July 20, 2018

July 20, 2018

20th July 2018

Oil Drilling Activity

Onshore US drilling activity continued to tread water, decreasing by 6 with a total active count of 1024 rigs; those targeting oil decreased 5, with the total at 858. Across the three major unconventional oil basins, the oil rig count decreased by 1 to 603, with Permian and Eagle Ford flat and Williston down 1.

EIA reported last week’s total domestic crude output increased to 10.981 million barrels a day, reversing a five-week flat trend. Despite short-term takeaway capacity constraints, the Permian region is expected to continue to drive US crude oil production growth through 2019.

The number of Americans filing for unemployment benefits unexpectedly fell last week, hitting its lowest level in more than 48-1/2 years, as the labor market continues to strengthen.  Thus, the sluggish US GDP growth of 2% reported for Q1 2018 is expected to be replaced with a more robust 4% GDP growth in Q2 (Bank of America estimate July 17, 2018). 

Natural Gas- Permian pipelines constrained

The natural gas spot price spread between the Permian Basin, as priced at the Waha Hub in western Texas, and the US national benchmark Henry Hub in Louisiana has grown considerably in the past year. Natural gas prices at Waha are nearly a dollar per million British thermal units lower than Henry Hub prices. This spread widened as the ability to transport the increased natural gas production in the Permian Basin in western Texas and southeastern New Mexico was constrained by existing pipeline capacity.  

Several new pipelines are currently in development to carry natural gas from the Permian Basin to the Gulf Coast: the Gulf Coast Express Pipeline (2.0 Bcf/d capacity), the Permian to Katy Pipeline (1.7 to 2.3 Bcf/d capacity), and the Pecos Trail Pipeline (1.9 Bcf/d capacity). Of these three projects, only the Gulf Coast Express is under construction, with an expected in-service date of October 2019. The proposed pipelines from the Permian Basin are intended to meet Gulf Coast demand for natural gas, which includes new liquefied natural gas export facilities and regional industrial use.

In addition, newly completed gas pipeline capacity to Mexico is underutilized this summer pending completion of Mexican midstream/downstream gas projects, which when completed in 2019 should allow a further 1-1.5 Bcf/d to exit south and west Texas.

Crude Oil – Prices are feeling the pressure

Oil prices fell after official data showed an unexpected rise in US crude stockpiles, US output hit a record high and emerging evidence of higher production from Saudi Arabia and other members of OPEC, as well as Russia.

The oil market is likely to become progressively more unpredictable over the coming months. International benchmark Brent crude has tumbled nearly 9% from last week’s high of more than US$79 a barrel. Political and economic events are shaping the oil market in a way that they have not shaped for quite some time. The amount of uncertainties surrounding the global supply (and) demand balance is growing almost by the day.

The global economy is rapidly running out of spare capacity and nowhere is that more obvious than in the oil market. The oil market's unused production capacity has fallen to multi-decade lows as a result of strong consumption growth and a series of output disruptions in Venezuela, Libya and elsewhere.  EIA analysis highlights that when OPEC spare capacity is <2.5 million barrels per day, the ability to mitigate unplanned outages at OPEX/Non-OPEC supply is limited.  As is evident in the following chart, outages of 2-3 million barrels per day have been the norm for the last 5-6 years.

Iran sanctions threaten to reduce spare capacity even further from the start of November, pushing it down to the lowest level since the oil shocks of 1973/74 and 1979/80.

Global oil consumption has expanded by an average of 1.7 million barrels per day in each of the last three years, led by growth in Asia. Oil consumption forecast to rise at a slightly lower rate in 2018 and 2019 as price increases curb demand, but it will still top the 100 million barrels per day level around the end of this year. The result is that the global oil industry is finely balanced with US crude inventories about 2% below the five-year average for this time of year while China continues to add to its Strategic Reserve at a rate of close to 100,000 million barrels per day.

Oil prices over the last year are putting upward pressure on global inflation from 3% to 3.5% (IMF April 2018), though the forecast is more stable for next year and beyond.

No one likes to predict tough times, but the global economy is likely to experience a modest slowdown by 2020, and the slowdown may be necessary to relieve upward pressure on oil prices.

Morgan Stanley indicated that oil markets are likely to tighten in coming months despite contradictory signals and Brent price could hit US$85 a barrel by year-end while other banks suggest “safe scenarios” in the range of US$70-75 a barrel for Brent in 2019.

Weekly Recap

Drilling Activity

Total US rig count (including the Gulf of Mexico) stands at 1045, down 8 this week. The horizontal rig count stands at 922, down 8 this week. US rig activity has shown no growth for 8 of the last 9 weeks and is up just 10% above last year’s total.

Compared to a November 2014 figure of 1,876 active rigs, the current level is just above 50% of the 2014 high.

Crude Oil Price

Brent, the global benchmark for oil, decreased US$1.22 to US$73.31 a barrel, reflecting a loss of 1.64% on the week.

WTI crude fell US$0.55 to US$70.00 a barrel, down 0.78% 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 94.3% of their operating capacity last week. This is 413,000 barrels per day less than the previous week’s average.

US gasoline demand over the past four weeks was unchanged at 9.6 million barrels, down 0.1% from a year ago. Total commercial petroleum inventories increased by 6.0 million barrels last week.

US crude imports increased to an averaged 9.1 million barrels per day last week, up by 1,635,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 8.5 million barrels per day, 8.1% more than the same four-week period last year.

US crude exports averaged 1.461 million barrels per day last week, a decrease of 566,000 barrels per day from the previous week. Over the last four weeks, crude oil exports averaged 2.206 million barrels per day, 199.9% more than the same four-week period last year.

Crude oil inventories increased 5.8 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 24.6 million barrels (~28% utilization).



July 20, 2018

P. Kevin Galvin

Facilities/Cost Engineer - kevin.galvin@gaffney-cline.com
July 20, 2018

Nick Fulford

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

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