December 7, 2018

December 7, 2018

7th December 2018

Oil Drilling Activity

Onshore US drilling activity decreased 1 with a total active count of 1050 rigs; those targeting oil decreased 10 (a decrease of 1.1%), with the total at 877. Across the three major unconventional oil basins, the oil rig count decreased 3 and stands at 616, with Permian down 4, Williston flat, and Eagle Ford up 1.

Sources: EIA Weekly Update and GCA Analysis

EIA reported last week’s total US domestic crude output at 11.7 million, flat for the past four weeks. Additionally, the EIA’s data indicated an inventory draw in crude oil of 7.3 million barrels for the week to November 30, the first draw down in ten weeks.

Record imports in October drove the US trade deficit to the highest level in a decade. The Commerce Department said Thursday that the gap between what the United States sells and what it buys from foreign countries hit US$55.5 billion in October, the fifth straight increase and highest since October 2008.

The US economy added 155,000 jobs in November, a bit short of expectations, and average hourly earnings also fell short. The US Fed could tighten monetary policy at a slower-than-expected pace.

Natural Gas – G for Geopolitical

This last week has provided many reminders that natural gas, and its growing role as a globally traded commodity, has arrived fairly and squarely on the world stage, being used as a tool of foreign policy, and affecting many, if not most, of the geopolitical challenges that face the world today.

First, let us look at the Nord Stream 2 pipeline, set to increase flow of Russian gas directly into Western Europe, via Germany, and with the potential to deprive the Ukraine of billions of dollars of revenue from the current gas flows that transit the country.  With the increased tensions between Russia and the Ukraine caused by the recent scuffle at sea, and the weakened position of Angela Merkel in the German political arena, some of her political opponents are starting to side with what has been consistent US opposition to the plan, making the project seem a lot less likely.  Of course, you could argue that American foreign policy with respect to Nord Stream 2 is also somewhat self-serving, with at least another 40 million tonnes of LNG per annum still to find a home internationally, with Europe being an easier target market than Asia for much of it, albeit without the premium pricing.  No doubt this is a story that has many twists and turns to go, but the global flow of natural gas will remain front and center.

Next, we have the announcement this week that Qatar will leave OPEC after many decades of participation, ostensibly to focus on monetizing its vast natural gas resources.  With plans to build an additional four mega trains, adding another 32 MTPA to its existing 77 MTPA.  With many of the leading IOCs, such as Shell, ExxonMobil, ENI, Total and others all pursuing a pivot to natural gas, this is yet more evidence that natural gas is shaking off its quiet position behind the scenes, while the oil industry attracts the attention of the politicians and economic planners. 

As if that were not enough for one week, the G20 in Argentina has once again drawn attention to the thorny issue of trade between the US and China, and the imposition back in October of a 10% tariff on American LNG imports.  It is still not clear whether or not the apparent thawing in the relationship will go as far as removal of the tariffs, but the US LNG exporters will no doubt be watching that space carefully, with China being the undisputed engine of LNG growth for the next decade at least.

The gas industry is still adjusting to its new role in the spotlight, but one thing is clear, there is no going back.  Natural gas will displace oil as the major source of fuel for the global economy sometime in the next couple of decades, driven by cost, environmental benefits, and a plentiful resource base, able to meet global needs for not decades, but centuries.  With this in mind, the gas industry is going to have to develop new skills to position itself well in this new era.  G is for gas... and geopolitical.

Crude Oil – OPEC losing its mojo…. perhaps?

OPEC’s reliance on non-members like Russia highlights the cartel’s waning influence in oil markets, which it had dominated for decades. The OPEC-Russia alliance was made necessary in 2016 to compete with the United States’ increased production of oil in recent years. By some estimates, the US this year became the world’s top crude producer.

The fall in the price of oil will be a help to many consumers as well as energy-hungry businesses, particularly at a time when global growth is slowing. Crude prices have been falling since October because major producers are pumping oil at high rates and due to fears that weaker economic growth could dampen energy demand. The price of oil fell 22% in November and was down again this week amid speculation that OPEC’s action might be too timid.

Saudi Arabia has indicated it is willing to cut production, its decision may be complicated by Trump’s decision to not sanction the country over the killing of dissident journalist Jamal Khashoggi. US Senators say, after a briefing with intelligence services, that they are convinced that Saudi’s de-facto ruler, Crown Prince Mohammed bin Salman, was involved in Khashoggi’s death. Which may give the US some leverage over the Saudis.

While Middle Eastern producers want to reverse the recent slump in prices to pay for government spending, sensitivities are different in Russia, where the government is running a budget surplus and a weak ruble mitigates the impact of lower prices. The government is concerned about the impact of higher prices on Russian consumers.

This week’s meeting of the Organization of the Petroleum Exporting Countries will influence the price of oil over the coming months. How strongly it does could depend on Russia’s contribution to any production cuts.

Stronger oil and natural gas prices combined with continuing development of shales and low permeability formations drove producers of crude oil and natural gas in the US to report new all-time record levels of proved reserves for both fuels in 2017. Total US oil reserves in 2017 exceeded a brief, one-year, 47-year-old record, highlighting the importance of crude oil development in shales and low permeability plays, mainly in the Southwest. The new record for natural gas extends a longer-term trend of development, mainly in shale plays in the Northeast. Both US proved reserves of crude oil and natural gas are approximately double their levels from a decade ago. These new proved reserves records were established in 2017 despite production of crude oil at levels not seen since 1972, and record natural gas production.

Despite trying for nearly two years to prop up coal by rolling back climate regulations, the industry remains in sharp decline — coal consumption peaked in 2007. The shale boom created a glut of natural gas in America, and the costs to deploy wind and solar continue to plunge.

Weekly Recap

Drilling Activity

Source: BHGE Rotary Rig Count

Total US rig count (including the Gulf of Mexico) stands at 1075, down 1 this week. The horizontal rig count stands at 933, down 1 this week. US rig activity continue to show constrained growth for 26 of the last 28 weeks and stands 15% above last year’s total. US shale operators are clearly focused on well productivity (i.e. well completion) over rig growth.

Crude Oil Price

Brent, the global benchmark for oil, increased US$3.88 to US$62.62 a barrel, reflecting a gain of 6.61% on the week.

WTI crude rose US$2.90 to US$53.47 a barrel, up 5.73% on the week.

US Crude Oil Supply and Demand

Sources: EIA Weekly Update and GCA Analysis

US crude oil refinery inputs averaged 17.5 million barrels per day, with refineries at 95.5% of their operating capacity last week. This is 66,000 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 0.2% from a year ago. Total commercial petroleum inventories decreased by 8.3 million barrels last week.

US crude imports averaged 7.2 million barrels per day last week, down by 943,000 barrels per day from the previous week. Over the past four weeks, crude oil imports averaged 7.6 million barrels per day, 0.3% more than the same four-week period last year.

US crude exports averaged 3.203 million barrels per day last week, an increase of 761,000 barrels per day from the previous week. Over the last four weeks, crude oil exports averaged 2.416 million barrels per day, 76.0% more than the same four-week period last year.

Crude oil inventories decreased 7.3 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) increased 1.8 million barrels; total stored is 38.3 million barrels (~43% utilization).


December 7, 2018

P. Kevin Galvin

Facilities/Cost Engineer -
December 7, 2018

Nick Fulford

Global Head of Gas/LNG -

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