1st February 2019
Oil Drilling Activity
Onshore US drilling activity decreased 13 with a total active count of 1025 rigs; those targeting oil dropped by 15 (a decrease of 1.7%), with the total at 847. Across the three major unconventional oil basins, the oil rig count decreased 3 and stands at 611, with Permian down 3, Williston and Eagle Ford flat.
EIA reported last week’s total US domestic crude output at 11.9 million, unchanged from last week. Data from the EIA on Wednesday showed US crude oil stockpiles rose less than expected last week due to lower imports, notably a fall in Saudi crude supply. The EIA reported that domestic crude storage edged up by 900,000 barrels for the week ended Jan. 25. That was smaller than the 3.1 million-barrel rise expected.
Actions speak louder than words, and the Federal Reserve’s promise to be “patient” and hold interest rates steady suggests it now senses greater risks to the downside than before, and it is consistent with past interest rate cycles.
Before the onset of each of the last four recessions (1981, 1990, 2001 and 2007), the effective federal funds rate had peaked and was already falling by the time the business cycle turned down.
Job growth in January shattered expectations, with non-farm payrolls surging by 304,000 despite a partial government shutdown that was the longest in history. January marked 100 months in a row of positive job creation, by far the longest streak on record.
Natural Gas – Change with a capital “C”
GCA’s gas and LNG team took part this week in the BHGE annual meeting in Florence, with over 1500 attendees, including many governments, NOCs, IOCs and independents. There were a number of themes that touched on the future of the gas sector, and especially the place of gas in the energy transition. GCA took part in a C-suite dialogue on natural gas as part of the event, in which a question was posed: “how much change is required in the gas sector, if it is to thrive as part of the transition to a low carbon future?” Delegates were asked to indicate whether they thought that the industry was already adapting, and that evolutionary changes would be enough, whether significant change was required to the status quo, or whether radical change was needed.
GCA offered up a picture of change, with a capital “C”, based on four other “C”s that were driving the industry over the next decade:
1. “C for Customers”. The shift towards customer choice and unbundled markets is giving much more discretion to end users, especially in developing markets in Asia where much of the growth is coming from. This is driving changes to gas procurement, whether by pipeline or LNG, with long term take or pay style contracts now being the exception rather than the rule.
2. One of the effects of pushing energy management down to the customer is the arrival of “C for Commoditization”. Increasingly we are seeing gas pricing based on indices – gas-on-gas competition – instead of the old ways of pricing gas as a percentage of oil. The last year has seen a substantial increase in gas and LNG being bought and sold on a short-term basis, as well as much more churn in the wholesale and financial markets, with LNG cargoes and pipeline gas being bought and sold multiple times before finally “going physical” and being delivered to the end user.
3. Commoditization of the sector also means that change is being encountered in “C for Contracts”. Gas SPAs are having to address new levels of flexibility never seen before; new types of contract are being developed such as MSPAs for LNG, and TUAs (terminal use agreements) to allocate capacity in shared re-gas facilities, not to mention an array of new contract formulations for FSRU charter and operation. Likewise, the contractual arrangements upon which lenders depend are also having to evolve to ensure that a new generation of gas projects can be suitably funded, at a competitive cost.
4. However, all this change is taking place while a fourth “C”, “C for Climate”, is creating major changes in economics. As smart grid technology, distributed generation and solar power become more and more competitive, the natural gas sector will have to make material adaptations over the next decade or so to even maintain its presence in the energy mix, let alone grow. For example, will methane become increasingly used as a feedstock for Hydrogen, already becoming a major energy source, with energy conversion technology such as hydrogen-powered turbines, fuel cells and other forms of carbon-free energy seemingly making headway?
One thing is for sure, though. For those entering the gas industry as young engineers, business graduates, or geoscientists, they will preside over a period of transformation and re-invention as the customers, commoditization, contracts and climate drive Change with a Capital “C” for Gas.
Crude Oil – US gasoline consumption flat-lines
The deceleration in US gasoline consumption is one reason climbing oil prices helped push the global oil market towards a surplus in 2018, and why prices needed to fall to rebalance production and consumption. The impact of rising prices on US motorists helps explains why President Donald Trump aggressively pressed OPEC to bring prices down last year.
US gasoline consumption was flat in the first 10 months of 2018 as escalating motor fuel prices offset the impact of a strong US economy and big employment gains. Flat-lining US gasoline consumption combined with surging US shale production, and a slowing global economy, pushed the oil market towards surplus and the nose-dive in crude prices late last year.
2018 consumption is forecast to have declined by around 40,000 barrels per day, according to estimates from the EIA. Consumption has shown little or no growth since 2017 after four years of variable but strong gains between 2013 and 2016.
Crude has surged more than 20% this year and is on pace for its best month since 2016, and its best January ever. Despite the gains, oil prices are still far from their multi-year highs, after falling swiftly in October. Production constraint is still needed; crude production is growing at an annual pace of over 2 million barrels a day, year over year, while demand only grows at 1-1.5 million.
The US sanctioned the state-run Petróleos de Venezuela SA, or PdVSA, earlier this week, raising the risk of disruptions to global oil supply from the Organization of the Petroleum Exporting Countries member, which also holds the world’s largest oil reserves.
Venezuelan dynamics play out against the broader OPEC-led production cuts of 1.2 million barrels a day for the first half of the year, aimed at rebalancing an oversupplied market. As supply is curbed, the oil market has also been pondering signs of slower global economic growth and the potential for weaker energy consumption, especially after the International Monetary Fund last week lowered its economic growth outlook for 2019.
The use of trains to carry crude is surging after dropping in recent years amid concerns about safety, as drillers in parts of North America produce more oil than area pipelines can accommodate.
An average of 718,000 barrels of crude a day crossed America’s railways as of October, the latest data available, an 88% increase from a year earlier, according to the EIA data. That compares with a peak average of about 1.1 million barrels in October 2014.
Much of the recent oil train growth is due to record shipments from Canada, where pipeline expansion projects, including Keystone XL and Trans Mountain, have stalled amid environmental opposition and legal delays.
EIA’s 2019 annual energy outlook recognizes scope for a wide range of oil prices and resulting uncertainty in levels of US oil production over the next decade, with 5 million barrels per day spread from low to high by 2030. EIA’s gas price uncertainty is much less, with Henry Hub trading between US$3-4 in most scenarios, increasingly reliant on LNG and pipeline exports to sustain rig activity, tough for Canadian gas exports to the US.
Total US rig count (including the Gulf of Mexico) stands at 1045, down 14 this week. The horizontal rig count stands at 925, a decrease of 7 this week. US rig activity continue to show constrained growth for 31 of the last 33 weeks and stands 10% above last year’s total. Crude prices continue to keep US shale operators focused on well productivity (i.e., well completion) and operational efficiency over rig growth.
The decline in active rigs reflects the more cautious 2019 capital budget announcements by the independent sector following the sharp decline in Q4 2018 WTI price. Current WTI (Cushing) prices are still US$15/barrel lower than mid-year 2018; hence, even with a reduced discount for WTI traded at Midland Hub, rig activity is not expected to increase in the near term.
Crude Oil Price
Brent, the global benchmark for oil, increased US$0.07 to US$61.29 a barrel, reflecting a gain of 0.11% on the week.
WTI crude rose US$0.78 to US$54.05 a barrel, up 1.46% on the week.
US Crude Oil Supply and Demand
US crude oil refinery inputs averaged 16.5 million barrels per day, with refineries at 90.1% of their operating capacity last week. This is 586,000 barrels per day less than the previous week’s average.
US gasoline demand over the past four weeks was at 8.9 million barrels, up 1.4% from a year ago. Total commercial petroleum inventories decreased by 4.8 million barrels last week.
US crude net imports averaged 5.139 million barrels per day last week, down by 1.02 million barrels per day from the previous week. Over the past four weeks, crude oil net imports averaged 5.41 million barrels per day, 18.8% less than the same four-week period last year.
US crude imports averaged 7.1 million barrels per day last week, down by 1,108,000 barrels per day from the previous week. Over the past four weeks, crude oil imports averaged 7.7 million barrels per day, 4.5% less than the same four-week period last year.
Crude oil inventories increased 0.9 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) decreased 0.1 million barrels; total stored is 41.2 million barrels (~46% utilization).
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