August 18, 2017

August 18, 2017

18th August 2017

Oil Drilling Activity

Drillers decreased onshore rigs by 1 this week, bringing the total to 927. Across the three major unconventional oil basins, the rig total decreased to 496, the past 10-week average was at 497. Rig growth in the major oil basins has stagnated with crude prices below US$50 WTI.

Previous Weeks Monitor

11 Aug 2017 - Pioneer Natl Resources, Crude stockpiles drop

4 Aug 2017 - Powerful gas markets, Crude oil demand

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Sources: EIA Weekly Update and GCA analysis

Natural Gas – will LNG size determine LNG prizes?

After years of LNG being a seller’s market, the last couple of years have definitely favoured buyers.  But the multi-billion-dollar question is if and when that will once again reverse.  The answer could be that to avoid destabilising boom-bust cycles, a more equitable balance is required for the long term stability and therefore sustainability of the industry.

LNG pricing has been of paramount importance in negotiations between buyers and sellers.  Lower LNG prices are fuelling gas demand, and our analysis has shown us a strong correlation between sub US$10/MMBtu prices and new LNG buyers emerging.  Lower priced LNG is also helping to fuel the electrification of emerging economies particularly in Africa, Asia and Latin America.

But putting price aside, in today’s market, “size” is of increasing importance.  What do we mean by size?

Traditionally we think of size as being the liquefaction train size which grew larger and larger approaching 7.8 MMtpa capacities, in the search to benefit from economies of scale.  Over the past decade, some of the newer trains were planned around the 4-5 MMtpa range.  Given recent deferrals and cancellations of such large scale LNG projects, it seems that they are increasingly difficult to justify in this era of low prices.  However, in a continued trend that “small scale may be greater than large scale”, some of the more recently proposed projects, in the US and elsewhere, are now looking at modular trains of “just” 0.5 MMtpa each, seemingly with a greater prospect of being financed and developed.  Fourchon LNG is one such organization pursuing this strategy in Louisiana following their pre-filing application to FERC this week.

Away from traditional gas liquefaction projects, small scale “fit for purpose” opportunities are also rapidly emerging in ship bunkering, transportation, Floating LNG (FLNG), Floating Storage and Regasification Units (FSRUs), Floating Storage Re-Gas, Water & Power (FSRWP).  This is being driven by the increasing need to aggregate and satiate smaller pockets of demand, which in total still account for large quantities of gas.  In the past few days, Singapore have announced that they are looking to supply LNG to fuel 500 MW of power generation in Indonesia.  However, this supply will not be on the old-school model of all LNG to one power plant, but rather LNG delivered in smaller quantities to small-scale, decentralized power plants (of c.25-50 MW each) in seven different locations in close proximity to Singapore, thus aiming to generate off-grid power for Indonesia.

However, this is not to say that there will still not be large scale anchor gas buyers out there, as evidenced this week with talk of Cheniere Energy setting up an office in China, to seek an outlet for the USGC LNG to the third largest LNG buyer globally.

Size is not only important from a physical perspective however, it is also of increasing importance from a contractual and trading perspective.  In our recent work we have noted distinct trends into what LNG buyers and traders are looking for, including: take or pay flexibility, shorter contract durations and smaller parcel sizes.  They are also looking to diversify portfolios and for increased collaboration to share risk and benefit from trading opportunity upsides.

It is clear that in an oversupplied market, only those sellers who can meet the expectations of an increasing number of demanding buyers, will succeed in securing a market for their LNG.  Prospects for additional LNG plants globally remain challenging but the small scale of the development may allow it to make progress, and beyond traditional liquefaction projects there is a whole world of smaller scale opportunity out there.  It is clear therefore that the appropriate size, whether that be contractually or physically, will determine who wins the prize.

Crude Oil – production gains continue

As sentiment about a balanced market competed against rising US and OPEC oil production, crude oil prices are on a steady decline, erasing a rally that lasted for most of the latter part of the first half of 2017. The price for Brent, the global benchmark for the price of oil, is down about 4.5 percent from where it started August.

Market balance has been the focus of the year, with OPEC working to reduce a surplus in the five-year average for global crude oil inventories with managed production declines.

Data this week from the EIA showed significant declines in US crude oil inventories; commercial crude oil inventories are about 26 million barrels below this time last year, nonetheless are still 214 million barrels greater than the same week in 2014.

For the moment, US crude oil production predictions continue to show gains despite weak market conditions. Despite positive indications that the oil market is working toward balance, market concerns remain regarding US and OPEC supply and the fact that the high demand season soon will be coming to an end. From a fundamental standpoint, prices are likely to continue to see downward pressure in the near term.

Sources: EIA Weekly Update and GCA analysis

Gasoline production by US refiners and blenders has run near record levels over the first seven months of 2017. US gasoline inventories remain relatively high despite growing domestic and foreign demand. Growth in US gasoline production since March is the result of record-high refinery runs. For the week ending April 21, 2017, US exceeded 17.5 million barrels per day for the first time since EIA began publishing the weekly data series in 1990. Refinery runs have since exceeded this threshold eight additional times, reaching an all-time high of 17.9 million barrels per day the week ending on August 4, 2017.

Lower WTI prices is aiding US crude exports; last week, US crude exports were about 20 percent higher than the four-week average for this time last year, but was only a fraction (about 9%) of the average 9.5 million barrels per day produced for the same week. Additionally, the US government indicated it planned to sell barrels from its strategic reserves, though the volume is not likely to have a major market impact.

Weekly Recaps

Oil Drilling Activity

Total US rig count (including the Gulf of Mexico) stands at 946, down 3 this week with rigs targeting oil down 5. The horizontal rig count stands at 799, down 2.

The total number of active onshore rigs decreased to 927.  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 496, with Permian flat, Eagle Ford down 1 and Williston down 2.

Crude Oil Price

Brent, the global benchmark for oil, fell US$0.53 to US$51.15 a barrel, reflecting a loss of 1.03% on the week.

WTI crude dropped US$1.11 to US$47.21 a barrel, down 2.30% 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 96.1% of their operating capacity last week. This is 9,000 barrels per day less than the previous week’s average.

US gasoline demand over past four weeks was at 9.7 million, down 0.3% from a year ago. Total commercial petroleum inventories decreased by 7.3 million barrels last week.

On the supply side, EIA data indicated that total domestic crude production increased 79,000 barrels to 9.502 million barrels a day. The Lower 48 crude production now stands at 9.07 million barrels per day, up 25,000 this week.

US crude imports averaged 8.1 million barrels per day last week, an increase of 364,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 8.0 million barrels per day, 4.7% below the same four-week period last year.

Crude oil inventories decreased 8.9 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 57 million barrels (~63% utilization).

Authors

August 18, 2017

P Kevin Galvin

Principal Advisor, Field Development Planning - kevin.galvin@gaffney-cline.com
August 18, 2017

Ryan Pereira

Principal Commercial Manager, Global Gas and LNG - ryan.pereira@gaffney-cline.com
August 18, 2017

Bob George

Global General Manager - bob.george@gaffney-cline.com

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