January 18, 2019

January 18, 2019

18th January 2019

Oil Drilling Activity

Onshore US drilling activity decreased 23 with a total active count of 1029 rigs; those targeting oil down 21 (a decrease of 2.4%), with the total at 852. Across the three major unconventional oil basins, the oil rig count decreased 5 and stands at 610, with Permian down 7, 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, an increase of 200,000 barrels per day.  EIA’s data indicated another inventory draw in crude oil of 2.7 million barrels last week; with US production growth constrained and exports remaining robust (~ 3 million barrels per day), the trend to draw from crude stocks continues.

China's central bank made its biggest daily net cash injection via reverse repo operations, pumping $82.73 billion into the banking system. The news came after comments from the Chinese state planner and Premier Li Keqiang suggested the country would inject more stimulus amid concerns of a slowdown in economic growth.

Natural Gas –  Glut or no glut?

Two differing views of the LNG market have dominated each of the last two years.  In 2017, much of the talk was of a glut, but after some very healthy increase in demand, especially from China, pushing up prices in late 2017, much of that commentary then reversed in 2018. Many of the various industry stakeholders pondered a more robust future of burgeoning demand, to soak up the supply that is very visibly going to hit the market over the next few months.

To some extent, 2019, especially the winter of 2019, may help the industry decide where the truth lies.  On the demand side, China has been (almost) singlehandedly attracted much of the new LNG on the market, recording an unprecedented 40% plus rise in demand two years running.  However, a brief assessment of the utilization rate of re-gas terminals confirms that whether market demand is there or not, it’s going to be impossible to repeat that growth in 2019/20.  Even with additional construction well underway, Chinese LNG import capabilities are unlikely to exceed 70 million tonnes by 2020, compared with an annualized import rate of 72 million tonnes in November last year.  Although many of the terminals have shown they can import at over 100% of nameplate, this still represents a potential bottleneck.

On the supply side, substantial additional LNG volumes will be available from Inpex’s Ichthys project in Australia, in addition to Shell’s Prelude, both of which will be fully operational in 2019, as will Cove Point, with at least one train from Freeport, and potentially more from Cameron also hitting the market in 2020.

Asian spot prices are already down around 15 to 20% from this time last year, though the one feature of the market that appears to continue to be tight is LNG shipping capacity, where spare capacity seems to have been absorbed, with further demand possible.

By the end of the 18-19 heating season, we may start to be able to answer the questions that have been uppermost of the LNG sector for two years now... are we in an oversupply or not?  A related, and perhaps more pressing question for Chinese buyers, however, is whether its LNG or pipeline imports, how can more gas make its way into China, to meet the ever-growing demand.   As of early this month, Gazprom claims to be 91% complete on the “Power of Siberia” pipeline to China, with first gas scheduled for December 20th, 2019.  Many of the required development wells at Chayandinskoye field have been drilled; plus, one should not underestimate the Russian contractor’s project delivery of Russian facilities in even the harshest of climate in East Siberia. 

Crude Oil – US onshore rigs take a tumble!

EIA forecasts Brent prices will average $61 per barrel in 2019 and $65 per barrel in 2020. In 2018, Brent prices averaged $71 per barrel. EIA expects West Texas Intermediate (WTI) crude oil prices will average $8 per barrel lower than Brent prices in the first quarter of 2019 before the discount gradually falls to $4 per barrel in the fourth quarter of 2019 and throughout 2020.

The biggest uncertainty is still from the global economic outlook, where OPEC acknowledged in its most recent monthly report that risks to world growth remain skewed to the downside. If global growth continues to slow, the potential for an oil market surplus will re-emerge, and OPEC members may come under pressure to reduce output even further.

The hope is that major central banks will respond to signs of an economic slowdown by becoming less aggressive in tightening monetary policy. The result would be an easing of financial conditions, a weaker dollar, and a soft landing for the global economy and oil market in 2019.

Saudi Arabia and its OPEC and non-OPEC allies have implemented substantial reductions in production and exports during December and the first part of January. OPEC crude production declined by 750,000 barrels per day in December, according to industry sources.

Most of the reduction came from Saudi Arabia (470,000 bpd), but there were also substantial cuts from Iran (160,000 bpd) and Libya (170,000 bpd) as a result of US sanctions and domestic unrest respectively. Saudi Arabia has said its output will decline even further this month as the kingdom attempts to avoid an accumulation of excess oil inventories.

By acting quickly and aggressively, Saudi Arabia and its allies hope to avert an extended period of over-production and a sharper drop in prices, and early indication suggests they may have succeeded.

Today, the supply picture looks comfortable, with plenty of spare capacity and Saudi Arabia acting as swing producer, so prices will be determined primarily by demand side expectations.

EIA estimates that US crude oil production averaged 10.9 million barrels per day in 2018, up 1.6 million barrels per day from 2017, reaching its highest level and seeing its largest volume growth on record. EIA forecasts US crude oil production to average 12.1 million barrels per day in 2019 and 12.9 million barrels per day in 2020, with most of the growth coming from the Permian region of Texas and New Mexico.

Russian crude and condensate production rose in December to an all-time high of 11.45 million barrels a day

Weekly Recap

Drilling Activity

Source: BHGE Rotary Rig Count

Total US rig count (including the Gulf of Mexico) stands at 1050, down 25 this week. The horizontal rig count stands at 929, a decrease of 19 this week. US rig activity continue to show constrained growth for 29 of the last 31 weeks and stands 12% above last year’s total. US shale operators remain focused on well productivity (i.e. well completion) and operational efficiency over rig growth.

As oil prices declined in Q4 2018, there is a natural tendency to high grade drilling/completions in the most attractive basins, or in the case of the complex Permian Basin, the most attractive tier one plays.  Thus in the short term, declining rig numbers may not directly translate to any decline in production volumes, but if sustained, it would be expected to affect the mid to longer term deliverability of tight oil from the US.

Crude Oil Price

Brent, the global benchmark for oil, increased US$1.11 to US$61.81 a barrel, reflecting a gain of 1.83% on the week.

WTI crude rose US$0.82 to US$52.67 a barrel, up 1.58% on the week.

US Crude Oil Supply and Demand

Sources: EIA Weekly Update and GCA Analysis

US crude oil refinery inputs averaged 17.2 million barrels per day, with refineries at 94.6% of their operating capacity last week. This is 343,000 barrels per day less than the previous week’s average.

US gasoline demand over the past four weeks was at 8.8 million barrels, down 1.0% from a year ago. Total commercial petroleum inventories increased by 5 million barrels last week.

US crude net imports averaged 4.6 million barrels per day last week, down by 1.22 million barrels per day from the previous week. Over the past four weeks, crude oil net imports averaged 5.1 million barrels per day, 24.2% less than the same four-week period last year.

US crude imports averaged 7.5 million barrels per day last week, down by 319,000 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 2.7 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) decreased 0.8 million barrels; total stored is 41.5 million barrels (~46% utilization).

     

Authors

January 18, 2019

P. Kevin Galvin

Facilities/Cost Engineer - kevin.galvin@gaffney-cline.com
January 18, 2019

Nick Fulford

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

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