July 13, 2018

July 13, 2018

13th July 2018

Oil Drilling Activity

Onshore US drilling activity increased by 1 with a total active count of 1030 rigs; those targeting oil remained flat with the total at 863. Across the three major unconventional oil basins, the oil rig count increased by 1 to 604, with Permian up 1, Eagle Ford and Williston flat.

EIA reported last week’s total domestic crude output at 10.9 million barrels a day, dog flat for the past five weeks. This week’s domestic crude oil production estimate incorporates a re-benchmarking that raised estimated volumes by less than 50,000 barrels per day, which is roughly 0.5% of this week’s estimated production total.

Source: EIA Weekly Update, BHGE Rig Count and GCA Analysis

Global benchmark Brent crude oil had its biggest one-day drop in two years on Wednesday.  US-China trade tensions threatened to hurt oil demand, and news that Libya would reopen its ports raised expectations of growing supply.

Natural Gas – Nordstream 2 pipeline

The controversy that has been smoldering for several years about the Nordstream 2 pipeline hit the headlines this week, when President Trump decided to home in on European reliance on Russian gas, during the NATO summit.

The pipeline represents many things to many people.  For Ukraine, it brings an alternative route to transport Russian gas, which will result in the loss of billions of dollars of revenue, and will remove the strategic role that the Ukraine has enjoyed for many decades, as an energy bridge to the West.

For Chancellor Merkel, Russian gas is essential for delivery of the ambitious Energiwende policy, her green energy agenda, without reliance on nuclear energy.  Her predecessor, Gerhard Schröder, who has been actively involved in the project since its inception, and is said to be a close friend of Russia’s President Putin, said that it would mean delivery of a lifetime ambition to see a major new gas pipeline across northern Europe.

For President Trump, and many others, however, it pushes Europe more and more into a situation where Russian gas becomes the lifeblood for Western European economies.  US policy makers fear the creation of a dependency that places far too much influence in the hands of the Russian government, and would change the geopolitical landscape for decades to come.

Of course, all this comes at a time when US LNG exports are ramping up, with Cove Point now fully operational, and two more export terminals due to be commissioned next year.  Like oil, natural gas has now entered the geopolitical arena with a vengeance; control over such a strategic resource has made it to the most senior levels of international diplomacy.  Coupled with the European debate about fracking, banned in Germany, France, and Scotland, Europe is fast becoming a battleground for a strategic tug of war on who supplies its energy, and what form it takes.

Although this debate has only just now becoming a talking point for people outside the energy industry itself, it will no doubt rumble on for many years to come, as the US and Russia struggle for energy dominance in Europe.   All that can really be said is that with both superpowers working hard to find a market for their natural gas, and capturing the revenues that go with that, perhaps the only beneficiary will be the ordinary gas customers of Europe, be it London, Berlin or Paris.

In the UK, after years of alleged overpricing by the major energy suppliers, a new round of capped retail gas tariffs is being introduced.  Perhaps once this battle for gas supremacy in Europe really gains momentum, those capped tariffs will become an irrelevance amid lowering wholesale prices as Europe benefits from an abundance of supply from both sides.  Time will tell.

Crude Oil – Production cushion diminishing

Oil supply outages around the globe is stretching the cushion of available crude.  OPEC and its Russia-led allies agreed late June to boost their output to replace a fall in production such as in Venezuela and Iran. The planned production increase comes at the expense of the world’s spare capacity cushion, which might be stretched to the limit. Saudi Arabia increased production by 430,000 barrels a day in June, confirming the Kingdom had reopened the spigots even before OPEC agreed.

However, the Saudi output increase hurt its rapid-response production capacity that can be brought back within 90 days. The IEA said it may step in to help the global oil market in case unforeseen outages or geopolitical turmoil create a supply crunch.

EIA’s forecast of global liquid fuels balances indicates a looser oil market in the second half of 2018 and through the end of 2019 compared with the tight oil market conditions that prevailed in 2017 and the first half of 2018. EIA expects inventories to be relatively unchanged in 2018 and to increase by 0.6 million barrels per day in 2019.

The inventory builds in 2019 are mainly the result of expected production growth in the United States, Brazil, Canada, and Russia. EIA forecasts that these countries will collectively provide 2.2 million barrels per day out of the 2.4 million barrels per day of total global supply growth in 2019.

Supply growth of this magnitude would outpace EIA’s forecast for global consumption growth of 1.7 million barrels per day for 2019. Total US crude production is expected to average 10.8 million barrels per day in 2018, up 1.4 million barrels per day from 2017, and 11.8 million barrels per day in 2019.

Weekly Recap

Drilling Activity

Source: BHGE Rotary Rig Count

Total US rig count (including the Gulf of Mexico) stands at 1054, up 2 this week. The horizontal rig count stands at 930, flat this week. US rig growth has trended flat for 7 of the last 8 weeks and is up just 11% above last year’s total.

Rigs targeting gas moved up 2 to 189, partly in response to LNG plant start-ups but also 1 Bcfd of new pipeline export capacity to Mexico coming on line in June 2018.  In parallel to the new cross border pipelines, there are major upgrades to Mexican domestic pipelines to complete the 5-year infrastructure expansion plan 2015-2019.  When fully operational, this plan calls for up to 9 Bcfd of US gas exports, or 3 Bcfd higher than current Canadian net exports to the US.  Despite all this demand pull, Henry Hub gas prices remain stubbornly below US$3 as supply is growing faster still, led by 26 Bcfd from Marcellus/Utica (31% growth in 2 years). 

With working gas in storage well below the 5-year average and rising marketed gas production, even with the shale gas miracle, there may come a time when Henry Hub traders will be glad of back-stop Canadian gas imports to balance the market.

Crude Oil Price

Brent, the global benchmark for oil, decreased US$2.00 to US$74.53 a barrel, reflecting a loss of 2.61% on the week.

WTI crude fell US$1.80 to US$70.55 a barrel, down 2.49% on the week.

US Crude Oil Supply and Demand

Sources: EIA Weekly Update and GCA Analysis

US crude oil refinery inputs averaged 17.7 million barrels per day, with refineries at 96.7% of their operating capacity last week. This is 1,000 barrels per day less than the previous week’s average.

US gasoline demand over the past four weeks was 9.6 million barrels, down 1.7% from a year ago. Total commercial petroleum inventories decreased by 7.2 million barrels last week.

US crude imports averaged 7.4 million barrels per day last week, up by 1,624,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 8.3 million barrels per day, 5.9% more than the same four-week period last year.

US crude exports averaged 2.027 million barrels per day last week, a decrease of 309,000 barrels per day from the previous week. Over the last four weeks, crude oil exports averaged 2.434 million barrels per day, 256.5% more than the same four-week period last year.

Crude oil inventories decreased 12.6 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) decreased 2.1 million barrels; total stored is 25.7 million barrels (~29% utilization).

  

Authors

July 13, 2018

P. Kevin Galvin

Principal Advisor - Sr. Manager Facilities/Cost Engineering Advisor - kevin.galvin@gaffney-cline.com
July 13, 2018

Nick Fulford

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

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