August 4, 2017

August 4, 2017

4th August 2017

Oil Drilling Activity

Drillers increased onshore rigs by 3 this week, bringing the total to 934. Total (including GOM) oil and gas rigs declined by 4 this week. Gulf of Mexico released 7 rigs, bringing the offshore total to 17. With crude prices below US$50 WTI, US operators continue to show signs of decelerating their drilling activities.  

Sources: EIA Weekly Update and GCA analysis

Natural Gas – Are markets more powerful than governments?

This week’s UK energy news headlines contain reports that the largest gas supplier in the UK, British Gas, is raising prices, meaning that UK natural gas and power customers are paying more for their energy at a time when wholesale energy prices continue to soften.  Interestingly, British Gas has gone on the offensive and has put most of the blame for higher prices on increased transmission and distribution costs and the costs of government policy.  The energy provider cites that the various “green” tariffs and charges that are imposed by government have doubled over the past 3 years (from £81 per year in 2014, to £165 now), making up around 15% of the standard tariff gas and electricity bill. 

Despite all of the talk of energy price rises in the UK, domestic consumers still benefit from some of the lowest domestic electricity and gas prices in Europe.  An interesting feature to note is that wholesale energy costs in the UK have actually fallen in the last 4 years (see chart below sourced from the Financial Times utilizing data from Centrica, parent company of British Gas).

While the wholesale gas costs determined by the National Balancing Point (NBP) in the UK (and Henry Hub in the USA) are essential ingredients to the cost that industrial and residential customers pay for energy, government decisions can sometimes be a significant feature in the final delivered cost. 

The ongoing battle between government and industry will be an interesting one to keep an eye on.  In the UK, this battle is likely to be politically motivated as some politicians continue to talk of price caps while the defense from the energy providers is that non-energy costs are expected to continue to rise and that profit margins remain modest and are required to enable future sustained investment in energy provision.

Crude Oil – Demand supports crude prices

Strong demand in the US continues to support crude prices. The EIA reported record gasoline demand of 9.84 million barrels per day for last week and a fall in commercial crude inventories of 1.5 million barrels to 481.9 million barrels - that’s below crude stock levels seen this time last year, an indication of a tightening US market.

However, high production by the Organization of the Petroleum Exporting Countries (OPEC) is putting downward pressure on crude prices. OPEC output hit a 2017 high of 33 million barrels per day in July, up 90,000 barrels per day from the previous month.

Ample supply continues to keep a lid on prices and there are signs that the oil industry has adapted to an era of low prices and can produce and operate at levels that would previously have been uneconomic. US investment bank Goldman Sachs said this week that the oil industry had successfully adapted to oil prices around US$50 per barrel

US oil refiners have come to depend on Venezuela to feed their massive refineries. Last year alone, more than 270 MMbbl (worth about US$10 billion) was imported into America -- enough to produce about 5 billion gallons of gasoline.

An embargo on oil from Venezuela, the third biggest supplier to the US, could constrain production at Gulf Coast refineries and, at least, a temporary spike in gasoline prices. US refiners could turn to suppliers of heavy crude from Canada to Mexico to Iraq, but the move would ripple across global markets as other customers are shoved aside. It’s unclear how quickly alternate sources like Canada’s oil sands, most of which already go to the US, or from Mexico, which is battling supply disruptions of its own, could fill the gap.

While US refiners have been trimming Venezuelan imports for months, the nation is still a key supplier for some of America’s biggest refineries. If the US decides to block Venezuelan imports, it could seek to blunt the impact by releasing oil from an emergency stockpile, the Strategic Petroleum Reserve.

However, those crude supplies wouldn’t be a perfect match for US refineries running heavy crude from Venezuela. The release of crude from the Strategic Petroleum Reserve would be at best a very short-term solution.

Weekly Recaps

Oil Drilling Activity

Total US rig count (including the Gulf of Mexico) stands at 954, down 4 this week with rigs targeting oil down 1. The horizontal rig count stands at 807, down 3.

The total number of active onshore rigs increased to 934.  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 increased to 502, with Permian flat, Eagle Ford up 3 and Williston down 1.

Crude Oil Price

Brent, the global benchmark for oil, increased US$0.18 to US$52.03 a barrel, reflecting a gain of 0.35% on the week.

WTI crude dropped US$0.17 to US$49.07 a barrel, down 0.35% on the week.

US Crude Oil Supply and Demand

Sources: EIA Weekly Update and GCA analysis

US crude oil refinery inputs averaged 17.4 million barrels per day, with refineries at 95.4% of their operating capacity last week. This is 123,000 barrels per day more than the previous week’s average.

US gasoline demand over past four weeks was at 9.8 million, up 0.1% from a year ago. Total commercial petroleum inventories increased by 1.1 million barrels last week.

On the supply side, EIA data indicated that total domestic crude production increased 20,000 barrels to 9.430 million barrels a day. The Lower 48 crude production now stands at 9.03 million barrels per day, up 25,000 this week.

US crude imports averaged 8.3 million barrels per day last week, an increase of 209,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 8.0 million barrels per day, 3.8% below the same four-week period last year.

Crude oil inventories decreased 1.5 million barrels from the previous week and persist at historically high levels. The crude stored at Cushing (the main price point for WTI) deceased 1.7 million barrels; total storage is 55.8 million barrels (~62% utilization).

Authors

August 4, 2017

Nick Fulford

Global Head of Gas and LNG - nick.fulford@gaffney-cline.com
August 4, 2017

P Kevin Galvin

Principal Advisor, Field Development Planning - kevin.galvin@gaffney-cline.com
August 4, 2017

Ryan Pereira

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

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