11th January 2019
Oil Drilling Activity
Onshore US drilling activity increased 2 with a total active count of 1052 rigs; those targeting oil down 4 (a decrease of 0.45%), with the total at 873. Across the three major unconventional oil basins, the oil rig count increased 1 and stands at 615, with Permian up 1, Williston and Eagle Ford unchanged.
EIA reported last week’s total US domestic crude output at 11.7 million, remaining firm for the past 10 weeks. EIA’s data indicated another inventory draw in crude oil at 1.7 million barrels last week; with US production flat and exports remaining robust, the trend to draw from crude stocks continues.
EIA basin productivity reports show that as the total number of tight oil and gas wells increases, their natural decline provides an ever-greater challenge to replace with “flush” production from new producers. Taken at face value, EIA data suggests >75% of total new Permian oil production merely offsets natural legacy well decline; average productivity per new well is broadly flat over the last 2 years. Perhaps it was fortunate that Santa Claus chose Christmas Eve to arrest the US$30/barrel decline in oil price with a modest recovery to help fund drill/completion of the flush producers needed to sustain and/or grow US production and fill the planned new pipeline capacity due on stream in 2019.
Federal Reserve Chairman Jerome Powell said on Thursday the US central bank has the ability to be patient on monetary policy given stable price measures, and he downplayed predictions from policymakers suggesting interest rates would be raised twice more in 2019.
Natural Gas – Out with the old, in with the new
As we leave 2018 behind us, there have been a series of landmark announcements and developments on the global gas front that typify the main trends in the sector right now....
As we bid farewell to 2018, figures were released which showed that natural gas feedstock to support US LNG exports had surpassed 5bcfd, a figure which is set to be considerably higher by the end of the year. Put into context, the whole of the UK on average consumes 8 bcfd, so to have achieved such a target within just three years of starting to export LNG is remarkable, and confirms that the US is going to be an ever more significant player on the global gas scene.
Of course, some of this gas will inevitably make its way to Europe, where re-gas terminals are providing a gateway, increasingly in competition with Europe’s traditional pipeline imports from Russia. In a move that is perhaps intended to underline Russian attention in the Baltic, President Putin himself this week opened a new Gazprom LNG re-gas facility in Kaliningrad, sandwiched between Lithuania and Poland, both of which have shown a propensity for US LNG in recent years.
In another development indicative of the geopolitical role of gas in the region, the German foreign minister this week warned against US sanctions against the planned Nordstream 2 pipeline, which is also said to be losing support within Germany itself, as the US ramps up pressure to cancel the project amid fears of its impact on Ukraine.
Moving to more mundane, but perhaps equally significant developments for the LNG market itself, Jacksonville in Florida continues to define itself as the cutting edge of LNG marine developments, with the launch of a fourth huge container ship that will ply the route to Puerto Rico, and use the LNG marine fuel terminal and liquefaction facility built at the port. As we get one year closer to the IMO deadline for NOX and SOX restrictions, 2019 is going to be a critical year for the marine industry, as more and more ship owners realize that the far-reaching restrictions on high Sulphur fuel oil will have a major effect on their operations.
Finally, as we look further north, in Canada, the issues around development of LNG facilities continue to smolder, with construction operations on the Coastal Link pipeline, to supply the LNG Canada facility, stopped for a time by protestors. While this does not seem to have materially impacted plans, it is a reminder that natural gas continues to have to fight for its credentials as a clean, sustainable fuel.
Crude Oil – Oil prices ease after eight-day rally
The price of US crude oil climbed, and could well rise further, on the back of Saudi Arabia cutting its exports in January by 10% compared with November. Saudi has indicated that it will reduce its exports from eight million barrels per day to 7.2 million and that there will be a further cut of 100,000 barrels per day in February.
Crude prices have held up well despite data from the US Energy Information Administration showing that crude inventories fell by 1.7 million barrels in the week to January 4, compared with expectations for a decrease of 2.8 million barrels.
The IEA indicated their confidence that the cuts already promised by the Organization of the Petroleum Exporting Countries and its allies should be more than sufficient to balance the market but that further action could be required if that proved not to be the case.
Hopes of progress in the US-China trade talks are helping lift oil prices too, despite ample supplies from the US.
2019 starts with a high degree of uncertainty over the path of the global economy. Leading economic indicators point to a downturn and US trade policy has halted the former direction of more globalized free trade.
The US-Chinese trade war continues, the EU and the UK stand on the abyss of a ‘no deal’ Brexit divorce, which threatens the economic prospects of both. The era of quantitative easing appears to be over and interest rates are on the rise. All of the world’s major economies face a tougher economic outlook.
Given the close correlation between global GDP and oil demand, the oil markets turned bearish at the end of 2018, calculating that muted oil demand growth may require OPEC+ to do more than it currently intends to balance supply and demand in 2019.
However, despite the prevailing pessimism, a downturn is not yet an established fact, nor is a significant supply surplus in the oil market assured throughout 2019.
Total US rig count (including the Gulf of Mexico) stands at 1075, down 4 this week. The horizontal rig count stands at 948, an increase of 3 this week. US rig activity continues to show constrained growth for 28 of the last 30 weeks and stands 14% above last year’s total. US shale operators remain focused on well productivity (i.e., well completion) over rig growth.
Canadian rig activity, despite a recent uptick following the holiday break, is still circa 100 rigs lower year on year, reflecting large differentials between US and Canadian oil and gas prices at the wellhead. New export routes to other than US Lower 48 customers are needed if these price differentials are going to narrow in the next few years.
Crude Oil Price
Brent, the global benchmark for oil, increased US$3.31 to US$60.70 a barrel, reflecting a gain of 5.77% on the week.
WTI crude rose US$3.68 to US$51.85 a barrel, up 7.64% on the week.
US Crude Oil Supply and Demand
US crude oil refinery inputs averaged 17.6 million barrels per day, with refineries at 96.1% of their operating capacity last week. This is 194,000 barrels per day less than the previous week’s average.
US gasoline demand over the past four weeks was at 9.0 million barrels, down 1.2% from a year ago. Total commercial petroleum inventories increased by 13.3 million barrels last week.
US crude net imports averaged 5.8 million barrels per day last week, up by 626,000 barrels per day from the previous week. Over the past four weeks, crude oil net imports averaged 5.2 million barrels per day, 20% less than the same four-week period last year.
US crude imports averaged 7.8 million barrels per day last week, up by 454,000 barrels per day from the previous week. Over the past four weeks, crude oil imports averaged 7.6 million barrels per day, 3.6% less than the same four-week period last year.
Crude oil inventories decreased 1.7 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) increased 0.4 million barrels; total stored is 42.3 million barrels (~47% utilization).
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