February 8, 2019

February 8, 2019

8th February 2019

Oil Drilling Activity

Onshore US drilling activity increased 4 with a total active count of 1029 rigs; those targeting oil added 7 (an increase of 0.8%), with the total at 854. Across the three major unconventional oil basins, the oil rig count decreased 1 and stands at 610, with Permian down 3, Williston flat and Eagle Ford up 2.

Sources: EIA Weekly Update and GCA Analysis

EIA reported last week’s total US domestic crude output at 11.9 million, unchanged four weeks running. The EIA on Wednesday indicated US crude oil stockpiles rose less than expected last week; the EIA reported that domestic crude storage edged up by 1.3 million barrels for the week ended Feb 1. That was smaller than the 2.18 million barrels’ rise expected.

Final permit approvals and confirmation of new midstream investors exercising options for equity stakes in new oil, gas and ngl pipeline projects linking the Permian Basin to the US Gulf this week shows that midstream capital investment is accelerating even as some upstream companies have announced scale back on 2019 budgets.  Capacity expansions should be coming on line from midyear onwards into early 2020 with much of the capacity already booked by shippers.

The Federal Reserve's next move may well be an interest rate cut if weakening growth around the world starts infecting the US economy, former central bank Chair Janet Yellen indicated on a CNBC interview.

Natural Gas – Hare and the tortoise

If the race to export LNG from the US followed the same course as the parable of the Hare and the Tortoise, this week, it is the turn of the Tortoise to cross the finish line, in the form of the Golden Pass LNG export terminal.  Years in the making, but backed by perhaps the most powerful LNG dynamo in the world, ExxonMobil and Qatar Petroleum, Golden Pass is the classic LNG project.  Well designed, carefully optimized, backed by innumerable environmental reports and marine studies, and with contractors poised to move quickly to start construction.

Not far behind Golden Pass are at least two expansions, one at Sabine, the other at Freeport, as well as another greenfield project Calcasieu Pass, which could certainly qualify as the Hare.  Unconventional modular design, fast track construction, and a novel approach of multiple smaller scale trains, versus the mega train concept favored by Exxon and Shell.

The two very different philosophies are both vying for the prize of being lowest cost, and most efficient, and the outcome of that particular competition will be watched by many around the world, as the parable of the Hare and the Tortoise play out on the Gulf Coast.

In the meantime, short run and long run forecasts are also in the spotlight, as the amount of gas being liquefied on the gulf coast has dropped by some 4bcfd from its peak of 5.5bcfd.  Fog in the Gulf, halting shipping traffic, and a number of planned shutdowns have brought LNG production back to levels seen two years ago as the export rush was just getting started.

In another parallel to that famous race, it is a reminder that while LNG exports from the US are undoubtedly on the rise, it is by no means a smooth journey.

Record setting low temperatures following the Polar Vortex event in late January led to short-term peak demand record on January 30 provided very limited price support.  The mid-term forecast of milder than normal weather meant Henry Hub prices subsided over the last few weeks and are now US$2/MMBtu below Q3 2018 peak.  Of interest was the flexibility of Canadian gas markets with increased exports to US in the west plus reduced imports from US to Canada in the east helping to balance short term supply/demand.  This ability to ride out a severe winter event without major price or supply disruption is a positive signal to global customers seeking to purchase US LNG export volumes.     

Crude Oil – US refinery runs to remain strong

Recently announced US sanctions directed at Venezuela’s energy sector and state oil company, Petróleos de Venezuela, S.A. (PDVSA), will eliminate US imports of Venezuelan crude oil as the full effects of the sanctions emerge. However, it is not anticipated that US refinery runs will decrease as a result of these sanctions. US imports of Venezuelan crude oil have been falling for several years and refineries have been replacing Venezuelan crude oil with other heavy crude oils. US Gulf Coast imports of Venezuelan crude oil fell from an average of 618,000 barrels per day in the first 11 months of 2017 to 498,000 barrels per day over the same period in 2018.

The sanctions also prohibit the United States from exporting petroleum products to Venezuela. This prohibition includes diluent, which PDVSA uses to mix with its much heavier crude oils. If PDVSA cannot find another source for diluent in a relatively short period of time, Venezuela’s crude oil production is likely to decline.

As each refinery’s imports from Venezuela declined, imports from Iraq, Canada, and Mexico will increase.

Weekly Recap

Crude Oil Price

Brent, the global benchmark for oil, increased US$0.91 to US$62.20 a barrel, reflecting a gain of 1.48% on the week.

WTI crude fell US$1.24 to US$52.81 a barrel, down 2.29% on the week.

Drilling Activity

Source: BHGE Rotary Rig Count

Total US rig count (including the Gulf of Mexico) stands at 1049, up 4 this week. The horizontal rig count stands at 923, a decrease of 3 this week. US rig activity continue to show constrained growth for 32 of the last 34 weeks and stands 8% 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.

US Crude Oil Supply and Demand

Sources: EIA Weekly Update and GCA analysis

US crude oil refinery inputs averaged 16.6 million barrels per day, with refineries at 90.7% of their operating capacity last week. This is 170,000 barrels per day more than the previous week’s average.

US gasoline demand over the past four weeks was at 9.0 million barrels, up 1.6% from a year ago. Total commercial petroleum inventories decreased by 3.4 million barrels last week.

US crude net imports averaged 4.276 million barrels per day last week, down by 0.863 million barrels per day from the previous week. Over the past four weeks, crude oil net imports averaged 5.033 million barrels per day, 24.3% less than the same four-week period last year.

US crude imports averaged 7.1 million barrels per day last week, up by 63,000 barrels per day from the previous week. Over the past four weeks, crude oil imports averaged 7.5 million barrels per day, 7.3% less than the same four-week period last year.

Crude oil inventories increased 1.3 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) increased 1.4 million barrels; total stored is 42.6 million barrels (~47% utilization).

   

Authors

February 8, 2019

P. Kevin Galvin

Facilities/Cost Engineer - kevin.galvin@gaffney-cline.com
February 8, 2019

Nick Fulford

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

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