August 17, 2018

August 17, 2018

17th August 2018

Oil Drilling Activity

Onshore US drilling activity decreasing by 1 with a total active count of 1034 rigs; those targeting oil remained flat, with the total at 869. Across the three major unconventional oil basins, the oil rig count increased by 1 to 611, with Permian up 1, Eagle Ford and Williston flat.  

EIA reported last week’s total domestic crude output at 10.9 million barrels a day, an increase of 100,000 barrels from the previous week. During May and June 2018, the price difference between the US benchmark West Texas Intermediate (WTI) crude oil and the international benchmark Brent crude oil was the widest since 2015.

Sources: EIA Weekly Update and GCA Analysis

The oil market is delicately poised between a mildly tightening production outlook (with partially effective Iran sanctions) and a mildly deteriorating consumption outlook (with somewhat slower growth).

Natural Gas – Signs that coal is losing the war

In the tug of war between gas and coal in the power generation and industrial space, there has been some recent bad news for coal, which suggests that coal is losing significant ground.

In the US, the problem is one of simple economics.  In spite of some politically driven initiatives, which recognize the continuing importance of coal as a major employer, more coal plants have closed in the last few years than remain in operation; and, according to a recent report, more than 43 GW of further closures are likely before 2030, with some estimates citing higher numbers still. 

Some followers of the sector suggest that if natural gas prices remain in the US$3/MMBtu range, which today’s ten-year strip supports, and renewable prices continue to fall as we have seen in recent years, most of the coal fleet could be unable to compete by 2030.

In Europe, it is not just commodity prices, but carbon prices that are coals greatest enemy.  Under the cap and trade mechanism that most of Europe has signed up to, the price of carbon reached a ten-year high this week of over US$20/tonne.  The price spike is a result of permits, sufficiently plentiful to keep carbon pricing low until recently, now being in short supply.

However, while these costs will erode coal profit margins, recent rises in the cost of natural gas will mean that nuclear and renewables will be the big winners in Europe on the generation front.  Until carbon prices reach around double the current levels, a comprehensive switch to gas and renewables seems unlikely, based on current market assessments.

In Japan, coal has also suffered setbacks, with Tokyo Gas and Kyushu Electric reported to be considering abandoning their planned coal fired station in favor of gas, and two other coal fired stations involving Kansai Electric and Shikoku Electric having already been scrapped.

However, in many growing Asian economies, such as Indonesia, India and Pakistan, it should be remembered that coal continues to beat gas hands down on cost of generation, and China’s Belt and Road Initiative is likely to drive this trend still further.  Whether the air quality and other environmental drawbacks of coal start to erode the simple financial equation remains to be seen, but for now, while coal appears to be in a terminal spiral in the US, Europe and some of the developed economies of Asia, there are still some important markets ready to bet on its future.

Crude Oil – Crude prices trending downward

Oil has retreated about 13% from the three-year high reached at the end of June as concerns about the global economy grow just as the Organization of Petroleum Exporting Countries and its allies revive production.

Concerns about the world economy impact oil prices as trade disputes escalate between the United States and its major trading partners. The United States and China have been locked in a trade battle for months, a dispute that threatens to curb economic activity in both countries.

Chinese oil importers now appear to be shying away from US crude oil as they fear Beijing may decide to add the commodity to its tariff list. Not a single tanker has loaded crude oil from the United States bound for China since the start of August, Thomson Reuters Eikon ship tracking data showed, compared with about 300,000 barrels per day in June and July.

Meanwhile, markets are watching the impact of US sanctions on Tehran, which analysts say could remove as much as 1 million barrels per day of Iranian crude from the market by next year.

Oil markets will struggle for direction as uncertainty around both the impact on supply from the Iranian sanctions and escalating trade tensions between the US and China continues.

US crude inventories rose unexpectedly last week, climbing 6.8 million barrels in spite of refinery crude runs hitting a record high, the EIA’s weekly data indicated. Crude stocks at the Cushing, Oklahoma, delivery hub for US crude futures rose 1.6 million barrels. Analysts had expected a weekly seasonal decline in US crude stocks.

US Crude oil processing increased sharply and reached a record level of almost 18 million barrels per day last week but this was not enough to prevent the inventory build. Or take it this way; it prevented an even larger crude stock build!

Weekly Recap

Drilling Activity

Source: BHGE Rotary Rig Count

Total US rig count (including the Gulf of Mexico) stands at 1057, flat this week. The horizontal rig count stands at 922, down 2 this week. US rig activity has shown little growth for 11 of the last 13 weeks and is up just 12% 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, increased US$0.08 to US$72.36 a barrel, reflecting a gain of 0.11% on the week.

WTI crude fell US$1.06 to US$66.21 a barrel, down 1.58% on the week.

US Crude Oil Supply and Demand

Sources: EIA Weekly Update and GCA Analysis

US crude oil refinery inputs averaged 18.0 million barrels per day, with refineries at 98.1% of their operating capacity last week. This is 383,000 barrels per day more than the previous week’s average.

US gasoline demand over the past four weeks was at 9.6 million barrels, down 1.0% from a year ago. Total commercial petroleum inventories increased by 17.4 million barrels last week.

US crude imports averaged 9.0 million barrels per day last week, up by 1,083,000 barrels per day from the previous week. Over the past four weeks, crude oil imports averaged 8.1 million barrels per day, 0.9% more than the same four-week period last year.

US crude exports averaged 1.592 million barrels per day last week, an decrease of 258,000 barrels per day from the previous week. Over the last four weeks, crude oil exports averaged 1.859 million barrels per day, 124.2% more than the same four-week period last year.

Crude oil inventories increased 6.8 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) increased 1.6 million barrels; total stored is 23.4 million barrels (~25% utilization).

 

Authors

August 17, 2018

P. Kevin Galvin

Principal Advisor - Sr. Manager Facilities/Cost Engineering Advisor - kevin.galvin@gaffney-cline.com
August 17, 2018

Nick Fulford

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

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