14th December 2018
Oil Drilling Activity
Onshore US drilling activity decreased 5 with a total active count of 1045 rigs; those targeting oil decreased 4 (a decrease of 0.4%), with the total at 873. Across the three major unconventional oil basins, the oil rig count decreased 5 and stands at 611, with Permian and Williston down 3, and Eagle Ford up 1.
EIA reported last week’s total US domestic crude output at 11.6 million, a decrease of 100,000 barrels per day (a decrease of 0.8%) but still 2 million a day up from 12 months ago. EIA’s data indicated another inventory draw in crude oil at 1.2 million barrels last week, the second draw down in eleven weeks. Over the longer term, only PADD 3 (Gulf Coast) stocks are higher than the same period in 2017, highlighting the confluence of light sweet US crude for export, heavier sour crude imports that Gulf Coast refineries were designed to handle.
The European Central Bank will halt at year-end the stimulus program that for almost four years has reinvigorated the Eurozone economy — despite new risks including global trade wars and Brexit.
US filings for unemployment benefits fell last week to the lowest since September, returning to hover near an almost five-decade low and signaling the labor market remains tight after what some economists saw as possible cooling signs.
Natural Gas – Transition fuel or Sustainable in the long term?
This week, GCA representatives spoke at a number of events in Southeast Asia, focused on new markets, such as the Philippines, growing ones, such as Thailand, and established stalwarts of the LNG sector, such as Taiwan, Japan and Korea. One issue above all else has been on everyone’s mind. Where does natural gas sit in the energy transition that is sweeping the emerging energy growth markets, as renewables take a bigger and bigger share of power generation.
For the Philippines, the question is very much whether there is room for LNG imports, as indigenous gas resources start to dwindle. Whether coal and renewables can manage on their own is very much the question at hand; but of course, however compelling the economics of solar these days, when the sun is not shining, something needs to take its place.
For those markets that rely on LNG in particular, if natural gas generation is squeezed into the first part of the day, before the sun has come up, or the late evening, when its gone down, the economics of conventional LNG liquefaction and re-gas start to look quite challenged. The consensus right now seems to be that solar still cannot quite make the 9c/kwh target range that gas or coal can support on a long run marginal cost basis, but it is getting closer. Innovative concepts such as floating solar coupled with hydroelectric plants offer a nice combination of dispatchable (hydro) and non-dispatchable (solar) sources of power, both making use of the same major grid interconnections, and this is something being trialed in Thailand, but will remain something of a niche technology.
The APEC nations appear to be heading towards a 20% renewable target, with reasons of grid stability and reliability being cited as constraints to a higher target, and for many of the current mainstream LNG markets such as Japan, Korea and Thailand, gas fired generation seems to be well established and unlikely to be vulnerable for the time being.
The one message for the LNG sector that the threat from renewables seems to be drawing attention to is the question of flexibility. The sector has developed further than many thought possible in the last few years, with much greater flexibility around volumes, cargo size, scale and of course pricing. With sources of renewable power now such a strong feature of many developing economies being targeted by many of the emerging LNG projects, it is starting to look as if a lot more innovation and flexibility is going to be required for gas to remain on the growth track that the last few years has seen.
The global gas sector has adapted to some major changes in this last few years, not least of which has been demonstrated by the US and its shale gas resources. Perhaps finding synergies with renewables, at the same time underpinning major capital investments in infrastructure is simply one more change that the sector will take in its stride.
Crude Oil – Near-term demand dominates
Oil prices remained under pressure, after US government data showed domestic crude supplies declined for a second week in a row, but by less than the market expected.
The IEA indicated that crude output in OPEC rose by 100,000 barrels a day to reach 33.03 million barrels a day in November. Saudi Arabia was the main impetus behind that jump, with production surging by 410,000 barrels a day to a historic high of 11.06 million barrels a day.
Last week, OPEC agreed to reduce its overall production by 800,000 barrels a day from October’s levels for six months, beginning in the new year. The cartel did not specify the output cut by nonmember allies, which include Russia, but their cuts are expected to be 400,000 barrels a day, to bring the total reduction to 1.2 million barrels a day.
The oil market has seen overall volatility, with little clear price direction, as the announcement by OPEC and allies to cut production followed the more-than-30% plunge by oil prices by late November from a nearly four-year high hit in early October.
Several factors contributed to oil prices falling in November. Crude oil production from the world’s three largest producers—the United States, Russia, and Saudi Arabia—were at or near record levels. Implementation of Iranian sanctions began on November 5, but the United States granted waivers for some of Iran’s largest customers to continue importing Iranian crude oil for six months. In addition, concerns about the pace of global economic growth in coming months has led to related concerns about the pace of oil demand growth.
EIA’s short-term energy outlook issued Tuesday forecast an average 2018 WTI price of US$65.18 a barrel, down 2.4% from the forecast in their November report. It also cut its 2019 view by 16.4% for WTI to US$54.19. For Brent, the EIA lowered its forecast by 2.3% to US$71.30 in 2018 and by 15.2% to US$61 in 2019.
By contrast, planned cuts in Alberta crude announced by Premier Rachel Notley has seen a surge in Western Canada Select crude prices, halving the discount to US benchmark to around US$13-15 per barrel.
Crude prices saw some support earlier this week from a supply outage in Libya. The country’s national oil company has declared force majeure on exports from the El Sharara oil field following an attack by a militia group over the weekend. Roughly 400,000 barrels a day of oil have come offline.
Natural gas prices are off their US highs, with Henry Hub dipping below US$4 this week as milder than normal temperatures affected most of the US. Gas in storage is down 20% (both for 1 and 5 year averages) despite increased demand, met in a “just in time” process of increased domestic supply up 10+bcfd led by Marcellus, Utica, Permian and Haynesville shale/tight gas. European and Asian gas prices have levelled off in the last month, with Japan LNG import prices holding at US$11.66/MMBtu.
Total US rig count (including the Gulf of Mexico) stands at 1071, down 4 this week. The horizontal rig count stands at 927, down 6 this week. US rig activity continue to show constrained growth for 27 of the last 29 weeks and stands 15% above last year’s total. US shale operators remain focused on well productivity (i.e., well completion) over rig growth.
Crude Oil Price
Brent, the global benchmark for oil, decreased US$1.36 to US$61.26 a barrel, reflecting a loss of 2.17% on the week.
WTI crude fell US$1.14 to US$52.33 a barrel, down 2.13% on the week.
US Crude Oil Supply and Demand
US crude oil refinery inputs averaged 17.4 million barrels per day, with refineries at 95.1% of their operating capacity last week. This is 51,000 barrels per day less than the previous week’s average.
US gasoline demand over the past four weeks was at 9.1 million barrels, up 0.1% from a year ago. Total commercial petroleum inventories decreased by 6.0 million barrels last week.
US crude imports averaged 7.4 million barrels per day last week, up by 174,000 barrels per day from the previous week. Over the past four weeks, crude oil imports averaged 7.6 million barrels per day, 1.9% more than the same four-week period last year.
US crude exports averaged 2.274 million barrels per day last week, a decrease of 929,000 barrels per day from the previous week. Over the last four weeks, crude oil exports averaged 2.472 million barrels per day, 81.5% more than the same four-week period last year.
Crude oil inventories decreased1.2 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) increased 1.1 million barrels; total stored is 39.4 million barrels (~44% utilization).
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