February 16, 2018

February 16, 2018

16th February 2018

Oil Drilling Activity

Onshore US drilling activity decreased by 1, and stands at 956.  Rigs targeting oil increased by 7, with the total now standing at 798. The indicators that suggest continued growth in the US are in alignment, with rising prices leading, after a few months, to more drilling, more completions and more production.   

Source: EIA Weekly Update and GCA Analysis

Natural Gas – LNG has a reputation to protect

The news that two of the LNG storage tanks at Cheniere’s Sabine Pass terminal are to be taken out of service because of small leaks, and that the other three are to be subject to inspection, is a timely reminder that the liquefaction, storage, and shipping of LNG remains a very specialized segment of the oil and gas industry, which carries special risks.  The fact that these leaks were detected, and action taken so promptly, underlines the emphasis given to safety in the LNG sector. In spite of the commoditization of LNG over the last few years, and the emergence of new markets, such as FSRUs, break bulk, ship-to-ship transfers, and increasingly, ship bunkering, this is a timely reminder that technical risk remains a feature of LNG projects.

In a measure of how society views natural gas related activity, it is interesting to note that parts of the French government, and indeed some activists in the UK and elsewhere, are looking to ban LNG imports from the US not based on safety per se, or the risk of a release of LNG, but because it might originate from a gas development involving fracking.

Everyone in the industry is familiar with the debate around fracking that has emerged over the last five years or so, and become a major controversy, which has materially impacted natural gas developments in many locations.  One of the successes of the LNG sector is that no such debate has caught the public imagination in quite the same way, even though the potential risks are arguably orders of magnitude higher.

As the proliferation of LNG projects continues, and new technologies and processes are increasingly rolled out in response to market demand, events such as the one in Sabine Pass remind us that the continuing excellent record of LNG containment and process reliability have been one of the pillars of sustained growth in the sector for the last fifty years.

Crude Oil – Risk to oil prices remains skewed to the downside

Washington lifted a 40-year ban on most oil exports in late 2015, in the process reshaping the world’s energy trading with US crude being sent to locations including Switzerland, China, Israel and Arab oil rich nations such as the United Arab Emirates. The de facto export ban, which only allowed a few exceptions, was imposed in the aftermath of a 1973 to 1974 oil embargo led by Saudi Arabia. 

Since the ban was lifted, US crude oil exports have surged to a record high of 2.1 million barrels, up from a trickle a decade ago. The amount of crude leaving the US could be about to get a major boost: the nation’s top imports terminal, Louisiana Offshore Oil Port (LOOP), is utilizing one of the industry’s biggest tankers to load an export cargo for the first time.

The start of regular exports from LOOP could be a step change in America’s capacity to export the growing crude production that roiled global oil markets. The ability to load very large crude carriers (VLCC), the industry term for giant ships able to carry two million barrels, will significantly cut the cost of shipping cargoes overseas.

IEA’s revised data shows a modest tightening of the oil supply and demand balance in the early part of 2018, but the main message remains unchanged: in 2018, rising production in non-OPEC countries, led by the US, is likely to grow by more than demand. The upward momentum that drove the price of crude up has stalled; the underlying oil market fundamentals in 2018 look less supportive for prices.

Oil price rises have come to a halt and gone into reverse, and, according to the IEA’s supply/demand balance, so might the decline in oil stocks, at least in the early part of this year. The main factor being US oil production. In just three months, to November 2017, US crude output increased by 846,000 barrels per day, and will soon overtake that of Saudi Arabia. By the end of this year, it might also become the global leader.

Today, having cut costs, US shale producers are enjoying a wave of growth so amazing that in 2018 their increase in crude production could equal global demand growth. Our expectations are for continued market tightening in the first part of 2018, a likely decline in demand because of slower economic growth, some OPEC/Russia quota cheating and robust global shale oil production.

Weekly Recaps

Drilling Activity

Total US rig count (including the Gulf of Mexico) stands at 975, flat this week with rigs targeting oil up 7. The horizontal rig count stands at 839, up 7 this week.

The total number of active onshore rigs decreased by 1 and stands at 956.  Compared to a November 2014 figure of 1,876 active rigs, the current level is slightly above 50% of the 2014 high.

However, the rig market is tighter than it appears because many older rigs have been scrapped, cannibalized for spare parts, or are simply unsuitable for drilling the very long wells now favored by shale producers. Producers increasingly favor new high-powered horizontal rigs that can drill ultra-long laterals as quickly as possible, so many of the older, lower-powered vertical or directional rigs are of marginal value.

Across the three major unconventional oil basins, the oil rig total decreased 4; it stands at 544, with Permian down 4, Eagle Ford up 1 and Williston down 1.

Crude Oil Price

Brent, the global benchmark for oil, decreased US$0.03 to US$64.27 a barrel, reflecting a loss of 0.05% on the week.

WTI crude rose US$0.58 to US$61.08 a barrel, up 0.96% on the week.

US Crude Oil Supply and Demand

Sources: EIA Weekly Update and GCA Analysis

US crude oil refinery inputs averaged 16.2 million barrels per day, with refineries at 89.8% of their operating capacity last week. This is 635,000 barrels per day less than the previous week’s average.

US gasoline demand over the past four weeks was 9.0 million barrels, up 6.5% from a year ago. Total commercial petroleum inventories decreased 2.7 million barrels last week.

On the supply side, EIA data indicated that total domestic crude production increased 20,000 barrels to 10,271 million barrels a day. The Lower 48 crude production now stands at 9.752 million barrels per day, an increase of 25,000 barrels this week.

US crude imports averaged 7.9 million barrels per day last week, a decrease of 4,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 8.1 million barrels per day, 5% less than the same four-week period last year.

Crude oil inventories increased 1.8 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) decreased 3.6 million barrels; total storage is 32.7 million barrels (~36.3% utilization).

   

Authors

February 16, 2018

P. Kevin Galvin

Principal Advisor - Sr. Manager Facilities/Cost Engineering Advisor - kevin.galvin@gaffney-cline.com
February 16, 2018

Nick Fulford

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

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