March 2, 2018

March 2, 2018

2nd March 2018

Oil Drilling Activity

Onshore US drilling activity increased by 4, and stands at 963.  Rigs targeting oil increased by 2, with the total treading water for the past three weeks and standing at 800. Across the three major unconventional oil basins, the oilrig total decreased 2; it stands at 545, with Permian down 1, Eagle Ford up 1 and Williston down 2.

The number of Americans filing for unemployment benefits unexpectedly fell last week, hitting the lowest level in more than 48 years, pointing to a rapidly tightening labor market. This could become a constraint to US drilling activities for the near term while oil and gas operators and service companies recruit, hire, teach and integrate new employees.

Source: EIA Weekly Update and GCA Analysis

Natural Gas - LNG – Helping the world “weather” the storm!

Recent bulletins have been heavily focused on gas for power generation.  However, the stark weather events of the past few months globally, have meant that LNG has begun to play an increasingly interesting and important role in the energy mix across several continents.  However, it is not keeping the lights on this time that has created the need; it is largely a result of the huge heating load that the northern hemisphere winter has unleashed.

China’s rise to the world’s second largest importer of gas was fueled this winter by a government program to raise gas usage to clean the country’s polluted air, with millions of homes switching from coal to gas for their energy needs.  This has resulted in what we expect to see as continued seasonal spikes in LNG prices, but also structural demand changes as other South East Asian demand centers will likely follow suit.

In December, an extreme cold snap in the USA resulted in what could have been perceived as “Russian LNG” finding its way to Boston, ironically at the same time as US LNG was leaving Sabine Pass on the US Gulf Coast.

Followers of the gas game would not have missed the following significant announcements this week:

  • The cold gripping the UK due to the “Beast from the East” and “Storm Emma” resulted in a first emergency “gas deficit” warning by National Grid in 8 years (heightened because of the closing down of the Rough storage facility and other operational issues with the interconnectors and reduced European supplies), causing within day gas prices to hit a within day peak of 275p/therm at one point, a 10 year high and significantly above a previous spike of c.100p/therm in 2013.

  • In eastern Australia, despite warm temperatures, a different type of problem in terms of domestic gas deficit caused in part by a heavy reliance on coal seam gas and other conventional gas sources.  The gas supply demands of the East Coast LNG projects is leading a consortium including Japan’s JERA and Marubeni to consider reversing the usual direction of LNG, by supplying it to Australia (ironically the second largest exporter of LNG).  This is by no means the first concept to consider imports LNG to eastern Australia, and was something evaluated by GCA in 2015 as the gas crunch started to bite.

  • With other emerging buyers of gas, especially those undergoing and aiming to capitalize on deregulation of gas markets (such as Indonesia, Malaysia, Vietnam, China and Korea in addition to Japan and China), demand side effects could have large knock on effects on the global LNG trade.

  • All of the above demand side factors put into the shade the fact that this week another natural effect of an earthquake has resulted in the Papua New Guinea LNG plant being shut in for the next six weeks.

It seems that wherever we live in today’s world, we are having to get used to the reality that LNG is playing an increasing role in helping to “weather” the storm in global gas markets.  As LNG becomes increasingly globally mobile, and easily tradeable, expect to see increased price volatility in the short term driven by LNG importers who are not only highly weather sensitive, but also price sensitive.  Whether this will lead to longer term stability relies on LNG’s ability to increasingly help the world to stay warm…

Crude Oil – Oil falls for a fourth day

Our expectations are for continued market tightening in the first part of 2018, a likely decline in demand due to slower economic growth, some OPEC/Russia quota cheating and robust global shale oil production. The gains in US crude production are dominant in shaping sentiment in the oil market. The market has been focusing on the rising US supply trend.

Oil fell for a fourth day, dropping toward US$60 (WTI) a barrel as rising US inventories, record US crude production and a stronger dollar outweighed high OPEC compliance with its production constraining deal.

EIA’s data released on Wednesday indicated a larger-than-expected increase in US crude inventories and a rise in gasoline stocks. Additionally, US crude output reached a record in November, although it dropped in the last month of 2017 by 108,000 barrels per day.

US crude output hit an all-time high of 10.057 million barrels per day in November before falling in December; however, weekly data showed that further gains are expected. Weekly figures suggest the upward trend will resume in January and February and US crude production could hit new highs.

The rise in US crude production has been overshadowing supply curbs by other producers, led by the OPEC and Russia. OPEC officials will meet US shale executives at a US energy conference next week, a gathering that underlines the influence of American’s crude producers in keeping global prices from rising. Downside price pressure remains for crude in the near term as US producers continue to bring on incremental supply at a rate faster than demand can absorb. 

Oil also fell due to a stronger dollar, which makes commodities denominated in the US currency more expensive for holders of other currencies. The dollar index hit a six-week high on Thursday.

OPEC’s cut, which began a year ago, has aided to boost prices from levels below US$30 seen in January 2016. Producers are sticking to the deal and an involuntary drop in Venezuelan output has further boosted compliance.

Weekly Recaps

Drilling Activity

Total US rig count (including the Gulf of Mexico) stands at 981, up 3 this week with rigs targeting oil up 1. The horizontal rig count stands at 847, up 5 this week.

The total number of active onshore rigs increased by 4 and stands at 963.  Compared to a November 2014 figure of 1,876 active rigs, the current level is slightly above 50% of the 2014 high.

The rig market is tighter than it appears because many older rigs have been scrapped, cannibalized for spare parts, or are simply unsuitable for drilling the very long wells now favored by shale producers. Producers increasingly favor new high-powered horizontal rigs that can drill ultra-long laterals as quickly as possible, so many of the older, lower-powered vertical or directional rigs are of marginal value.

Across the three major unconventional oil basins, the oilrig total decreased 2; it stands at 545, with Permian down 1, Eagle Ford up 1 and Williston down 2.

Source: BHGE Rotary Rig Count

Crude Oil Price

Brent, the global benchmark for oil, decreased US$2.89 to US$63.53 a barrel, reflecting a loss of 4.35% on the week.

WTI crude dropped US$1.89 to US$60.89 a barrel, down 3.01% on the week.

US Crude Oil Supply and Demand

Source: EIA Weekly Update and GCA Analysis

US crude oil refinery inputs averaged 15.9 million barrels per day, with refineries at 87.8% of their operating capacity last week. This is 49,000 barrels per day more than the previous week’s average.

US gasoline demand over the past four weeks was 9.0 million barrels, up 3.8% from a year ago. Total commercial petroleum inventories increased 3.7 million barrels last week.

On the supply side, EIA data indicated that total domestic crude production increased 13,000 barrels to 10,283 million barrels a day. The Lower 48 crude production now stands at 9.772 million barrels per day, an increase of 10,000 barrels this week.

US crude imports averaged 7.3 million barrels per day last week, an increase of 261,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 7.5 million barrels per day, 8.1% less than the same four-week period last year.

Crude oil inventories increased 3.0 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) decreased 1.2 million barrels; total storage is 28.2 million barrels (~32% utilization).


March 2, 2018

P. Kevin Galvin

Principal Advisor - Sr. Manager Facilities/Cost Engineering Advisor -
March 2, 2018

Nick Fulford

Global Head of Gas and LNG -
March 2, 2018

Ryan Pereira

Principal Commercial Manager, Global Gas and LNG -

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