August 31, 2018

August 31, 2018

31st August 2018

Oil Drilling Activity

Onshore US drilling activity increased by 3 with a total active count of 1028 rigs; those targeting oil increased by 2, with the total at 862. Across the three major unconventional oil basins, the oil rig count was flat at 606, with Permian up 1, Eagle Ford down 1 and Williston flat.  

Sources: EIA Weekly Update and GCA Analysis

EIA reported last week’s total US domestic crude output at 11.0 million barrels a day, meaning 3 months of almost no net growth as the Permian pipeline bottlenecks hamper output.  With 2+ million barrels a day of new pipeline capacity due on stream by this time next year, plus 5,000 drilled by uncompleted wells in Texas and New Mexico alone, resumption of growth in US domestic crude output is likely in H2 2019.

The EIA reported Wednesday that domestic crude oil stock declined by 2.6 million barrels last week. Market analysts had forecast a fall of 1 million barrels, while the American Petroleum Institute on Tuesday reported a modest rise of 38,000 barrels.  Gross crude imports were stable at 7.5 million barrels a day, but exports jumped 0.62 million barrels a day to 1.8 million, close to the average export volumes in the year to date.

The number of Americans filing for unemployment benefits rose last week, but the underlying trend continued to point to a robust labor market that should keep the economy on a strong growth path this year, building on the 4.2% GDP growth in the first half of 2018. Additionally, US consumer spending showed a solid increase in July, pointing to strong economic growth early in the third quarter.

Natural Gas – Reloads the next big thing?

It wasn’t that long ago that the idea of putting gas back onto a ship, after it had been unloaded at an LNG reception terminal, would have been ridiculed as something for which there would be no conceivable need.  In fact, until recently, few re-gas terminals had sufficiently powerful pumps to empty LNG into a ship quickly enough for it to be even feasible.  The practice only became routine following the financial meltdown of 2007-8 and the subsequent drop in gas demand in Spain followed by the consequent need to send take-or-pay LNG elsewhere.  It has to be said that some of the early reload opportunities were not without controversy, and even litigation, as gas contracts that never envisaged reloading LNG were put under strain.  Since then, most new LNG re-gas terminals have been built with the capability to reload, and of course, the proliferation in FSRUs means that the trading opportunities resulting from LNG put back into a ship are becoming more and more widespread. 

With an ever-increasing number of entities entering the still lucrative market for LNG price arbitrage, opportunities to move LNG around the world in response to price spikes have multiplied. Whether due to cold or hot temperatures, operational failures, or maintenance issues, there continue to be very material differences in wholesale gas prices around the world, and not enough LNG moving between markets to eradicate them quickly.   As we approach the transition from summer to autumn, with the new Gas Year commencing in October in many markets, the beginnings of a perfect storm are taking shape, to make this a bumper year for reloads.

The recent heatwave in Japan has caused an unseasonal demand-pull at the end of what would typically be their summer season.  Power generation demand is up in Korea and with China continuing to perform strongly, we are already seeing spot LNG prices in Asia in double digits, with a strong winter demand seeming likely in December and prices for December delivery exceeding the US$12/MMBtu mark.  Evidence from the LNG charter market also suggests that spare capacity is increasingly being soaked up, and LNG ship owners are starting to hope for some term charters to reverse several years of slack demand for freight.

With a US$3+/MMBtu price differential between Europe and Asia, reloads from the Isle of Grain, Zeebrugge and Gate are viable, and even with recent upward pressure on spot freight rates, there is still ample scope to move gas and make a margin.  Of course, with LNG exports from the US continuing to increase, and much of it destined for Asia, there are also downward pressures that may see a cap on Asia prices into early 2019.

It has to be said, however, that LNG is complicated stuff, and the industry operates very much akin to a huge game of global chess, with unloading and loading windows, tank topping, storage buffers and ship transit times all being continuously juggled, taking into account rough seas and typhoons along the way.  However, with the number of LNG carriers increasing all the time, and the number of reload-capable reception terminals and FSRUs also on the increase, the game of chess is likely to be complemented with a new move ... “Reload to Price Taker”.  Many eyes will be on the reload market for this winter, which promises to present us with some very unlikely itineraries, matching the extraordinary journey of the first ever Yamal loading, which confounded the industry and ended up in Boston. 

Naturally, if reloads from Europe expand, the market has to adjust, with Gazprom achieving record summer exports by pipeline in July with Nord Stream 2 approvals moving steadily forward.  Norway exports dipped in June due to plant maintenance, but rebounded 12.6% in July to 348 million Sm3/day, a level more usual for peak winter demand in Europe. 

Long-term decline of lower calorific Groningen gas supplies from Holland further complicates global gas trading trends, with EU providing encouragement for new supply options from prolific gas fields in East Mediterranean, Caspian and Kurdish Iraq.

Crude Oil – Oil prices continue to trend upward

Oil prices add to recent gains on growing evidence of disruptions to crude supply from Iran and Venezuela. US data showing a 2.6-million-barrel drop in the nation's crude stockpiles helped the bullish trend. Brent crude has risen by almost 10% over the last two weeks on perceptions that the global oil market is tightening.

Middle distillates, including road diesel and marine gasoil, are the critical link between global growth and the oil market. Stock draws in distillates have been much more closely associated with the shift in Brent prices than changes in gasoline stocks.

Mid-distillates accounted for 35 million barrels per day of global oil consumption in 2017, around one-third of the total, according to BP (“Statistical Review of World Energy,” 2018).

Freight transportation, including cargo moved by road, rail, pipelines, barges, shipping and aviation, is the biggest end-user of fuels derived from the middle part of the crude barrel. Substantial quantities are also used by manufacturing firms, as well as miners and within the oil and gas industry itself, with much smaller volumes used for heating and cooking.

Distillate consumption is more closely geared to the level of business activity and the macroeconomic cycle than any other section of the oil market. Distillate stocks are in turn closely correlated with changes in benchmark crude prices and the shape of the futures curve. Since mid-distillates are one of the most important refinery outputs, the link is not unexpected.

As the distillate market alternates between over- and under-supply, Brent cycles between contango and backwardation. Periods when distillate stocks were abnormally high (1998/99, 2001/02, 2006, 2009/10 and 2015/16), all linked to slower growth in economic activity, have been associated with a large contango in Brent.

Likewise, periods when distillate stocks became unusually tight (1999/2000, 2003/04, 2007/08 and 2012-2014), mostly linked with stronger economic growth, have all been associated with Brent backwardations.

Colorado voters in November will decide whether to ban oil-and-gas drilling near their homes and other spaces. The measure could make most of the US’s seventh largest oil-producing state off limits to energy firms.

Weekly Recap

Drilling Activity

Source: BHGE Rotary Rig Count

Total US rig count (including the Gulf of Mexico) stands at 1044, down 13 this week. The horizontal rig count stands at 919, down 3 this week. US rig activity has shown little growth for 13 of the last 15 weeks and is up 11% above last year’s total.

Crude Oil Price

Brent, the global benchmark for oil, increased US$1.85 to US$77.63 a barrel, reflecting a gain of 2.44% on the week.

WTI crude rose US$1.21 to US$70.08 a barrel, up 1.76% 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 326,000 barrels per day less than the previous week’s average.

US gasoline demand over the past four weeks was at 9.6 million barrels, down 1.5% from a year ago. Total commercial petroleum inventories decreased by 1.7 million barrels last week.

US crude imports averaged 7.5 million barrels per day last week, down by 33,000 barrels per day from the previous week. Over the past four weeks, crude oil imports averaged 8.0 million barrels per day, 1.9% less than the same four-week period last year.

US crude exports averaged 1.779 million barrels per day last week, an increase of 624,000 barrels per day from the previous week. Over the last four weeks, crude oil exports averaged 1.594 million barrels per day, 86.3% more than the same four-week period last year.

Crude oil inventories decreased 2.6 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) increased 0.1 million barrels; total stored is 24.3 million barrels (~27% utilization).

   

Authors

August 31, 2018

P. Kevin Galvin

Principal Advisor - Sr. Manager Facilities/Cost Engineering Advisor - kevin.galvin@gaffney-cline.com
August 31, 2018

Nick Fulford

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

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