August 11, 2017

August 11, 2017

11th August 2017

Oil Drilling Activity

Drillers decreased onshore rigs by 6 this week, bringing the total to 928 and links with reductions in capital spending for the second half of 2017. Taken together, the indications are that the average breakeven price is close to US$50 WTI, plus or minus a few dollars per barrel.

Sources: EIA Weekly Update and GCA analysis

Per-mania ….it’s a gas!

Investors took fright this week, as new data published by Pioneer Natural Resources Co. showed more natural gas and natural gas liquids production than expected.  Shares in pure play Permian producers were promptly sold off, leading to a massive US$9bn fall in capitalization.

But what do these figures really mean?  Well, it appears that Permian wells are indeed gassier than had been expected, with industry analysts quoting around 59% of production in the form of oil, rather than the 65% that had previously been used as the benchmark.  However, the Pioneer figures also suggest that the crude barrels produced have not actually changed materially, and it’s simply a matter of more gas.  Whether its new completion techniques, a different blend of acreage or some other feature of the way in which producers are getting to grips with the basin, even at US$2.90/MMBtu if it is not substituting for oil then more gas is simply more revenue. Of course, it has yet to be seen whether this increased gas production will lead to faster depletion of reservoir energy and a potentially adverse impact on future oil recovery.  With Permian production set to increase by 500,000 barrels in 2017 and even more in 2018, these gas figures suggest that the million or more barrels of oil will also account for around 5 bcfd of extra gas, compared to today.  A good job then, that Cheniere’s Train 4 at Sabine Pass is loading its first cargo this week.

However, even another 4.5 million tonnes of export capacity won’t put much of a dent in all that Permian gas, with another nine similar trains being needed to use it all up.

With some signs that lower LNG prices are spurring global demand, especially for power in developing economies around the world, some of that gas will get soaked up but, before long in gas terms, there is going to be an “embarrassment of riches”. Hard to imagine, but perhaps the commercial risk that investors were so worried about this week will not be from less oil per well, but having to curtail drilling because there simply isn’t anywhere to put all that gas.

Crude stockpiles drop and WTI price moves down

US crude stockpiles fell last week as refineries boosted output to the highest percentage of capacity in 12 years. Refiners processed nearly 17.6 million barrels of crude, the most since the EIA started keeping data in 1982, surpassing a record set in May.

Sources: EIA Weekly Update and GCA analysis

Crude inventories fell by 6.5 million barrels last week, the decline came as refiners boosted overall utilization rates to 96.3 percent of total capacity, the highest since August 2005. Refiners have been running at high rates due to surprisingly strong distillate demand and heavy demand for US petroleum exports.

The large increase in gasoline stocks, expanding for the first time since early June and the continued increase in US oil production outside Alaska continue to restrain WTI price gains. The bullish draw to crude inventories has been somewhat negated by a solid build to gasoline stocks which rose by 3.4 million barrels, indicating that consumption boosted by the summer US driving season may be waning

Additionally, the International Energy Agency reduced demand estimates for OPEC crude and said the group’s commitment to drain a global glut is fading. OPEC’s rate of compliance with production cuts slipped last month to 75 percent, the lowest since the accord started in January. OPEC reported Thursday its output is increasing on more supplies from Libya.

Weekly Recaps

Oil Drilling Activity

Total US rig count (including the Gulf of Mexico) stands at 949, down 5 this week with rigs targeting oil up 3. The horizontal rig count stands at 801, down 6.

The total number of active onshore rigs decreased to 928.  When compared to a November 2014 figure of 1,876 active rigs, the current level remains 50% below the 2014 high.

Across the three major unconventional oil basins, the oil rig total decreased to 499, with Permian down 2, Eagle Ford down 1 and Williston flat.

Crude Oil Price

Brent, the global benchmark for oil, fell US$0.35 to US$51.68 a barrel, reflecting a loss of 0.67% on the week.

WTI crude dropped US$0.75 to US$48.32 a barrel, down 1.53% 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 96.3% of their operating capacity last week. This is 166,000 barrels per day more than the previous week’s average.

US gasoline demand over past four weeks was at 9.8 million, down 0.1% from a year ago. Total commercial petroleum inventories decreased by 4.6 million barrels last week.

On the supply side, EIA data indicated that total domestic crude production decreased 7,000 barrels to 9.423 million barrels a day. The Lower 48 crude production now stands at 9.04 million barrels per day, up 15,000 this week.

US crude imports averaged 7.8 million barrels per day last week, a decrease of 491,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 8.0 million barrels per day, 4.9% below the same four-week period last year.

Crude oil inventories decreased 6.5 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) increased 0.6 million barrels; total storage is 56.4 million barrels (~62% utilization).

Authors

August 11, 2017

Nick Fulford

Global Head of Gas and LNG - nick.fulford@gaffney-cline.com
August 11, 2017

P Kevin Galvin

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

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