Pricing Momentum

Pricing Momentum

7th April 2017

Up 15 this week, the onshore rig count continues its seemingly relentless march forward, now totaling 813 - almost double from the 414 a year ago.  Despite the increase in shale oil drilling activities, US onshore rigs are still down over a 1,000 from their peak in November 2014.

Natural Gas – gambling on a price recovery?

Following hot on the heels of CERA’s week in Houston, Gastech is currently serving up a mixture of hope and concern for both gas buyers and sellers in Chiba, Japan.

Re-marketing of Nigerian LNG trains 1-3 is said to be currently in discussion for those contracts expiring in 2022.  Counterpoised with a reported "fixed price" LNG offering from Tellurian, buyers and sellers are in a quandary.   In an environment of market pressures and oversupply, do sellers pursue a strategy to transact and ensure they have a market, or do they do nothing in hopes of a tighter market and a price recovery developing again in a few years?  If the market does tighten, sellers may have benefited from adopting a flexible sales approach for the time being; but if the market remains oversupplied it’s the buyers who may regret committing now.

Notwithstanding the current oversupply situation, the continued lack of FIDs on new LNG projects of significance is starting to cause alarm bells to ring.  However, BP, Exxon and Shell still seem committed to increasing their exposure to gas and LNG and while prospect of a rebound in LNG pricing is coming closer as the current glut disappears,  a sudden hard landing seems unlikely.  The rate at which demand from emerging economies grows will be one of the factors impacting this, particularly with the investment that has recently been made in new FSRUs.

As Gastech continues, the gamers should be revealed -- who is playing short-term and who has the resilience and confidence to play long term?  In next week's blog there will be detailed analysis of the strategic, commercial and technical implications of this week’s discussions in Chiba.

Upward Momentum on Crude Price

Weekly data indicated an increase of 1.57 million barrels in crude inventories bringing total US stocks to a record of 535.5 million barrels.

The record crude inventories came as US oil production rose 52,000 barrels per day to 9.2 million, an increase of more than 9 percent mid-2016 to levels last seen at the start of the market slump in late 2014 and early 2015.

Stocks at Cushing, the delivery hub for WTI, rose 1.4 million barrels to a record 69.1 million barrels. Cushing crude tanks have a total storage capacity of ~77 million barrels.

Because of the crude glut, US crude exports have risen to a record 1.1 million barrels per day. Most cargoes are going to Asia, where there are early signs of a tightening market due to efforts led by OPEC to cut output and raise crude prices. The global picture is more important than just the US, and stocks outside the US appear to be drawing down. In the short-term, crude is being sold out of storage around the world, adding to the current crude glut. Once a significant amount of crude had been sold out of inventories, then the full effect of tighter supplies should be reflexed in crude prices.

Using history as a guide, crude price moves may start going more in an upward momentum. With the gasoline market tightening in recent weeks and refiners ramping up, US crude draws should start to accelerate. The crude draws are going to get larger and more frequent and the impact of the OPEC and non-OPEC cuts should support crude price’s upward movement.

Despite the best effort of US shale producers, they will most likely fall short of replacing OPEC cuts and the decline rate of existing crude production. While oil struggled in the first quarter, the underlying reality is that we are on a path to a tighter crude market and assuming that both OPEC and non-OPEC countries extend cuts, crude should be in for a further rise.

US crude oil production profile is near a mirror image of where it was last year, when at the end of the second quarter 2016, production was ~600,000 barrels per day lower than at the start of 2016. By the end of the second quarter 2017, US production could be up by 1 million barrels per day from its low in 4th quarter 2016.

Sources: EIA Weekly Update and GCA analysis

Weekly Recaps

Oil Drilling Activity

Total US rig count (including the Gulf of Mexico) stands at 839, up 15 last week, with rigs targeting oil up 10. The horizontal rig count increased to 695, up 10 last week.

The total number of active onshore rigs increased to 813.  When compared to a November 2014 figure of 1,876 active rigs, the current level remains 57% below the 2014 high.

Across the three major unconventional oil basins, the oil rig total increased to 438 (up 11 last week), with Permian up 12, Eagle Ford down 1 and Williston flat.

Crude Oil Price

Brent, the global benchmark for oil, rose $2.33 to US$54.87 a barrel, reflecting a gain of 4.43% on the week.

WTI crude rose $1.62 to US$51.79 a barrel, up 3.23% on the week. 

US Crude Oil Supply and Demand

Sources: EIA Weekly Update and GCA analysis

US crude oil refinery inputs averaged 16.4 million barrels per day, with refineries at 90.8% of their operating capacity last week. This is 203,000 barrels per day more than the previous week’s average.

US gasoline demand over past four weeks was at 9.3 million, down 0.6% from a year ago. Total commercial petroleum inventories increased by 1.0 million barrels last week.

On the supply side, EIA data indicated that total domestic crude production increased 52,000 barrels to 9.199 million barrels a day. The Lower 48 crude production now stands at 8.666 million barrels per day, up 40,000 this week.

US crude imports averaged about 7.9 million barrels per day last week, a decrease of 0.374 million barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 7.9 million barrels per day, 2.3% above the same four-week period last year.

Crude oil inventories increased 1.6 million barrels from the previous week and persist at historically high levels. The crude stored at Cushing (the main price point for WTI) was up 1.4 million barrels; total storage is 69.1 million barrels (~76.8% utilization).


Pricing Momentum

Nick Fulford

Global Head of Gas/LNG -
Pricing Momentum

P Kevin Galvin

Facilities/Cost Engineer -
Pricing Momentum

Bob George

Global General Manager -

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