Egypt, Netherlands, Mexico and other markets, as buyers reacted to the tariffs being applied in July.  Many will anticipate the same kind of redistribution of LNG exports, but unlike Soybeans, LNG cannot be stored in any meaningful volumes, so stockpiling will not be an option.

At present, therefore, it would appear that the effects on the US economy of tariffs on Soybeans are far higher than the potential effects on LNG.  However, the way in which global agricultural markets moved earlier this summer may hold some clues for LNG exporters, and potential exporters.

For a while at least Europe may come to the rescue.  Although the EU trade team have emphasized that there is only so much they can do to encourage more European imports of LNG, in the face of market forces, wholesale prices may be moving in the US’ favor.  With winter '19 forward gas price moving from about 50p/therm to 60p/therm (US$4.65/MMBtu) since April, the relative attractiveness of markets on the other side of the Atlantic is starting to get European destinations back into the fray.  Equally, Australia’s LNG exporters will be hoping that the recalibration that could follow the imposition of tariffs might help them to take a bigger share of Asian demand.

The looming threat of LNG import tariffs in China adds another layer to a very complex picture of global gas flows, but learning from the farming community, and following the fate of Soybeans, may be one way to plan for the future.

Crude Oil – Oil prices down as stockpiles jump

Oil prices fell to their lowest level in nearly seven weeks as total US stockpiles of oil and fuel hit a seven-month high and U.S.-China trade tensions escalated. According to the EIA, US crude oil inventories alone fell slightly last week, a decrease of 1.4 million barrels, but total commercial stockpiles of crude oil and most fuels including gasoline and diesel rose to their highest since early January.

Prices in the crude market could continue to soften due to US crude inventories that may rise further as refineries head toward maintenance season after the summer driving season.

Import data from China highlighted a continuing drop in demand from the world’s second-largest economy and one of the biggest importers of crude oil, raising questions about oil’s ability to gain further traction higher after the threat of production slowdowns in Middle East had supported prices.

Iran also remains in focus. Iranian Foreign Minister Mohammad Javad Zarif told a local newspaper that sanctions by the US, which came into effect Tuesday, will not disrupt the country’s crude exports.

The IEA kept its demand growth forecast for 2018 unchanged, at 1.4 million barrels a day, but warned of risks to the forecast from “escalating trade disputes and rising prices if supply is constrained.” In its closely-watched monthly oil market report, the IEA said Russian crude and condensate production climbed by 150,000 barrels a day last month, to 11.21 million barrels a day—a “significantly sharper acceleration than expected.”

Weekly Recap

Drilling Activity

Source: BHGE Rotary Rig Count

Total US rig count (including the Gulf of Mexico) stands at 1057, up 13 this week. The horizontal rig count stands at 924, up 12 this week. US rig activity has shown little growth for 10 of the last 12 weeks and is up just 11% above last year’s total.

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

Crude Oil Price

Brent, the global benchmark for oil, decreased US$1.28 to US$72.28 a barrel, reflecting a loss of 1.74% on the week.

WTI crude fell US$1.60 to US$67.27 a barrel, down 2.32% on the week.

US Crude Oil Supply and Demand

Sources: EIA Weekly Update and GCA Analysis

US crude oil refinery inputs averaged 17.6 million barrels per day, with refineries at 96.6% of their operating capacity last week. This is 118,000 barrels per day more than the previous week’s average.

US gasoline demand over the past four weeks was at 9.7 million barrels, down 0.7% from a year ago. Total commercial petroleum inventories increased by 3.3 million barrels last week.

US crude imports averaged 7.9 million barrels per day last week, up by 182,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 8.1 million barrels per day, 1.4% more than the same four-week period last year.

US crude exports averaged 1.850 million barrels per day last week, an increase of 540,000 barrels per day from the previous week. Over the last four weeks, crude oil exports averaged 1.826 million barrels per day, 130.6% more than the same four-week period last year.

Crude oil inventories decreased 1.4 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) decreased 0.6 million barrels; total stored is 21.8 million barrels (~24% utilization).



August 10, 2018

P. Kevin Galvin

Facilities/Cost Engineer -
August 10, 2018

Nick Fulford

Global Head of Gas/LNG -

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