December 22, 2017

December 22, 2017

22nd December 2017

Happy Holidays ... The Monitor will return on January 12, 2018.

Oil Drilling Activity

Onshore drilling activity increased slightly, up 1 this week, at 910. Across the three major unconventional oil basins, the oil rig total increased by 2. US rigs targeting oil was flat, with the total holding at 747. US operators continue to show patience as crude prices continue to hold below US$60 (WTI) per barrel; rig direction for 2018 could be decided in Texas ... keep an ardent eye on Texas onshore rig growth!

Sources: EIA Weekly Update and GCA Analysis

Natural Gas – US LNG looking good for 2018?

To conclude the flurry of events in Europe, following the cold weather and supply disruptions of the last few weeks, prices are once more stabilizing, with warmer temperatures, resumed Norwegian production, Continental imports to the UK, and LNG imports all contributing to a much more balanced supply situation.  As a result, prices are stabilizing, albeit at around US$8/MMBtu for January. 

The other big story that has been reported in this bulletin over the last month has been the unerring monthly increases in demand from China.  Official figures suggest China will have achieved almost 20% year on year growth during 2017, and as a result, the last week of the year is seeing Asian LNG spot prices at a 6 year high, of almost US$10/MMBtu.

Contrast this with the sluggish natural gas prices in the US, resulting from relatively warm temperatures and full storage.  With US natural gas prices now struggling at around US$2.70, those who have taken capacity bookings at the various US LNG export facilities are starting to see a very attractive arbitrage opportunity, in fact the highest since exports started. Very different to the situation less than a year ago, when liquefaction, fuel and shipping to move gas to what were low value markets seemed to point to an unsustainable leakage of cash.

 Although LNG freight rates are also beginning to respond to this higher activity, with charter rates double what they were at the beginning of 2017, it is still possible to move LNG around the world at freight rates well below the cost of new build ships.

With Europe and Asia both now offering a viable market for US LNG, and Asian prices continuing to firm up from Chinese demand, and freight still at affordable rates, as we enter 2018 the prospects for US natural gas exports have never looked better.

Crude Oil – Production nears Saudi Arabia and Russia levels

Financial statements from the third quarter of 2017 for 47 US oil production companies indicate that they hedged more than 1.2 million barrels per day of crude oil at a weighted average price of WTI$49.63 per barrel, locking in some of their revenues at a fixed price even if oil prices decline lower than US$50 (WTI) per barrel.

The third quarter of 2017 represented the fourth consecutive quarter of year-over-year growth in capital expenditures and cash from operations for these 47 companies. Increased hedging will likely smooth revenue volatility for this set of companies, and the uptrends in capital expenditures and cash from operations for these companies supports EIA's forecast for US crude oil production to reach more than 10 million barrels per day by the middle of 2018; a level only surpassed by Saudi Arabia and Russia.

In EIA’s latest Short-Term Energy Outlook (STEO), total U.S. crude oil production is forecast to average 9.3 million barrels per day in 2017, up 0.5 million barrels per day from 2016. In 2018, EIA expects crude oil production to reach an average of 9.9 million barrels per day, which would surpass the previous record of 9.6 million barrels per day set in 1970. EIA forecasts that most of the growth in US crude oil production through the end of 2018 will come from tight rock formations within the Permian region in Texas and from the Federal Gulf of Mexico.

Based on data from Baker Hughes, 398 of the 910 onshore rigs in the Lower 48 states were operating in the Permian region; 323 rigs were active in the Texas’s Permian basin. In addition to responding to changes in WTI price, increases in rig counts are also related to cash flow. In the Permian, operators have been able to maintain positive cash flow because of lower costs, higher productivity, and increased hedging activity by producers, many of whom have sold future production at prices higher than US$50 (WTI) per barrel. Available cash flows could potentially contribute to the growth of rigs in this region despite relatively flat crude oil prices since December 2016.

Weekly Recaps

Oil Drilling Activity

Total US rig count (including the Gulf of Mexico) stands at 931, up 1 this week with rigs targeting oil flat. The horizontal rig count stands at 801, flat this week.

The total number of active onshore rigs increased by 1, standing at 910.  Compared to a November 2014 figure of 1,876 active rigs, the level remains 50% below the 2014 high.

Across the three major unconventional oil basins, the oilrig total increased 2; standing at 510, with Permian up 1, Eagle Ford flat and Williston up 1.

Crude Oil Price

Brent, the global benchmark for oil, rose US$1.12 to US$64.61 a barrel, reflecting a gain of 1.76% on the week.

WTI crude increased US$0.66 to US$58.02 a barrel, up 1.15% on the week. 

US Crude Oil Supply and Demand

Sources: EIA Weekly Update and GCA Analysis

US crude oil refinery inputs averaged 17.1 million barrels per day, with refineries at 94.1% of their operating capacity last week. This is 111,000 barrels per day more than the previous week’s average.

US gasoline demand over the past four weeks was at 9.0 million barrels, up 0.4% from a year ago. Total commercial petroleum inventories decreased 14.2 million barrels last week.

On the supply side, EIA data indicated that total domestic crude production increased 9,000 barrels to 9.789 million barrels a day. The Lower 48 crude production now stands at 9.271 million barrels per day, an increase of 15,000 barrels this week.

US crude imports averaged 7.8 million barrels per day last week, an increase of 471,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 7.4 million barrels per day, 6.2% less than the same four-week period last year.

Crude oil inventories decreased 6.5 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) increased 0.8 million barrels; total storage is 53.0 million barrels (~58% utilization).

  

Authors

December 22, 2017

P Kevin Galvin

Principal Advisor, Field Development Planning - kevin.galvin@gaffney-cline.com
December 22, 2017

Nick Fulford

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

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