Fundamentals are Improving?

Fundamentals are Improving?

10th March 2017

The onshore rig count continued to move upward, 9 this week and posting its 18th increase in 19 weeks. This brings the total to 743, approximately 65% above the 450 a year ago. US drillers have added a total of 301 oil rigs in 38 of the past 41 weeks, averaging a weekly gain of ~7.3 rigs. But, the rate of climb for oil rigs is beginning to slow.

Natural Gas ….have we arrived at the “Age of Gas”?

The CERAWeek gathering in Houston is always a good litmus test of market sentiment on the outlook for natural gas, and this year was no exception.

There are five big “takeaways” from the discussion this week that will trickle down to boardroom planning meetings, national energy policy debates, and investment committee deliberations over the next few months.  These takeaways may even herald the “Age of Gas” that for many, still hasn’t quite arrived.

Takeaway Theme #1: North American gas is the big story for the next couple of decades, at least. Some now see Canada, and much more significantly, the US, becoming the largest LNG exporter within that timeframe.  This is a remarkable turn of events considering just over one year has passed since the first cargo left Louisiana.

Theme #2, which will create billions of dollars of new revenue for the gas sector, will be the electrification of emerging economies all over the world, based on an expectation that natural gas will be the fuel of choice.  However, gas doesn’t have the upper hand in all areas, and in the absence of any meaningful carbon pricing, coal continues to represent the cheapest source of power generation for many growing economies in Asia.

Theme #3 is the growing democratization of the global gas sector. One of the important corollaries of the growth in gas/LNG-to-power for these new markets in Asia and Africa is smaller scale projects.  In years past, global gas projects were the exclusive preserve of well capitalized IOCs and the host NOCs whose resources underpinned many of these huge undertakings. Going forward, mini and micro LNG projects, barges, coastal LNG trade, and smaller, often floating LNG regas terminals, will become more numerous and widespread.  Many of these projects will be backed by modestly capitalized investors who will replace the “seven (now six) sisters” omnipresence in global gas, as smaller, more innovative gas monetization and related gas-to-power projects emerge.

Theme #4:  Demand is elastic and many emerging markets are highly price sensitive.  Unless gas is affordable, particularly as a fuel for low cost generation, the hoped-for demand will evaporate.  A return to rampant cost inflation and high cost infrastructure is therefore untenable.  Evidence of collaboration between technology providers, project developers, and lenders has never been more evident than this week in Houston’s CERAWeek gathering.  Lower cost, more efficient, modularized, repeatable gas monetization on a smaller scale is mandatory. This is signaling a departure from the previous trend to build ever bigger trains in situ to capture economies of scale.

And so moving to the final theme, Theme #5: the emergence of a comparative price of natural gas within the global energy mix. With global gas becoming more fungible, more connected and with a greater ability to move around the world in response to demand, the emergence of a true global pricing paradigm has the potential to supercharge the other themes set out above. Exactly where, when and how these envisaged global pricing hubs will develop remains to be seen.  With a concentration of LNG in and around the Gulf Coast and US gas markets already the most sophisticated in the world, the US is one of the likeliest candidates.  Progressive markets in Asia (notably Singapore already developing its SLInG index with other regional products) are also likely to evolve.

After many false starts, maybe we really have arrived at the ”Age of Gas”!

Crude Oil – High oil imports drive inventory gains

High inventories may seem to be a function of the resurgence of US oil production and there is no hiding the fact that domestic oil production has risen in recent weeks, but it is still below the levels of a year ago.

Sources: EIA Weekly Update and GCA analysis

The foremost contributors to the US inventory rise are stubbornly high crude oil imports (100,000 bpd higher than a year ago) and the highest levels of refinery maintenance in recent years which is driving refinery demand down 400,000 barrels per day relative to a year ago.

US crude oil inventories increased 8.2 million barrels last week, to an all-time record high of 528.4 million barrels. High crude oil inventories are certainly not bullish news; and oil prices reacted and fell more than 5% on Wednesday, which marked the largest single-day drop in more than a year.

However…US refinery maintenance season is currently underway. During this time oil demand drops as refineries service equipment ahead of peak demand season. Refinery utilization this turnaround season is at the lowest level since 2013, which maybe indicates that refiners may have delayed maintenance to take advantage of favorable market conditions.

Crude oil inputs to refineries this week were over 400,000 barrels per day lower than the same period a year ago but refinery utilization will recover. Within a few months refinery input demand should increase by more than a million barrels per day relative to last week’s demand.

Sources: EIA Weekly Update and GCA analysis

At the same time, lower refinery utilization means that finished product inventories will be drawn down. Looking at the overall change in petroleum inventories, total commercial inventories (oil and refined products) decreased by 13.1 million barrels over the last three weeks.

Be mindful that the US imported 8.2 million barrels per day of crude last week. The amount of the crude oil inventory build (8.2 million barrels) this week was equal to a single day of US crude oil imports. Reduced imports and higher refinery input demand should cause US inventory to be drained.However, incremental demand could be supplied by increased global production and US inventories could remain high.

Conversely, the US isn’t the entire world. Global inventories are declining. The International Energy Agency recently reported that OECD stocks of crude and products have fallen for five consecutive months, and in Q4 2016 they were falling at a rate of nearly 800,000 barrels per day. As long as global inventories continue to drop, Brent prices will likely firm which should slow the pace of US crude oil imports.

Weekly Recaps

Oil Drilling Activity

The total number of active onshore rigs increased to 743.  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 held at 410 (flat last week), with Permian up 1, Eagle Ford down 1 and Williston flat.

Total US rig count (including the Gulf of Mexico) stands at 768, up 12 last week, with rigs targeting oil up 8. The horizontal rig count increased to 639, up 6 last week.

Crude Oil Price

Brent, the global benchmark for oil, was down $3.91 to US$51.72 a barrel, reflecting a loss of 7.03% on the week.

WTI crude fell $4.36 to US$48.83 a barrel, down 8.20% 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 85.9% of their operating capacity last week. This is 172,000 barrels per day more than the previous week’s average.

US gasoline demand over past four weeks was at 8.8 million, down 6.1% from a year ago. Total commercial petroleum inventories decreased by 2.4 million barrels last week.

On the supply side, EIA data indicated that total domestic crude production increased 56,000 barrels to 9.088 million barrels a day. The Lower 48 crude production now stands at 8.561 million barrels per day, up 46,000 this week.

US crude imports averaged about 8.2 million barrels per day last week, an increase of 0.561 million barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 7.9 million barrels per day, 1.7% above the same four-week period last year.

Crude oil inventories increased 8.2 million barrels from the previous week and remain at historically high levels. The crude stored at Cushing (the main price point for WTI) was up 0.9 million barrels; total storage is 64.4 million barrels (~71.6% utilization).

Authors

Fundamentals are Improving?

Nick Fulford

Global Head of Gas and LNG - nick.fulford@gaffney-cline.com
Fundamentals are Improving?

P Kevin Galvin

Principal Advisor, Field Development Planning - kevin.galvin@gaffney-cline.com

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