8th December 2017
Oil Drilling Activity
Onshore drilling increased activity five weeks running, with the addition of 1 rig to 909. Across the three major unconventional oil basins, the oil rig total increased by 5. US rigs targeting oil is up 2, with the total standing at 751. US operators continue to show patience and are keeping a keen eye on their balance sheets as crude prices hold just below US$60 (WTI) per barrel.
Natural Gas – Two superpowers team up
In yet another example of the way in which global gas markets are becoming ever more interconnected, two pieces of news this week emphasized both the visible, physical flows of gas, and the less visible commercial connections that are also developing.
As we reported a few weeks ago, in spite of the apparent oversupply in the global LNG market, spot prices in Asia have been increasingly bolstered by higher than anticipated Chinese demand. The result has been the highest LNG prices since January 2015, with the JKM index sitting just a whisker short of $10/MMBtu.
A new push in China to meet environmental targets, a recovery in economic growth, and a cold snap in the Beijing area have conspired to push up demand, to the point where rationing is taking place in some service territories, with both industrial and residential customers being hit. It even led to one hospital appealing to local residents to curb their gas demand to help maintain supplies.
Moving across the world, therefore, to the frozen wastes of the Yamal peninsula, we have another major event in the world of LNG, which on first sight doesn’t have much of a connection with gas shortages in Beijing. On closer inspection, however, the links are obvious.
The first cargo loading at Yamal LNG is a direct result of Chinese investment and influence backstopping the consequences of western sanctions on Russia in the wake of the Ukraine annexation. With Novatek, the operator, itself accessing Chinese finance to fund its 50% share, and CNPC and the Silk Road Fund accounting for another 30% of the investment (the remainder being with French company Total), the gas links between Russia and China are becoming stronger still.
Whether those first cargoes from Yamal go directly to China remains to be seen, but either through direct shipment or by displacement, China will benefit directly from its financing activities.
As the first application of ice-breaking LNG carriers, Yamal is also interesting for a host of technical reasons, and many eyes will be turned north as the project starts moving into its fully commercial phase.
The geopolitics of gas have never quite rivaled those of oil, but we are in a new era for the gas sector now, where the stakes are higher and the role of gas as an engine for the world’s biggest economies has never been greater.
Crude Oil – Synchronized global expansion drives demand
Strong worldwide distillate consumption reflects the synchronized economic expansion across most advanced and emerging economies and the acceleration in global trade. Distillate is set to remain the main driver of oil demand in 2018, unless there is a recession in the United States or China. But with refineries focused on maximizing throughput to make distillate, gasoline, which is a co-product, remain relatively more abundant. Gasoline stocks, like distillates, have drawn down this year, but the reduction has been far smaller and stocks remain above the decade average.
Prices for refined products, especially distillate fuel oil, led crude prices higher between June and November, but now fuel prices are falling and putting crude prices under pressure.
The US distillate market started the year in substantial oversupply, with inventories well above the long-term average. But as a result of strong demand, primarily in export markets, the market has moved into an increasingly large deficit as the year has progressed. Stocks have fallen by more than 33 million barrels since the start of the year compared with a ten-year seasonal average fall of 3 million barrels.
US refiners have responded by increasing crude processing and distillate production to unprecedented levels to meet demand. US refinery crude runs have been running at record rates almost continuously since April, according to data from the EIA.
Refinery runs in the most recent week were 800,000 barrels per day higher than at the same point in 2016 and 1.8 million barrels per day above the 10-year seasonal average.
At the end of November, US refineries were processing crude at rates that had only ever previously been seen during the summer peak driving season. There has been a clear lean towards maximizing the production of distillate fuel oil to take advantage of higher margins than on gasoline. US refineries produced a record 5.4 million barrels per day of distillates in the last week of November, 480,000 barrels per day above the 10-year seasonal average.
In the longer term, with developed and emerging markets on track for expansion next year, strong demand for distillate fuel oil should keep refinery margins firm and provide an upward bias to crude prices in 2018.
Oil Drilling Activity
Total US rig count (including the Gulf of Mexico) stands at 931, up 2 this week with rigs targeting oil up 2. The horizontal rig count stands at 796, up 4 this week.
The total number of active onshore rigs increased to 909 (up 1). 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 oil rig total increased 5; it stands at 510, with Permian up 3, Eagle Ford up 3 and Williston down 1.
Crude Oil Price
Brent, the global benchmark for oil, dropped US$0.15 to US$63.32 a barrel, reflecting a loss of 0.24% on the week.
WTI crude decreased US$0.66 to US$57.60 a barrel, down 1.13% on the week.
US Crude Oil Supply and Demand
US crude oil refinery inputs averaged 17.2 million barrels per day, with refineries at 93.8% of their operating capacity last week. This is 192,000 barrels per day more than the previous week’s average.
US gasoline demand over the past four weeks was at 9.1 million barrels, up 0.5% from a year ago. Total commercial petroleum inventories decreased 2.5 million barrels last week.
On the supply side, EIA data indicated that total domestic crude production increased 25,000 barrels to 9.707 million barrels a day. The Lower 48 crude production now stands at 9.191 million barrels per day, up 20,000 barrels this week.
US crude imports averaged 7.2 million barrels per day last week, a decrease of 127,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 7.6 million barrels per day, 4.9% less than the same four-week period last year.
Crude oil inventories decreased 5.6 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) decreased 2.7 million barrels; total storage is 55.6 million barrels (~62% utilization).
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