Despite Large Stock Build, Prices Hold

Despite Large Stock Build, Prices Hold

10th February 2017

The onshore rig count continued to rise, up 12 this week, posting its 14th increase in 15 weeks; this brings the total to 717; onshore rigs are 203 (~40%) above the 514 a year ago.

Since crude prices topped $50 a barrel in May 2016, US drillers have added a total of 273 oil rigs in 34 of the past 38 weeks, the biggest recovery in rigs since a global oil glut crushed market demand over two years starting in mid-2014.The oil rig count plunged from a record 1,609 in October 2014 to a six-year low of 316 in May 2016.

Natural Gas – The Winter’s Tale 

This week’s natural gas story is a tale of two winters.  In the US, Gas Weighted Heating Degree Days (GWHDD), the key parameter for gas demand, is expected to be 20% below the ten year average.  The warmer weather in the US is in stark contrast to some of the freezing temperatures experienced in Europe so far this year.  In the height of the cold snap, Turkey imposed gas rationing for the power sector, and France issued an urgent call for additional LNG.  On the power side, parts of central Europe struggled as countries stopped exporting power in order to conserve domestic generation. 

With the UK’s Rough storage undergoing extended maintenance, gas storage is at only 35% of the normal level for the time of year, and NBP has responded accordingly.  The market is doing what markets do, and the demand gap is being filled.  In a great illustration of how supply and demand are becoming more efficiently matched with each year that passes, another first was achieved this week.   A cargo of Peruvian LNG has reached mid-Atlantic on its way to the UK, taking advantage of the widened Panama Canal, which is now seeing regular LNG traffic in both directions.

With the Asian market responding to shut-in LNG from the Gorgon Terminal in Australia, and now the cold temperatures in Europe, its been a good start to the year for those with uncommitted LNG.  Perhaps the lasting memory of Winter 2016-2017, however, will be the beginnings of a truly interconnected global gas market where price signals are allowed to drive even the (seemingly) most geographically challenged trades.  With LNG carrier charter rates remaining near an all-time low, gas being moved half way around the world is likely to be a feature that stays with us for some time to come.

Crude Oil

OPEC and other major crude-producing nations may need to extend output cuts into the second half of the year to re-balance the market.  Energy Information Administration (EIA) released data showing crude oil inventories added 13.8 million barrels, much more than the expected. This was the largest increase in inventory data since October 2016.

Despite such a large increase in crude stocks, oil prices rose unexpectedly with traders appearing to have focused on the lower than expected figures for products such as gasoline and distillates.  Gasoline inventories fell by 869,000 barrels.  If next week’s data shows another increase, oil may react differently and sell off.

The U.S. Army will grant the final permit for the Dakota Access oil pipeline after an order from President Donald Trump to expedite the project despite opposition. The 1,170-mile pipeline is intended to move about half of the Bakken crude oil produced in North Dakota to refineries located near the Gulf of Mexico.  This would reduce transportation costs and could provide additional cash flow to shale oil producers operating in the Bakken basin, increasing drilling activities in the play.

US Tax Reform

Republicans in the US House of Representatives are pushing for a shift to what is known as a border adjustment tax, or destination-based cash flow tax (BAT, BTA or DBCFT, variable by author) that, if implemented on crude oil and products imports, would push US crude prices higher than the global benchmark Brent. The measure is intended to boost US manufacturing by taxing imports while exempting US business export revenues from corporate taxation.

Goldman Sachs analysis indicated that a BAT/BTA/DBCFT could trigger large-scale domestic production and that WTI future prices could see a 25% jump in comparison to Brent prices. Such an appreciation in WTI prices would be an incentive for US producers to further increase drilling activity, with the resulting ramp up in US crude in turn driving decline is global crude prices.

The investment bank indicated that the uncertainty on whether such a policy would be implemented is high due to concerns about World Trade Organization noncompliance issues. Such skepticism has also been shared in the futures market for WTI, which showed limited reaction to the possibility.  However, if implemented across the board including for hydrocarbons, the impact on the global crude market would be significant.  

Weekly Recaps

Oil Drilling Activity

The total number of active onshore rigs increased to 717.  When compared to a November 2014 figure of 1,876 active rigs, the current level is 62% below the 2014 high.

Across the three major unconventional oil basins, the oil rig total increased to 392 (up 9 last week), with Permian up 6, Eagle Ford up 3 and Williston remained flat.

Total US rig count (including the Gulf of Mexico) stands at 741, up 12 last week, with rigs targeting oil up 8. The horizontal rig count increased to 607, up 11 last week.

Crude Oil Price

Brent, the global benchmark for oil, was down $0.10 to US$56.78 a barrel, reflecting a loss of 0.18% on the week..

WTI crude rose $0.25 to US$54.061 a barrel, up 0.46% on the week. 

US Crude Oil Supply and Demand

Sources: EIA Weekly Update and GCA analysis

US crude oil refinery inputs averaged 15.9 million barrels per day, with refineries at 87.7% of their operating capacity last week. This is 54,000 barrels per day less than the previous week’s average.

US gasoline demand over past four weeks was at 8.3 million, down 6.0% from a year ago. Total commercial petroleum inventories increased by 1.4 million barrels last week.

On the supply side, EIA data indicated that total domestic crude production increased 63,000 barrels to 8.978 million barrels a day. The Lower 48 crude production now stands at 8.460 million barrels per day, up 73,000 this week.

US crude imports averaged about 9.4 million barrels per day last week, a increase of 1.1 million barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 8.5 million barrels per day, 10% above the same four-week period last year.

Crude oil inventories increased 13.8 million barrels from the previous week and remain at historically high levels. The crude stored at Cushing (the main price point for WTI) was up 1.2 million barrels; total storage is 65.3 million barrels (~72.6% utilization).

Authors

Despite Large Stock Build, Prices Hold

Nick Fulford

Global Head of Gas and LNG - nick.fulford@gaffney-cline.com
Despite Large Stock Build, Prices Hold

P Kevin Galvin

Principal Advisor, Field Development Planning - kevin.galvin@gaffney-cline.com
Despite Large Stock Build, Prices Hold

Bob George

Regional Director: Americas - bob.george@gaffney-cline.com

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