14th June 2019
Oil Drilling Activity
Onshore US drilling activity dropped 7 with a total active count of 941 rigs; those targeting oil down 1, with the total at 788. Across the three major unconventional oil basins, the oil rig count decreased by 6, with Permian down 5, Williston flat and Eagle Ford down 1.
US domestic crude output decreased by 100,000 barrels per day; US crude oil production dropped below the record level of 12.4 million barrels per day and stands at 12.3 million barrels per day. US crude inventories increased 2.2 million barrels last week, compared to an expected decrease of 80,000 barrels. That marked a second weekly gain in a row.
Growth in world oil demand will accelerate to 1.4 million barrels a day in 2020; however, it will be eclipsed by a 2.3 million barrel-a-day surge in output, as the ongoing boom in US shale is augmented by new fields in Brazil, Norway and Canada.
At the 2019 AIPN International Petroleum Summit, Bill Cline was inducted as President for 2019-20.
AIPN (Association of International Petroleum Negotiators) is the preeminent organization for professionals involved in the commercial and legal aspects of the international oil and gas industry business. It comprises more than 4,000 members in 110 countries representing international oil and gas companies, service companies, national oil companies, law firms and academic institutions.
Natural Gas – Sweet porridge (Der süße Brei)
One of the Brothers Grimm folkloric tales about magic involved a little girl and a pot of porridge that would produce as much as needed, until told to stop. One day, her mother started the pot, but did not know how to stop it, and the whole town was enveloped with porridge. Only one house was left uncovered, and the townsfolk had to eat their way back home. Sometimes it seems as if there is a magic LNG carrier out there somewhere, that someone forgot to stop...
With Asian and European gas prices at the lowest levels for around three years, it appears that Asian demand is being easily satisfied by Pacific basin production, and any excess is now finding a home in Europe. Volumes of short-term gas being traded at Europe’s main gas hubs has now reached record levels, partly as a result of term gas now being turned down to contractual minimums, while gas buyers “fill their boots” with low-priced LNG. In Europe, with hub prices around $4/MMBtu for July delivery, and Brent at over $60, that represents about a $6/MMBtu price discount for gas compared to oil. If that spread were to continue, we could see a wave of investment in petrochemicals and gas-to-products technologies to convert gas into high value liquids. However, by next year, the forward curves start to converge and the spread settles down to more historic levels.
Ironic, then, that this is the week that has seen the first LNG cargo loaded from Shell’s Prelude FLNG vessel in Australia, which represents a technological step forward and a successful start for what is the largest floating structure ever built, and several billion dollars of investment.
However, any seasoned professional in the LNG sector will tell you that LNG is a long game, and investments are typically recouped over decades rather than years. At current gas prices globally, gas-to-power represents a very attractive alternative for the growing economies of South Asia, Africa and Latin America. As a result, the increased demand needed to soak up the current glut is only just around the corner, in the timeframes that LNG investors work with, but for this summer at least, the fuel for the gas cooker on which the pot of porridge depends, should be very inexpensive.
Crude Oil – Oil prices rebound
Oil plunged after a report showing US crude supplies climbed for a second week in a row. Worries about energy demand on the back of growing US-China trade tensions continued to pressure crude prices.
Geopolitical tensions jolted the price the other way. Media reports said a tanker in the Gulf of Oman had sent a distress signal after being attacked and was on fire, while Bloomberg reported a second tanker had also been attacked after both had sailed from Saudi Arabia.
Concerns about the outlook for global demand growth have contributed to recent oil price declines. Several macroeconomic indicators—including expected industrial activity—as measured by the manufacturing Purchasing Managers’ Index (PMI), declined across several countries in May.
The US manufacturing PMI fell to its lowest level since 2009, and the Chinese manufacturing PMI for May declined to 49.4—any reading lower than 50 indicates a contraction in manufacturing activity.
In addition, China and the US issued tariffs on each other’s goods, and in late May, the US announced potential tariffs on Mexico, which has added to economic growth uncertainty.
In the June 2019 Short-Term Energy Outlook (STEO), the EIA forecasts that Brent crude oil prices will average $67 per barrel in 2019 and in 2020. EIA expects that West Texas Intermediate (WTI) crude oil prices will average $59 per barrel in 2019 and $63 per barrel in 2020.
Crude Oil Price
Brent, the global benchmark for oil, decreased $0.25 to $61.70 a barrel, reflecting a loss of 0.40% on the week.
WTI crude fell $0.38 to $52.38 a barrel, down 0.72% on the week.
Total US rig count (including the Gulf of Mexico) stands at 969, down 6 this week. The horizontal rig count stands at 852, down 3 this week. US rig activity continues to show constrained growth for 49 of the last 52 weeks and is 88 rigs below (-8%) last year’s total. Crude prices trending lower and US shale operators continue to focus on well productivity (i.e., well completion) and operational efficiency over rig growth. Capital discipline over production growth remains the driller's focus.
US Crude Oil Supply and Demand
Crude oil inventories increased 2.2 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) increased 2.1 million barrels; total stored is 52.9 million barrels (~59% utilization).
US crude oil refinery inputs averaged 17.1 million barrels per day, with refineries at 93.2% of their operating capacity last week. This was 126,000 barrels per day more than the previous week’s average.
US gasoline demand over the past four weeks was at 9.5 million barrels, down 0.2% from a year ago. Total commercial petroleum inventories increased by 9.3 million barrels last week.
US crude net imports averaged 4.489 million barrels per day last week, down by 140,000 barrels per day from the previous week. Over the past four weeks, crude oil net imports averaged 4.171 million barrels per day, 32.1% less than the same four-week period last year.
US crude imports averaged 7.6 million barrels per day last week, down by 316,000 barrels per day from the previous week. Over the past four weeks, crude oil imports averaged 7.3 million barrels per day, 9% less than the same four-week period last year.
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