2nd February 2018
Oil Drilling Activity
Onshore US drilling activity was flat, and stands at 929. Across the three major unconventional oil basins, the oil rig total increased by 1 in the Williston. Rigs targeting oil increased by 6, with the total standing at 765. Rig numbers continue to support the view that US shale oil producers have stopped chasing record production numbers and have become more focused on profitability.
Natural Gas – Russian LNG heats Boston homes this week
It would not be right to start on a new LNG topic this week without concluding the saga of the Russian LNG that has finally made its way to Boston. The French LNG carrier, Gaselys, arrived in Boston this week to commence discharging its cargo, most of which can be traced back to inaugural LNG cargo that left the Novatek LNG terminal in Yamal well over a month ago now, on December 8. A journey of several weeks, a short stop stored in the UK’s Isle of Grain LNG facility, a bunkering pause in Spain, and some confusing course reversals in the mid-Atlantic, led to speculation about the eventual destination. However, finally we have a conclusion of one of the most extraordinary LNG sagas of modern times, and an illustration of just how dynamic the global trade in LNG has now become.
Ironically, this week also saw the first cargo being loaded at the Cove Point LNG terminal, the second US export terminal to start operations. The fact that Cove Point, in Maryland, is just a few hundred miles south of Boston, compared to the journey of around 7,000 miles that the Yamal gas has taken, is strangely irrelevant. Those who questioned why the US would need gas from Russia, when it produces so much LNG of its own, need look no further than the Jones Act, which dictates that ships carrying goods between US ports have to be American crewed and flagged.
Whether such a far-reaching law, only two years off its hundredth birthday, is an appropriate mechanism to govern LNG trade around the US coast is debatable; but so far, there do not appear to be any meaningful moves to change it. How odd then that New Englanders are waking up this week to home heating created by imported Russian fuel, when there is so much close to home.
Crude Oil – Cost inflation dampen the supply response to higher prices
Muted rig growth is still delivering record oil production levels and a new peak of 7,493 drilled but uncompleted (DUC) wells (EIA) a 37% increase in 2017 alone, with the largest growth in DUC wells being in the Permian basin. With oil prices in backwardation (front months higher than later months), companies are not waiting for better prices; instead, bottlenecks in completions and/or midstream pipeline capacity are the likely current limiting factors in accelerating growth of US oil production.
The EIA reported that US crude oil production in November surpassed 10 million barrels per day for the first time since 1970, and neared the all-time output record. The EIA also reported the biggest increase in crude oil stocks since March last year, a rise of 6.8 million barrels.
US crude oil production reached 10.038 million barrels per day in November 2017, according to EIA’s latest Petroleum Supply Monthly. November’s production is the first time since 1970 that monthly US production levels surpassed 10 million barrels per day and the second-highest US monthly oil production value ever, just below the November 1970 production value of 10.044 million barrels per day.
The production values presented above are based on EIA’s monthly survey of crude oil production, which are considered more comprehensive and reliable values of US crude oil production than the preliminary estimates presented in EIA’s Weekly Petroleum Status Report.
Cost inflation will dampen the crude supply response to higher prices and intensify upward pressure on prices.
US shale producers are facing rising costs for everything from drilling rigs to pressure pumping equipment and labor as the cyclical expansion in oil prices and drilling matures. The cost of drilling oil and gas wells has increased over the last year, according to the latest provisional estimates from the US Bureau of Labor Statistics.
Drilling costs have increased by more than 10% since hitting a cyclical low in November 2016, though they are still 27% below the cyclical peak set in March 2014. Changes in drilling costs tend to follow changes in the number of rigs employed with a lag of around 1-2 months. The oil rig count itself tends to follow changes in the price of benchmark US crude futures (WTI) with a lag of 4 months.
In the current slump, however, drilling costs have recovered more slowly than normal as the market has absorbed a huge number of idled rigs. US crude prices hit a low in February 2016, the rig count reached its nadir in May 2016, and drilling costs fell to their lowest point in November 2016. Since then, drilling costs have been on a gradual upswing as the number of rigs drilling for oil and gas has more than doubled from 404 in May 2016 to 947 in January 2018. The number of active rigs is still less than half its peak before the oil prices started slumping in the second half of 2014.
Costs tend to follow oil prices with a lag and the relationship is non-linear, so an initial pick up in drilling activity may not have much effect, but the impact accelerates as the recovery matures. Assuming oil consumption continues to rise and oil prices climb, costs are likely to accelerate. The continued rise in oil prices and shale production over the next year should spur a further increase in drilling and completion costs in 2018 and 2019.
The largest impact will likely be in the cost of completions as the Permian basin alone has almost 2,800 DUC wells at the end of 2017. This inventory was increasing at an average rate of over a 100 wells a month. When Exxon announced rapid expansion to 600,000 barrels of oil per day from the Permian basin, it allocated US$2 Billion of midstream infrastructure investment to ensure that their crude reaches the market.
Total US rig count (including the Gulf of Mexico) stands at 946, down 1 this week with rigs targeting oil up 6. The horizontal rig count stands at 808, flat this week.
The total number of active onshore rigs was flat. Compared to a November 2014 figure of 1,876 active rigs, the level remains 50% below the 2014 high. But 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 increased 1; it stands at 531, with Permian and Eagle Ford flat and Williston up 1.
Crude Oil Price
Brent, the global benchmark for oil, decreased US$1.45 to US$68.69 a barrel, reflecting a loss of 2.07% on the week.
WTI crude dropped US$0.21 to US$65.30 a barrel, down 0.32% on the week.
US Crude Oil Supply and Demand
US crude oil refinery inputs averaged 16.0 million barrels per day, with refineries at 88.1% of their operating capacity last week. This is 470,000 barrels per day less than the previous week’s average.
US gasoline demand over the past four weeks was at 8.8 million barrels, up 7.1% from a year ago. Total commercial petroleum inventories increased 2.1 million barrels last week.
On the supply side, EIA data indicated that total domestic crude production increased 41,000 barrels to 9.919 million barrels a day. The Lower 48 crude production now stands at 9.412 million barrels per day, an increase of 40,000 barrels this week.
US crude imports averaged 8.4 million barrels per day last week, a decrease of 380,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 8.0 million barrels per day, 4.3% less than the same four-week period last year.
Crude oil inventories increased 6.8 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) decreased 2.2 million barrels; total storage is 37.0 million barrels (~41.1% utilization).
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