June 29, 2018

June 29, 2018

29th June 2018

Oil Drilling Activity

Onshore US drilling activity decreased by 8 with a total active count of 1024 rigs; those targeting oil decreased 4 with the total at 858. Across the three major unconventional oil basins, the oil rig count decreased by 4 to 598, with Permian down 2, Eagle Ford flat and Williston down 2.

The EIA pegged last week’s total domestic crude output at 10.9 million barrels a day, unchanged from the previous week. While US crude exports hit a high and averaged 3.0 million barrels per day last week.

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

Just last month Matt Egan at CNN said, "US producers have become a victim of their own success…The Permian Basin has been so prolific that it's overwhelmed pipelines…There isn't enough capacity to move barrels to market."  With production flat and oil-rig numbers taking a breather, these statements were not a generic forecast, the bottlenecks are upon us.  However, expect a rapid rebound to output growth as soon as the planned capacity expansions are available late this year and early 2H 2019.  With a stock of 3,200 Permian Drilled Un-completed wells (DUC), the frac crews should be extremely busy by Thanksgiving.

Oil prices rallied, with the US benchmark settling at its highest since 2014. Record crude exports, flat US production and record refinery runs have combined to yield the biggest draw to crude stocks so far this year. The EIA reported Wednesday that crude supplies declined by 9.9 million barrels for the week ended June 22.

US economic growth in the first quarter was revised down to a lackluster 2% — a sharp deceleration and the poorest showing in a year. However, economists expect a significant rebound in the current quarter, forecasting a sizzling growth rate of 4% or more.

Natural Gas – China considers “FERC Order 636” type reform

GCA has long been an exponent of looking at the gas value chain by working from the market backwards, especially in these times of such widespread and plentiful low cost gas resource.

For some time now, changes in the way that natural gas, and its main demand sector, power generation consumes gas have driven a great deal of change in how it is bought and sold.  For example, Energy Market Reform in Japan, which has unleashed a surprising amount of competition between neighboring utilities, with each trying to secure offtake for expensive take or pay contracts.  Momentum for unbundling is building in Malaysia and Thailand, putting many more buyers into the frame as IPPs have the ability to negotiate directly for LNG.  But one of the more disappointing reform processes has been in China, where efforts to create third-party access to its giant natural gas pipeline system have met with resistance and obfuscation.

All that seems to be about to change, with reports in the press that regulators, worn down by lack of progress, plan to place China’s entire 70,000 kilometers of high pressure gas transmission into a single entity.  The effect would be a Chinese equivalent of FERC order 636, from back in the 1990s, which revolutionized the US wholesale gas market by unbundling sales and transportation services, and freeing up hundreds of thousands of gas buyers from their restrictive gas purchase arrangements.

One of the major constraints that has been holding back smaller buyers from securing LNG cargoes for China has been this chronic lack of access to pipeline capacity. With the potential for CNPC, Sinopec and CNOOC to be forced to place their capacity into a single, independent entity, this initiative would be a major achievement for those wishing to create a more efficient, and competitive liberalized market for gas.

Coming on the heels of a decision to harmonize industrial and residential city-gate prices in China, these reported moves suggest that the pace of change in China’s immense natural gas market may be about to be picked up a few notches.  Given the impact that a less constrained and more efficient marketplace in China for gas would have for the LNG sector globally, indications are stronger than ever that demand could outstrip supply more quickly than some were predicting even a few months ago.

Crude Oil – Higher prices likely to firm

The International Energy Agency (IEA) estimates global spare capacity at between 3 million and 3.5 million barrels a day. The real figure may be considerably lower, and the vast majority is held by OPEC heavyweight Saudi Arabia. In a 100 million barrels a day oil market, that puts Saudi Arabia firmly in the spot light to steading prices.

The more OPEC increases production, the less spare capacity the group has, leaving the oil market tight as it deals with a host of potential supply disruptions stemming from geopolitical and other issues. When oil markets set their sights on dwindling spare capacity, the result can be painful for consumers. Such concerns were behind oil’s record run to $147 a barrel in 2008. Global benchmark Brent is already driving toward $80 a barrel again, and higher prices for oil is not out of the question in the coming weeks.

Saudi and US interests appear to be aligned, but President Trump’s harsh rhetoric on Iran and the threat to reduce its exports to zero, could spook markets and causes prices to move higher. China, India or Turkey, which together buy around 60% of Iran’s oil exports of roughly 2.2 million barrels a day, are unlikely to stop purchasing Iranian oil altogether.  Reducing Iranian oil exports to ~1 million barrels a day would do plenty of economic damage to Tehran, as the last round of nuclear sanctions demonstrated, without causing oil prices to spike.

Even with US shale performing admirably this year and next, oil markets will remain volatile and subject to sharp swings based on headlines. Events over recent days show this clearly. The unexpected loss of 350,000 barrels a day of Canadian oil sands output for over a month, combined with the Trump administration’s announcement that it intends to use sanctions to drop Iran's crude exports to zero later this year, have pushed WTI prices higher.

Weekly Recap

Drilling Activity

Source: BHGE Rotary Rig Count

Total US rig count (including the Gulf of Mexico) stands at 1047, down 5 this week. The horizontal rig count stands at 926 down 4 this week. US rig growth has trended flat for the last 6 weeks.

Crude Oil Price

Brent, the global benchmark for oil, increased US$3.66 to US$78.73 a barrel, reflecting a gain of 4.88% on the week.

WTI crude rose US$5.97 to US$73.69 a barrel, up 8.82% on the week.

US Crude Oil Supply and Demand

Sources: EIA Weekly Update and GCA analysis

US crude oil refinery inputs averaged 17.8 million barrels per day, with refineries at 97.5% of their operating capacity last week. This is 115,000 barrels per day more than the previous week’s average.

US gasoline demand over the past four weeks was 9.5 million barrels, down 0.1% from a year ago. Total commercial petroleum inventories decreased by 4.6 million barrels last week.

US crude imports averaged 8.4 million barrels per day last week, up by 114,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 8.31 million barrels per day, 2.4% more than the same four-week period last year.

US crude exports averaged 3.0 million barrels per day last week, an increase of 626,000 barrels per day from the previous week. Over the last four weeks, crude oil exports averaged 2.28 million barrels per day, 292.3% more than the same four-week period last year.

Crude oil inventories decreased 9.9 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) decreased 2.7 million barrels; total stored is 29.9 million barrels (~33% utilization).


June 29, 2018

P. Kevin Galvin

Facilities/Cost Engineer - kevin.galvin@gaffney-cline.com
June 29, 2018

Nick Fulford

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

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