February 9, 2018

February 9, 2018

9th February 2018

Oil Drilling Activity

Onshore US drilling activity showed a significate increase of 28, and stands at 957.  Rigs targeting oil increased by 26, with the total now standing at 791. Shale operators, with the US Majors now scaling up their investments, are beginning to invest the cash flow that higher crude price is providing. 

Source: EIA Weekly Update and GCA Analysis

Natural Gas – Bunkering gaining momentum

As the dust settles over the Gaselys delivery of LNG to Boston, largely traced back to the Novatek Yamal LNG export terminal in Russia, another series of developments in the LNG market have been quietly gaining momentum.

GCA has previously featured the growth in LNG bunkering, especially in Northern Europe, as a sector that is gradually gaining momentum.  With the first ship-to-ship trial in Bilbao, the Bay of Biscay will soon have a source of LNG for bunkering and, in the Mediterranean, the port of Venice has announced plans to become a fueling stop, as part of the planned terminal.  The majority of new FSRU installations are now including the ability to load small scale bunkering vessels as a standard feature, and the order books for small-scale LNG carriers themselves are also filling up.  While Asia appears slower to adopt the IMO ECA protocols that are largely driving the thirst for LNG, the alternative being expensive FGD scrubbers fitted to vessels, Singapore’s modifications will also lay the groundwork for LNG as a marine fuel, and of course in such a busy port, the potential demand is vast.

In Japan, more big players are getting in on the act, with Chubu Electric forming an alliance with three of the largest Japanese shipping companies.  For companies like Chubu Electric, many of whom are facing substantial take or pay commitments under their LNG contracts with limited scope for selling the quantities they have committed to purchase, LNG bunkering represents a small but incremental source of additional demand.

As with many aspects of life the “mighty oaks” are going to take a while to grow from today’s acorns, but GCA anticipates that by 2030, the LNG bunkering sector could account for the equivalent to an LNG export terminal’s worth of LNG, in the 20MTPA region.  If current developments are anything to go by, this may yet be conservative.

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

Crude oil prices have increased over the past seven months as oil inventories, both in the United States and globally, have fallen steadily. In January, oil prices may have received some support following the OPEC monitoring committee meeting, where some oil ministers suggested extending the production cut agreement in some form beyond the currently scheduled expiration at the end of 2018.

Rapid declines in Venezuelan crude oil output are also likely contributing to higher crude oil prices. Average US imports of crude oil from Venezuela declined to less than 0.4 million barrels per day for the four weeks ending January 26, approaching the lowest level in decades.

OPEC total liquids production is expected to grow modestly through the US Energy Information Administration's (EIA) forecast period, averaging 39.4 million barrels per day in 2018 and 39.9 million barrels per day in 2019. As a result, EIA estimates that global inventories will build by 0.2 million barrels per day in both 2018 and 2019, indicating that global markets are largely in balance.

A key unknown in the oil market is the continued strength of the US shale sector and how it responds to recent oil price increases with regard to capital outlays for drilling and potential input costs escalation. US crude oil production is set to increase by more than 1.2 million barrels per day in 2018 compared with 2017, according to the latest short-term forecasts from the EIA.

US crude production will average almost 10.6 million barrels per day this year compared with 9.3 million bpd in 2017. The EIA forecast has been revised sharply higher from less than 10.3 million barrels per day in the latest prediction in January 2018 and 9.9 million barrels per day in their July 2017 forecast.   

Rapid growth in US onshore production from the Lower 48 states in recent months has caused the EIA to re-benchmark its output numbers going forward. Crude production from the Lower 48 excluding federal waters in the Gulf of Mexico, mostly from shale, is expected to rise by nearly 1.25 million barrels per day in 2018.   This growth is remarkable given that EIA stats suggest 70% of new Permian Basin production merely offsets decline in the 2.8 MMBOPD of “legacy” production.  Smarter completions are required to slow the annual decline rate per well to prevent this treadmill getting any harder to sustain.

Our expectations are for continued market tightening in the first part of 2018, a likely decline in demand due to 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, up 29 this week with rigs targeting oil up 26. The horizontal rig count stands at 832, up 24 this week.

The total number of active onshore rigs increased by 28 and stands at 957.  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 oilrig total increased 17; it stands at 548, with Permian up 10, Eagle Ford up 3 and Williston up 4.

Crude Oil Price

Brent, the global benchmark for oil, decreased US$4.39 to US$64.30 a barrel, reflecting a loss of 6.39% on the week.

WTI crude dropped US$4.80 to US$60.50 a barrel, down 7.35% on the week.  

US Crude Oil Supply and Demand

Sources: EIA Weekly Update and GCA Analysis

US crude oil refinery inputs averaged 16.8 million barrels per day, with refineries at 92.5% of their operating capacity last week. This is 784,000 barrels per day more than the previous week’s average.

US gasoline demand over the past four weeks was at 8.9 million barrels, up 6.5% from a year ago. Total commercial petroleum inventories increased 4.4 million barrels last week.

On the supply side, EIA data indicated that total domestic crude production increased 332,000 barrels to 10,251 million barrels a day. The Lower 48 crude production now stands at 9.727 million barrels per day, an increase of 315,000 barrels this week.

US crude imports averaged 7.9 million barrels per day last week, a decrease of 538,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 8.1 million barrels per day, 4.5% less than the same four-week period last year.

Crude oil inventories increased 1.9 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) decreased 0.7 million barrels; total storage is 36.3 million barrels (~40.3% utilization).



February 9, 2018

P. Kevin Galvin

Principal Advisor - Sr. Manager Facilities/Cost Engineering Advisor - kevin.galvin@gaffney-cline.com
February 9, 2018

Nick Fulford

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

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