25th August 2017
Oil Drilling Activity
Drillers decreased onshore rigs for the third week running, down 7 this week, bringing the total to 920. Across the three major unconventional oil basins, the rig total decreased to 495. Growth has stopped in the major oil basins and continues to show signs of weakening with crude prices holding below US$50 WTI.
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Natural Gas – American gas arrives in Russia’s backyard
Natural gas is becoming a more and more significant feature of US foreign policy as it starts to play a similar geopolitical role to that which oil has done for many decades.
This was highlighted with the specific mention of US LNG exports within the recent US/China trade agreement, President Trump’s recent mention of LNG during a visit to Warsaw, and the delivery this week of a US sourced LNG cargo to Lithuania, the first time that US natural gas has made its way to a former Soviet republic. Just to reinforce the significance of this commercially negotiated outcome, the US Government issued a congratulatory message to its Lithuanian counterpart, raising this otherwise routine transaction to a more significant level.
The likelihood of Europe becoming a battleground for Russian and American gas suppliers has been highlighted in this monitor previously, and this is certainly one of the first skirmishes in what promises to be a multi-year story. The outcome and consequences of this international battle for gas markets is uncertain, other than it will most certainly benefit European gas consumers. The fact that until Lithuania built its LNG terminal it was paying more for Russian natural gas than customers in Germany underlines the potential implications of this delivery, where arguably those most likely to benefit are Russia’s closest neighbors and former satellites in Central and Eastern Europe, who have previously had little choice other than Russia as its fuel supplier.
While the US and its Eastern and Central European allies appear pleased with this new development, other Western European stakeholders may be less happy with the situation. Germany in particular, which along with Russia is championing the Nord Stream 2 pipeline, will be concerned that the project may falter if US LNG becomes too widespread.
Over the coming year, and as more and more US gas finds its way into both Eastern and Western Europe, there is no doubt that Russia will respond to this threat to its closest gas markets, but in what way, and using what tactics remains to be seen.
Crude Oil – Refinery demand to drop due to hurricane Harvey
Hurricane Harvey, set to become the worst storm to strike Texas in more than a decade and potentially (as we go to press) wreaking havoc upon the heart of America’s energy sector, has forced evacuations from offshore platforms and shut Texas refineries. Oil refiners in the Gulf Coast, home to as much as half of the nation’s refining capacity, began halting operations as Harvey bore down on the Gulf Coast, threatening the region with floods and storm surges. When Harvey makes landfall it’ll be the strongest storm to hit the US since Wilma in 2005.
While its course (with the eye heading for the Corpus Christ area) has meant the storm isn’t shutting much oil and natural gas production in the Gulf of Mexico, it’s set to hit a cluster of refineries that process almost 5 million barrels of oil a day. Texas refiners have already started to shut plants, forcing about 1 million barrels a day of crude and condensate capacity offline.
Anadarko Petroleum Corp., Exxon Mobil Corp., Royal Dutch Shell Plc are among the energy explorers that have shut platforms in the Gulf of Mexico; ConocoPhillips and EOG Resources Inc. are among those that have halted drilling in Texas.
Beyond the weather, declines in US commercial crude storage levels were a sign of a gradually tightening market, although another rise in US production this week has continued to put downward pressure on WTI prices. With oil rigs declining in the US, production growth should begin to diminish and perhaps decline will follow.
US crude oil production hit 9.53 million barrels per day last week, its highest since July 2015 and up over 13 percent from their most recent low in mid-2016.
Sources: EIA Weekly Update and GCA analysis
Oil Drilling Activity
Total US rig count (including the Gulf of Mexico) stands at 940, down 6 this week with rigs targeting oil down 4. The horizontal rig count stands at 796, down 3.
The total number of active onshore rigs decreased to 920. 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 495, with Permian flat, Eagle Ford down 2 and Williston up 1.
Crude Oil Price
Brent, the global benchmark for oil, rose US$1.28 to US$52.43 a barrel, reflecting a gain of 2.50% on the week.
WTI crude increased US$0.33 to US$47.54 a barrel, up 0.70% on the week.
US Crude Oil Supply and Demand
US crude oil refinery inputs averaged 17.5 million barrels per day, with refineries at 95.4% of their operating capacity last week. This is 104,000 barrels per day less than the previous week’s average.
US gasoline demand over past four weeks was at 9.7 million, down 0.4% from a year ago. Total commercial petroleum inventories remain flat last week.
On the supply side, EIA data indicated that total domestic crude production increased 26,000 barrels to 9.528 million barrels a day. The Lower 48 crude production now stands at 9.08 million barrels per day, up 12,000 this week.
US crude imports averaged 8.8 million barrels per day last week, an increase of 664,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 8.2 million barrels per day, 3.1% below the same four-week period last year.
Crude oil inventories decreased 3.3 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) decreased 0.5 million barrels; total storage is 56.5 million barrels (~63% utilization).
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