July 21, 2017

July 21, 2017

21st July 2017

Oil Drilling Activity

Drillers decreased onshore rigs by 4 this week, bringing the total down to 924, only the second time this year that drillers have reduced onshore rig count. Weak crude prices continue to push US shale producers to reassess drilling capital; however, this could be a signal that producers are turning their focus (capital) to drilled but uncompleted inventory. The estimated number of uncompleted wells in the Permian has risen by more than 1,000 since June 2016. In most other shale basins, the estimated number of uncompleted wells has been stable. There are now almost 2,250 uncompleted wells in the Permian Basin.  

Natural Gas – Coal regains lost territory in the US, but losing the war in Europe

To the surprise of many, coal will squeeze back into top place in 2017 in terms of US power generation, edging gas back into second spot by the smallest of margins.  Pricier gas and cheaper coal are the main reasons, with average gas prices paid by generators rising from US $2.88/MMBtu last year to US $3.58 for the first half of 2017.  Furthermore, with the new administration entertaining pro-coal pre-election rhetoric, and the new Energy Secretary starting to tackle policy round generation fuel mix, coal is continuing to lobby hard.  The coal industry is making the case for policy support arguing that coal is more reliable than gas, with its ability to stockpile millions of tons of coal ready to burn and expectations are that it will hold its own against gas for the time being.

 However, as with many things, you look across the Atlantic Ocean and a totally different picture is emerging.  In the UK, generation from renewables is making major inroads into the fuel mix, squeezing coal down to record lows.  In the three months to June, coal managed a miserly 1.8% of the generation share in the UK, at 1.3TWh of power, compared to a dominant 38% of the market in the same quarter as recently as 2013.  Coal was dwarfed by output from wind farms and biomass, at 9.4 Twh and 5.9TWh respectively.   With lower electricity demand, and high wind output, thermal generation was already under pressure.  However, with a UK carbon tax set even higher than most other European countries, the breakeven cost of coal fired electricity is now well above that of gas.  As a result, gas has become the balancing mechanism for UK power, producing over 27TWh or nearly 40%.

As you look at where the gas growth is coming from over the next decade or so, many of the emerging gas to power markets will have to choose which path to follow.  China, India, Indonesia all have choices to make where cheap coal is the tempting option, but carbon and, more generally, air quality may prove the deciding factor.   One thing is for sure; gas demand will develop very differently depending on whether the US or the UK model is subscribed to, and what we are seeing right now suggests that carbon tax has very practical and immediate consequences when it comes to fuel choice.

Crude Oil – US refineries run at record-high

Oil prices moved higher as solid demand soaked up some of what is seen as an oversupplied crude market and the EIA’s data indicated a sharp drawdown in oil and fuel stocks.

Sources: EIA Weekly Update and GCA analysis

 

Inputs to US refineries hit a record high 17.7 million barrels per day for the week ending May 26, before dropping slightly to 17.6 million barrels per day for the week ending June 9. Petroleum products supplied to the US market as well as inventories and exports were at relatively high levels.

Weekly US refinery inputs have exceeded 17 million barrels per day only 24 times since EIA began publishing the weekly data series in 1990, and all those instances occurred after July 2015. However, despite record-high inputs, refinery utilization did not reach a record because refinery capacity has increased in recent years.

As of January 1, 2017, U.S. operable atmospheric crude distillation capacity reached 18.6 million barrels per day, 1.6% higher than at the beginning of 2016, according to EIA's annual Refinery Capacity Report. This increase in operable capacity was slightly lower than last year’s increase of 2.0%.

US refinery input capacity has increased by 659,000 barrels per day since mid-August 2015. 

Oil Drilling Activity

Total US rig count (including the Gulf of Mexico) stands at 950, down 2 this week with rigs targeting oil down 1. The horizontal rig count stands at 803, down 1.
The total number of active onshore rigs decreased to 924.  When compared to a November 2014 figure of 1,876 active rigs, the current level remains 51% below the 2014 high.
Across the three major unconventional oil basins, the oil rig total remained flat at 497 for the third week running, with Permian up 1, Eagle Ford down 2 and Williston up 1.

Crude Oil Price

Brent, the global benchmark for oil, increased US$0.39 to US$49.03 a barrel, reflecting a gain of 0.80% on the week.

WTI crude rose US$0.33 to US$46.64 a barrel, up 0.71% on the week. 

US Crude Oil Supply and Demand

Sources: EIA Weekly Update and GCA analysis

US crude oil refinery inputs averaged 17.1 million barrels per day, with refineries at 94% of their operating capacity last week. This is 125,000 barrels per day less than the previous week’s average.

US gasoline demand over past four weeks was at 9.7 million, down 0.8% from a year ago. Total commercial petroleum inventories decreased by 10.2 million barrels last week.
On the supply side, EIA data indicated that total domestic crude production increased 32,000 barrels to 9.429 million barrels a day. The Lower 48 crude production now stands at 8.970 million barrels per day, up 30,000 this week.

US crude imports averaged 8.0 million barrels per day last week, an increase of 386,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 7.8 million barrels per day, 1.7% below the same four-week period last year.

Crude oil inventories decreased 4.7 million barrels from the previous week and persist at historically high levels. The crude stored at Cushing (the main price point for WTI) deceased 0.1 million barrels; total storage is 57.5 million barrels (~64% utilization).

Authors

July 21, 2017

Nick Fulford

Global Head of Gas and LNG - nick.fulford@gaffney-cline.com
July 21, 2017

P Kevin Galvin

Principal Advisor, Field Development Planning - kevin.galvin@gaffney-cline.com

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