LNG by Rail? Crude Price Contango to End?

LNG by Rail? Crude Price Contango to End?

3rd February 2017

The onshore rig count continued to rise, up 16 this week, posting its 13th increase in 14 weeks; this brings the total to 707; onshore rigs are 162 (~30%) above the 545 a year ago.

US saw another large buildup in crude and refined products; one of the largest four-week increases in inventories ever recorded. With the refinery maintenance season close at hand, crude imports will need to be drastically constrained in the coming weeks to bring crude inventories to a more reasonable level.

Natural Gas  

One of the most interesting natural gas stories this week comes from Houston.  That is, Houston, AK not Houston TX.  A group representing Knikatnu Native Corporation is planning to leverage the pioneering work that Alaska Railroad has been doing with LNG-by-rail to build a mini-LNG liquefaction plant adjacent to the railroad with a “virtual pipeline” to Fairbanks.  Numerous schemes have been tried before to provide Fairbanks with lower cost fuel.  The city has the doubtful privilege of being both the most northerly population centre in the US, just shy of the Arctic Circle, and the most expensive, in terms of essential heating supplies.  Many residents rely on very expensive diesel for heating during the harsh winters.

The plan is based on GE’s “LNG in a box” concept, a modular, factory built unit that can easily be shipped into place and deliver LNG into specially designed railcars, each of which hold about 12.5 tonnes of LNG (0.6 MMscf).  These railcar mounted ISO containers are very similar to the ones being used to send LNG from Florida to Jamaica - another pioneering move.

As LNG solutions become smaller scale, and more flexible, and as the fleet of ISO containers starts to multiply, a whole new industry has the potential to develop, especially as economies of scale are captured.  With uses on the railroad, in the maritime industry for fuel bunkering and storage, and in shuttle based LNG-to-power, both the “LNG in a Box” and the ISO tank based infrastructure concepts have future promise.

Who knows, perhaps Houston, Alaska will steal the limelight from its much larger namesake as things develop.

Crude Oil

OPEC’s production cuts have turned oil speculators the most bullish in a decade. The supply curbs are boosting short-term oil prices, pushing some higher than later-dated contracts for the first time in two years. As OPEC’s cuts drain the world’s bloated inventories, short-term crude should appreciate further.

Since 2014, short-term crude traded at a discount because of a global surplus. This generated profits for physical suppliers who held oil for later sale. OPEC would like to flip the oil market from a structure known as “contango”, where longer-term prices are stronger, to “backwardation”, where short-term prices have a premium. Doing so should discourage companies from adding to their oil inventories and instead spur them to process excess stockpiles.

Additionally, keeping a lid on longer-term prices is also intended to impede rivals like US shale drillers, which will be deterred from locking in future revenue streams to fund their operations. US producers would not be able to hedge future profits.

What happens to the curve does depend on how the OPEC cuts are implemented (short lived or longer term) and currently the oil futures curve is indicating that the current OPEC cuts are expected to stay for a while.

Weekly Recaps

Oil Drilling Activity

The total number of active onshore rigs increased to 707.  When compared to a November 2014 figure of 1,876 active rigs, the current level is 62% below the 2014 high.

Across the three major unconventional oil basins, the oil rig total increased to 383 (up 6 last week), with Permian up 4, Eagle Ford up 2 and Williston flat.

Total US rig count (including the Gulf of Mexico) stands at 729, up 17 last week, with rigs targeting oil up 17. The horizontal rig count increased to 596, up 17 last week.

Crude Oil Price

Brent, the global benchmark for oil, was up $1.83 to US$56.88 a barrel, reflecting a gain of 3.32% on the week.

WTI crude rose $1.08 to US$53.81 a barrel, up 2.05% on the week. 

US Crude Oil Supply and Demand

Sources: EIA Weekly Update and GCA analysis

US crude oil refinery inputs averaged 15.9 million barrels per day, with refineries at 88.2% of their operating capacity last week. This is 100,000 barrels per day less than the previous week’s average.

US gasoline demand over past four weeks was at 8.2 million, down 5.7% from a year ago. Total commercial petroleum inventories increased by 5.3 million barrels last week.

On the supply side, EIA data indicated that total domestic crude production decreased 46,000 barrels to 8.915 million barrels a day. The Lower 48 crude production now stands at 8.387 million barrels per day, down 45,000 this week.

US crude imports averaged about 8.3 million barrels per day last week, a increase of 480,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 8.4 million barrels per day, 5.3% above the same four-week period last year.

Crude oil inventories increased 6.5 million barrels from the previous week and remain at historically high levels. The crude stored at Cushing (the main price point for WTI) was down 1.3 million barrels; total storage is 64.1 million barrels (~71% utilization).


 

Authors

LNG by Rail? Crude Price Contango to End?

Nick Fulford

Global Head of Gas and LNG - nick.fulford@gaffney-cline.com
LNG by Rail? Crude Price Contango to End?

P Kevin Galvin

Principal Advisor, Field Development Planning - kevin.galvin@gaffney-cline.com
LNG by Rail? Crude Price Contango to End?

Bob George

Regional Director: Americas - bob.george@gaffney-cline.com

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