17th March 2017

Up 22 this week, the onshore rig count marches forward, now totaling 765 - approximately 72% more than the 446 a year ago.  This is the 36th increase in 38 weeks. US drillers average a weekly gain of ~7.5 rigs, doubling (up 315) the total oil rigs over the past 42 weeks.

Natural Gas – oil plays may prove to be a pitfall for natural gas

April’s US shale oil production is set for its biggest monthly increase since October as output is expected to hit record highs, leaping by 109,000 barrels per day to a whisker under 5 million barrels per day.  Of this, the Permian Basin in Texas and New Mexico, the largest single US shale oil play, is set to rise by a further 79,000 barrels per day to 2.3 million barrels per day, the highest level on records dating back to 2007

Is this a good thing?  Probably not … depending on where you are standing!  A drilling surge in America’s hottest oil plays may prove to be a pitfall for natural gas bulls. As explorers extract crude oil, they’re also producing gas. A jump in the number of rigs operating in the oil basins adds to gas output, threatening to send gas prices lower.

Gas is already this year’s worst performer among major commodities, and the prospect of a torrent of supply from the oil shale basins means 2018 may not be much brighter. Output from the oil basins would augment production from the Marcellus shale in Pennsylvania and West Virginia as new pipeline projects are completed in the region.

Anxiety about US gas supply exceeding demand was underlined by an apparent pause last week in exports from Cheniere’s Sabine Pass LNG export terminal. A drop in feedstock demand sparked excitement among some traders that LNG export volumes may be falling due to higher recent Henry Hub prices, pushing significant volumes of gas back into the domestic market.  However, the situation stabilized quickly, and both Sabine demand and LNG exports appear back to previous levels.

Ironically, Australia, one of the US’ biggest competitors for LNG export markets, has the opposite problem.  Now that all three LNG export plants on Australia’s east coast Curtis Island are fully operational, the increasing demand on gas supplies in eastern Australia is creating major concerns over gas shortages for domestic markets.

Crude Oil – US crude oil imports fall

After nine consecutive increases, US crude stocks fell 237,000 barrels last week on reduced imports. Gasoline and distillate inventories continued to decline. The US stockpiles are closely watched by oil traders to determine whether a November agreement to cut output by OPEC is reducing a global supply glut.

US crude oil imports also fell by 745,000 barrels per day to 7.4 million barrels per day last week, the lowest level in a month, mostly due to large declines from OPEC member countries. Overall inventory levels continue high relative to the seasonal average, which remains a significant headwind for crude prices. This unseasonal draw may not be a trend and oil stock builds could make a comeback next week.

The IEA's monthly report struck a bullish note, indicating if OPEC maintains its output cuts, demand may overtake supply in the first half of 2017. Global oil inventories rose for the first time in January as the market grappled with a swell in production last year. The actual build in global stocks in January shows that it may be some time before global stocks start to fall significantly.

The increase comes from relentless supply growth in the latter stages of last year, particularly from OPEC countries that pumped at record levels, and from the US shale oil plays, where drilling activity began picking up 10 months ago.

For those looking for a re-balancing of the oil market, they should be patient, and hold their nerve. It takes time for production restraints to filter through in the form of inventory reductions.  If OPEC stays on track and non-OPEC delivers their agreed cuts, the market will tighten, constraining US imports.

Weekly Recaps

Oil Drilling Activity

The total number of active onshore rigs increased to 765.  When compared to a November 2014 figure of 1,876 active rigs, the current level remains 60% below the 2014 high.

Across the three major unconventional oil basins, the oil rig total increased to 413 (up 3 last week), with Permian down 1, Eagle Ford flat and Williston up 4.

Total US rig count (including the Gulf of Mexico) stands at 789, up 21 last week, with rigs targeting oil up 14. The horizontal rig count increased to 658, up 19 last week.

Crude Oil Price

Brent, the global benchmark for oil, was up $0.02 to US$51.74 a barrel, reflecting a gain of 0.04% on the week.

WTI crude fell $0.07 to US$48.76 a barrel, down 0.14% on the week.

US Crude Oil Supply and Demand

Sources: EIA Weekly Update and GCA analysis

US crude oil refinery inputs averaged 15.5 million barrels per day, with refineries at 85.1% of their operating capacity last week. This is 20,000 barrels per day less than the previous week’s average.

US gasoline demand over past four weeks was at 9.0 million, down 4.5% from a year ago. Total commercial petroleum inventories decreased by 7.8 million barrels last week.

On the supply side, EIA data indicated that total domestic crude production increased 21,000 barrels to 9.109 million barrels a day. The Lower 48 crude production now stands at 8.581 million barrels per day, up 20,000 this week.

US crude imports averaged about 7.4 million barrels per day last week, an decrease of 0.745 million barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 7.6 million barrels per day, 4.4% below the same four-week period last year.

Crude oil inventories decreased 0.2 million barrels from the previous week and persist at historically high levels. The crude stored at Cushing (the main price point for WTI) was up 2.1 million barrels; total storage is 66.5 million barrels (~74% utilization).



Nick Fulford

Global Head of Gas/LNG -

P Kevin Galvin

Facilities/Cost Engineer -

Bob George

Global General Manager -

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