July 28, 2017

July 28, 2017

28th July 2017

Oil Drilling Activity

Drillers increased onshore rigs by 8 (6 targeting gas) this week, bringing the total to 931. More evidence is emerging that indicates the US oil shale drilling boom could be slowing; ConocoPhillips, Anadarko Petroleum, Hess Corp. and others announced cuts this week to their 2017 capital spending plans which supports the slower growth in oil rigs over the last 6 weeks. 

Sources: EIA Weekly Update and GCA analysis

Natural Gas – Canadian LNG: "market conditions" or own goal?

Those who follow this weekly bulletin regularly will know that GCA has been closely tracking the Canadian LNG sector. Blessed with high quality and plentiful gas resources, it’s constrained by remoteness from key markets, high construction costs, and a plethora of First Nations issues.  A few weeks ago, another complication was added - changing provincial politics after the election with the pro-LNG liberals losing ground to the anti-LNG Green party and NDP.

Whether this was the straw that broke the camel’s back will never be known as the official explanation referred to “market conditions”, but it must surely have been a factor in this week’s decision by Petronas and its partners in the much-delayed Pacific Northwest LNG Project to announce its cancellation.  Following their acquisition of Progress Energy in 2012, Petronas had already acquired a considerable gas resource base in the prolific Montney unconventional horizon, and of course, this remains a strategic asset with considerable scope.

Even with a basis differential hovering at around US$1/MMBtu between the AECO and Henry Hubs, the irony is that the economics of moving this gas down to one of the LNG projects in the US pacific coast, such as Jordan Cove or Oregon LNG, or even all the way down to the Gulf Coast, could still make economic sense.  This latter option would avoid the need for a costly trans-Rockies pipeline and the likelihood of costlier liquefaction facilities, which together could compensate for the higher cost of moving the gas the longer distance.  However, it’s not without its complications, especially for the Asian markets this gas was originally intended to go. As for exports via the Gulf Coast at least, there is the additional burden of the Panama Canal and further steaming distance to Asian markets.  Of course, there is the option to take that gas even further across Mexico to access the Pacific markets from there.

Especially for the liquids rich, very low cost gas in Western Canada, many of these export routes via the US still look viable, if counter-intuitive.  Canada has always relied on the US to buy much of its natural gas, but for a while it appeared that situation might change.  However, the window of opportunity for Canada to take control of its gas exports appears to be closing fast, and moving gas south and east, the tried and tested pattern for the last 50 years, may prove to be more resilient than many thought.  Market conditions or own goal?  Time will tell.

Crude Oil –Fourth consecutive weekly stock reduction

The drawdown of US crude stock was a combination of higher exports, marginal decline in production and a rise in the refinery utilization rate. Oil prices rose as the fall in US inventories fortified expectations that a long-oversupplied market is moving towards a balance point.

Crude inventories fell 7.2 million barrels; the decline was the fourth consecutive drop bring the decline over the past four weeks to 25.2 million barrels.  The EIA’s weekly data has strengthened hopes for a long-awaited rebalancing of the oil market, however, US crude stockpiles remain near their five year averages and this could cap significant price gains in the near term.

Additionally, higher oil price signals could encourage shale oil producers to increase rigs and bring on more production. A price rebound could encourage US shale producers at a time when anecdotal evidence is emerging that indicates the US shale drilling boom could be slowing.

ConocoPhillips slashed its 2017 capital spending by 4 percent on Thursday, the latest US oil and natural gas producer to do so in reaction to crude prices below US$50 WTI. ConocoPhillips and peers had mapped out ambitious capital spending programs for 2017 early in the year, expecting oil prices to be higher. But Conoco becomes the latest this week to cut its spending plans, after Hess Corp, Anadarko Petroleum Corp and others.

Weekly Recaps

Oil Drilling Activity

Total US rig count (including the Gulf of Mexico) stands at 958, up 8 this week with rigs targeting oil up 2. The horizontal rig count stands at 810, up 7.

The total number of active onshore rigs increased to 931.  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 increased to 500, with Permian up 5, Eagle Ford down 2 and Williston flat.

Crude Oil Price

Brent, the global benchmark for oil, increased US$2.82 to US$51.85 a barrel, reflecting a gain of 5.75% on the week.

WTI crude rose US$2.60 to US$49.24 a barrel, up 5.57% on the week.

US Crude Oil Supply and Demand

Sources: EIA Weekly Update and GCA analysis

US crude oil refinery inputs averaged 17.3 million barrels per day, with refineries at 94.3% of their operating capacity last week. This is 166,000 barrels per day more than the previous week’s average.

US gasoline demand over past four weeks was at 9.7 million, down 0.3% from a year ago. Total commercial petroleum inventories decreased by 9.4 million barrels last week.

On the supply side, EIA data indicated that total domestic crude production decreased 19,000 barrels to 9.410 million barrels a day. The Lower 48 crude production now stands at 9 million barrels per day, up 35,000 this week.

US crude imports averaged 8.0 million barrels per day last week, an increase of 48,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 7.8 million barrels per day, 4.2% below the same four-week period last year.

Crude oil inventories decreased 7.2 million barrels from the previous week and persist at historically high levels. The crude stored at Cushing (the main price point for WTI) deceased 1.7 million barrels; total storage is 55.8 million barrels (~62% utilization).

Authors

July 28, 2017

Nick Fulford

Global Head of Gas and LNG - nick.fulford@gaffney-cline.com
July 28, 2017

P Kevin Galvin

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

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