US Production Growth Continues; LNG Exports to Help Balance US Trade

US Production Growth Continues; LNG Exports to Help Balance US Trade

26th May 2017

Drillers added 7 onshore rigs (5 targeting gas), increasing activity for an 18th week in a row and bringing the total to 881. Onshore rigs now stand 507 rigs above the same period a year ago.  

Crude - US Production Growth to Continue….

OPEC decided to extend cuts in oil output by nine months to March 2018, as the producer group battles a global glut of crude. The cuts are likely to be shared again by a dozen non-members led by top oil producer Russia, which reduced output with OPEC starting in January.  However, while the prospect of the cuts pushed oil (WTI) back above US$50 a barrel, it was short lived. Seemingly, the fact that the actual announcement contained no more than had originally been expected, led to disappoint and oil promptly took its biggest one-day hit in a while and dropped back to just over US$48 per barrel.

The declines in storage, and sentiment, suggests the market may actually be slightly underbalanced between current production and demand; however, it is not declining fast enough to balance available supply and demand, at least through the remainder of this year. Thus, it is difficult to expect an increase to US$60 in the near term.

OPEC also faces the dilemma of not pushing oil prices too high because doing so would certainly spur additional growth in US shale oil production; the US now rivals Saudi Arabia and Russia as the world's largest crude producer. Current crude price has incited growth in US shale oil production, which does not participate in the output deal, thus slowing the market's rebalancing and keeping a cap on higher crude prices.

In December, OPEC agreed to its first production cuts in a decade and the first joint cuts with non-OPEC, led by Russia, in 15 years. These cuts removed about 1.8 million barrels per day from the market in the first half of 2017, equal to 2% of global production.

Nevertheless, despite the production cut, OPEC kept exports fairly stable in the first half of 2017 by selling oil from its crude stocks. This action has helped to keep commercial oil stockpiles at record highs, compelling OPEC to extend cuts by nine months. OPEC members Nigeria and Libya are still excluded from cuts as their output remains curbed by civil unrest.

Saudi oil exports are expected to decline steeply from June due to increase internal demand and this may help to speed-up market rebalancing. OPEC has a self-imposed goal of bringing stocks down from a record high of 3 billion barrels to their five-year average of 2.7 billion. 

Sources: EIA Weekly Update and GCA Analysis

Natural Gas – A new tool to balance US trade

FERC’s budget filing this week, coupled with next week’s confirmation hearings for the two new Commissioners, is once more putting the spotlight on gas.  After an enforced shutdown due to the lack of a quorum, the new Commissioners are needed to re-tool FERC and enable key decisions to be made.  Some of the most material decisions facing the regulatory body include appraisal of a seemingly steady flow of new LNG export projects, with plans to carry American natural gas to the four corners globe.

It appears policy makers and economists are doing the sums on LNG and the US economy.  With the recent ten point trade agreement with China, which emphasizes the role that LNG exports can play in balancing trade between the two countries, the FERC funding discussion underlines that gas is increasingly being seen as a material source of export revenue.

While much of the press has been focused on the recommencement of crude exports, currently standing at around 1 million barrels per day, little attention has been given to the several cargoes per week of LNG already leaving Louisiana and the 60 MTPA of gas export capacity that’s under construction.  In fact, by coincidence, these both amount to revenues in the region of US$18bn per annum (at current prices) and will together generate well over half a trillion dollars in the next couple of decades.  When you include the multiplier effect of service industries and other consequential revenues, gas and oil exports together are sufficient to move the needle for even the IUS economy. We can expect Washington economists and policy makers to pay more attention as the new administration gets to grips with its new found tools to balance US trade with its global partners.

Weekly Recaps

Oil Drilling Activity

Total US rig count (including the Gulf of Mexico) stands at 907, up 7 last week, with rigs targeting oil up 2. The horizontal rig count increased to 766, up 7 last week.

The total number of active onshore rigs increased to 881.  When compared to a November 2014 figure of 1,876 active rigs, the current level remains 53% below the 2014 high.

Across the three major unconventional oil basins, the oil rig total increased to 484 (up 2 last week), with Permian up 1, Eagle Ford flat and Williston up 1.

Crude Oil Price

Brent, the global benchmark for oil, decreased US$1.72 to US$51.46 a barrel, reflecting a loss of 3.23% on the week.

WTI crude fell US$0.98 to US$48.94 a barrel, down 1.96% on the week. 

US Crude Oil Supply and Demand

US crude oil refinery inputs averaged 17.3 million barrels per day, with refineries at 93.5% of their operating capacity last week. This is 159,000 barrels per day more than the previous week’s average.

US gasoline demand over past four weeks was at 9.4 million, down 1.9% from a year ago. Total commercial petroleum inventories decreased by 3.5 million barrels last week.

On the supply side, EIA data indicated that total domestic crude production increased 15,000 barrels to 9.320 million barrels a day. The Lower 48 crude production now stands at 8.815 million barrels per day, up 20,000 this week.

US crude imports averaged 8.3 million barrels per day last week, a decrease of 296,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 8.2 million barrels per day, 8.1% above the same four-week period last year.

Crude oil inventories decreased 4.4 million barrels from the previous week and persist at historically high levels. The crude stored at Cushing (the main price point for WTI) deceased 0.7 million barrels; total storage is 65.6 million barrels (~72.89% utilization).

Authors

US Production Growth Continues; LNG Exports to Help Balance US Trade

Nick Fulford

Global Head of Gas and LNG - nick.fulford@gaffney-cline.com
US Production Growth Continues; LNG Exports to Help Balance US Trade

P Kevin Galvin

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

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