January 26, 2018

January 26, 2018

26th January 2018

Oil Drilling Activity

Onshore US drilling activity increased by 13, and now stands at 929. Across the three major unconventional oil basins, the oil rig total increased by 18, all in the Permian. Rigs targeting oil increased by 12, with the total standing at 759. With U.S. crude production at 9.85 million barrels per day and forecasted by EIA to cross 11 million barrels per day in 2019, the continued strength of the shale boom is far from certain as companies promise shareholders that their strategies pursue profit over just volume growth. 

Source: EIA Weekly Update and GCA Analysis

Natural Gas – The saga continues

As if it was not a strange enough tale already, the mystery of the Russian LNG that is making its way to Boston, via a short stay in Britain, deepened again this week.  The vessel carrying the LNG changed course, and listed its destination as Algeciras, in Spain, the port from which it had just sailed.  Amidst much speculation that the ship was no longer US bound, the LNG terminal owners, Engie, who acquired the Boston Everett terminal from Distrigas several years ago, confirmed that the ship was still expected in Boston, but on a different date from that planned.

The developments in the global market, including the escapades of the Boston-bound Gaselys, were discussed at the World Gas Congress Asia, chaired by GCA on the first day.  With the event taking place in Japan, the interaction between the Energy Market Reform and unbundling in the Japanese gas and power markets, and the way LNG is bought and sold in Asia, were high on the agenda.

METI opened the conference with a summary of their LNG strategy, designed to create a more competitive open market, delivering better value for Japanese energy customers.  In common with other major LNG importing nations in Asia, some of the constraints placed on more rapid market development stem from the lack of third party access (TPA) to LNG import terminals.  In Japan, many of the terminal owners have successfully resisted attempts by others to access terminals on the basis that there is no capacity available.  Similar arguments have been used in China, where LNG terminal access also continues to be thwarted by the major players.

Although spot prices in Asia continue to benefit from strong demand, with some March deliveries for Japan being agreed for over US$10, there are signs that with the changing season demand is slowing from China and India.  Many commentators believe we may be over the peak already, with speculation that prices could subside quite rapidly over the spring, with even more LNG due to come onto the market from Australia and the US during 2018.

Thus, in spite of relatively high prices over the last couple of months, hopes that expectations of an LNG oversupply were exaggerated, might be short lived.  As always in these situations, the Greek philosophers have some wise words to cover it, and in this case, it was Aristotle who said, “One swallow does not a summer make …”.  Some of the overbought LNG buyers in Asia may be paying heed to that particular idiom over the next few months.

Crude Oil – Drop in US crude inventories continues ... 10 weeks running

Oil prices moved to fresh highs not seen since late 2014; Brent crude oil hit US$71 a barrel on Thursday for the first time since 2014, supported by OPEC-led supply curbs, a record-breaking run of declines in US crude inventories and a weaker US dollar. WTI crude oil also climbed to its highest price since early December 2014.

The continuous fall in global crude inventories and the prolonged weakness in the US dollar have sent oil hitting new highs. In a further sign the crude storage glut is clearing, US crude inventories fell for a record 10th straight week to the lowest level since February 2015.  Speaking at the World Economic Forum on Wednesday, US Treasury Secretary Steven Mnuchin said, “a weaker dollar is good for trade,” boosting the position of US trade imbalance in dollar-denominated commodities.

At the Cushing, Oklahoma hub, the draw down led to three-year lows. Crude inventories fell 1.1 million barrels last week, though expectations for an even larger decrease of 1.6 million barrels were not fulfilled. Crude stocks at the Cushing, Oklahoma delivery hub for US crude futures fell by 3.2 million barrels to 39.2 million.

At 411.6 million barrels, US crude stocks were at the lowest since February 2015, and the string of drawdowns that began late November represents a record sustained decline, the largest since EIA figures began reporting in 1982.

The steady drawdown in US crude stocks comes even as production increased again, standing now at 9.9 million barrels per day, not far from the all-time U.S. record of 10.04 million barrels per day set in 1970, and as refining runs declined 392,000 barrels per day. The decline in Gulf Coast crude oil inventories and the continued rapid decline at Cushing, Oklahoma is offsetting the rise in US crude production.

Weekly Recaps

Oil Drilling Activity

Total US rig count (including the Gulf of Mexico) stands at 947, up 11 this week with rigs targeting oil up 12. The horizontal rig count stands at 808, down 6 this week.

The total number of active onshore rigs increased to 929.  Compared to a November 2014 figure of 1,876 active rigs, the level remains 50% below the 2014 high, highlighting just how much efficiency is being achieved (more production for half the rig count).  The debate continues on whether this improvement will be sustainable once today’s sweet spots have been drilled-up.  It would be brave to bet against US engineering ingenuity delivering yet further optimization.

Across the three major unconventional oil basins, the oil rig total increased 18; it stands at 530, with Permian up 18, Eagle Ford and Williston flat.

Crude Oil Price

Brent, the global benchmark for oil, increased US$1.61 to US$70.14 a barrel, reflecting a gain of 2.35% on the week.

WTI crude rose US$2.29 to US$65.51 a barrel, up 3.62% on the week.

US Crude Oil Supply and Demand

Sources: EIA Weekly Update and GCA Analysis

US crude oil refinery inputs averaged 16.5 million barrels per day, with refineries at 90.9% of their operating capacity last week. This is 392,000 barrels per day less than the previous week’s average.

US gasoline demand over the past four weeks was at 8.7 million barrels, up 5.4% from a year ago. Total commercial petroleum inventories decreased 2.9 million barrels last week.

On the supply side, EIA data indicated that total domestic crude production increased 128,000 barrels to 9.878 million barrels a day. The Lower 48 crude production now stands at 9.372 million barrels per day, an increase of 126,000 barrels this week.

US crude imports averaged 8.0 million barrels per day last week, an increase of 91,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 7.9 million barrels per day, 2.5% less than the same four-week period last year.

Crude oil inventories decreased 1.1 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) decreased 3.2 million barrels; total storage is 39.2 million barrels (~43.6% utilization).



January 26, 2018

P. Kevin Galvin

Principal Advisor - Sr. Manager Facilities/Cost Engineering Advisor - kevin.galvin@gaffney-cline.com
January 26, 2018

Nick Fulford

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

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