August 3, 2018

August 3, 2018

3rd August 2018

Oil Drilling Activity

Onshore US drilling activity continued to tread water, decreasing by 5 with a total active count of 1025 rigs; those targeting oil decreased 2, with the total at 859. Across the three major unconventional oil basins, the oil rig count decreased by 1 to 605, with Permian and Eagle Ford flat and Williston down 1.  

EIA reported last week’s total domestic crude output at 10.9 million barrels a day, a decrease of 100,000 barrels from the previous week. Despite a rise in refinery runs, a significate decline in crude exports last week yielded a crude build of 5.6 million barrels on the Gulf Coast—leading to a solid build of 3.8 million barrels for total US stocks.

Even with the stabilization in rig count, completion activity lags behind with drilled but uncompleted (DUC) well count likely exceeding 8,000 wells in July 2018, a 33% increase year on year.  Of these DUC wells, over 60% are located in the Permian and Eagle Ford plays (EIA data).  One would hope that with the much-vaunted improvements in capital discipline in US unconventional investment, that there are plans to reverse the 30+% growth in DUC well count which, if achieved, could add over 1 million barrels a day in short-term US crude production capacity by mid-2019. 

The U.S. Federal Reserve kept interest rates unchanged Wednesday, characterizing the US economy as strong and keeping the central bank on track to increase borrowing costs in September. The Fed said economic growth has been rising strongly and the job market has continued to strengthen while inflation has remained near the central bank's 2% target.

Natural Gas – Another boost for LNG Bunkers

As previously described in this bulletin, a few years ago the jury was out on whether the marine sector, the railroad sector, or the heavy road transport sector would be first to adopt LNG on a large scale basis.  That debate was over around two years ago, partly due to the IMO regulations on the burning of high Sulphur fuels in port, which make a switch to a fuel such as LNG inevitable, in the margin conscious global shipping industry.

The adoption of those regulations, and the formation of Emission Control Areas or ECAs, is creating many busy marine hubs where LNG will offer ship owners both commercially beneficial and environmentally sound engine technologies.

However, some port authorities, such as Amsterdam, have introduced yet more financial incentives by offering discounted port dues for ships that score highly on the so-called Environmental Ship Index (ESI).  The port already offers a discount for ships with an ESI certificate, but from now on, additional discounts will be available for ships who use LNG as their main means of propulsion.

Forward looking port authorities like Amsterdam view these incentives as a way to capture a higher proportion of marine traffic, and with 50,000 sea going vessels a year, Amsterdam is keen to maintain its leadership in providing port services.  With 18 dedicated LNG ship-to-ship bunkering vessels now in service or on order, it seems many other ports will be following Amsterdam’s lead.  Total announced plans in May for a new LNG bunkering facility in Oman to serve the Indian Ocean market.

Crude Oil – US refineries running at near-record levels

For the week ending July 6, 2018, the four-week average of US gross refinery inputs surpassed 18 million barrels per day for the first time since the US Energy Information Administration (EIA) began publishing that data series in 1990. US refineries are running at record levels, in response to robust domestic and international demand for motor gasoline and distillate fuel oil.

In its July update of the Short-Term Energy Outlook (STEO), EIA estimates that US refinery runs will average 16.9 million barrels per day and 17.1 million barrels per day in 2018 and 2019, respectively. If achieved, both would be new record highs, surpassing the 2017 annual average of 16.6 million barrels per day.

US refineries are responding to high demand for petroleum products, specifically motor gasoline and distillate. The four-week average of finished motor gasoline product supplied— EIA’s proxy measure of US consumption—typically hits the highest level of the year in early August. Weekly data for this summer to date suggest that this year’s peak in finished motor gasoline product supplied is likely to match that of 2016 and 2017, the two highest-level years on record each at 9.8 million barrels per day.

The US has typically been a net importer of gasoline in the spring and summer months, when domestic consumption increases, and a net exporter in winter months when demand is lower.  Recent strong international demand has pushed four-week average finished gasoline exports to 776,000 barrels per day for the week ending July 27, 2018, compared with 557,000 barrels per day at the same time last year.

Weekly Recap

Drilling Activity

Source: BHGE Rotary Rig Count

Total US rig count (including the Gulf of Mexico) stands at 1044, down 4 this week. The horizontal rig count stands at 912, down 10 this week. US rig activity has shown no growth trend for 10 of the last 11 weeks and is up just 9% 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$1.04 to US$73.56 a barrel, reflecting a loss of 1.39% on the week.

WTI crude fell US$0.61 to US$68.87 a barrel, down 0.88% on the week.

US Crude Oil Supply and Demand

Sources: EIA Weekly Update and GCA Analysis

US crude oil refinery inputs averaged 17.5 million barrels per day, with refineries at 96.1% of their operating capacity last week. This is 195,000 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 0.9% from a year ago. Total commercial petroleum inventories increased by 10.6 million barrels last week.

US crude imports averaged 7.7 million barrels per day last week, down by 21,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 8.0 million barrels per day, 0.4% more than the same four-week period last year.

US crude exports averaged 1.310 million barrels per day last week, a decrease of 1,373,000 barrels per day from the previous week. Over the last four weeks, crude oil exports averaged 1.870 million barrels per day, 121.5% more than the same four-week period last year.

Crude oil inventories increased 3.8 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) decreased 1.3 million barrels; total stored is 22.4 million barrels (~25% utilization).

Authors

August 3, 2018

P. Kevin Galvin

Principal Advisor - Sr. Manager Facilities/Cost Engineering Advisor - kevin.galvin@gaffney-cline.com
August 3, 2018

Nick Fulford

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

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