20th March 2020
Oil Drilling Activity
Onshore US drilling activity decreased by 20 with a total active count of 751 (Y/Y decrease of 242) rigs; those targeting oil down 19, with the total at 664. Across the three major unconventional oil basins, the oilrig count decreased 15, with Permian down 13, Williston and Eagle Ford each down 1.
US Shale Oil Drillers are slashing capital spending and dropping rigs.
US domestic crude production increased 100,000 barrels last week; crude production stands at 13.1 million barrels per day, of which ~2.55 million barrels per day is offshore and Alaskan production. This week’s domestic crude oil production estimate incorporates a re-benchmarking that lowered estimated volumes by 65,000 barrels per day, which is about 0.5% of this week’s estimated production total.
The impact of sharp declines in rig count over the next few months is expected to contribute to many oil companies having exit production rates for Q4 2020 being measurably lower than Q4 2019. Just how much US liquids production declines by year-end is part of the back-story behind the OPEC+ dispute, which continues to evolve with other OPEC players stating their intention to produce more oil.
Crude oil traders from West Africa to the US Gulf Coast are offering cargoes at deep discounts, desperately trying to attract buyers as global supplies swell and demand plunges.
Next Thursday's report alone could show claims going from 281,000 in this week's report to 2.25 million, according to Goldman Sachs. Bank of America says it will be even worse, with a number more like 3 million.
Natural Gas and Carbon Management - Swings and roundabouts
One of the peculiar characteristics of the US oil and gas market today is the symbiosis that exists between the two commodities, in the sense that oil prices affect gas prices quite materially. The mechanism, through which this happens, is on the oil production dynamics in the Permian.
A fact that is often overlooked is that Permian oil production comes with prodigious quantities of gas. In fact, each barrel of oil produced from the Permian produces anything from 2,000 to as much as 5,000 cubic feet of gas. Furthermore, the longer the wells produce, the gassier they become.
In the current oil price scenario, it is quite conceivable, therefore, that Permian production will level off, or even reduce. At an average gas oil ration of say 3.000 cubic feet per barrel, a million barrels of oil equates to 3 bcf per day, or around 3% of North American production. That also corresponds to the equivalent of 60,000 tonnes of LNG production, per day or over 20 million tonnes per annum.
With gas activity having stalled now for several months in the low-price scenario, domestic gas production is already falling, as existing well production starts to decline. With the potential for associated gas to fall off as well, we may see a rebalancing of supply and demand more rapidly than some had forecast, and perhaps within the year.
If we see a tighter gas market developing, and Henry Hub prices respond, it will put US LNG netbacks under even more pressure. The potential for US LNG trains to be mothballed for a period of time could be one outcome.
Therefore, we seem to be looking at two potential gas consequences of the current precipitous fall in the price of oil. The first is the potential for a sudden tightening in the Lower 48 gas supply, and the second is the potential for US LNG to take a furlough, while the global gas supply recovers.
Today’s market dynamic certainly underlines the need for a balanced portfolio, where a blend of oil and gas exposure is a good hedge to the current demand shock.
Moving to the carbon side, this last few weeks has reminded the world of the existence of micro-biological agents and their ability to impact on the human environment. However, as well as the harmful agents such as Coronavirus, there are also a host of beneficial microbes that make life on earth possible, and also harness nature in very positive ways. Although typically under-reported, much of the same technology that goes into helping scientists understand the characteristics of the Coronavirus can also be used in the production of low-carbon oil and gas. One pioneer in the field is Synthetic Genomics, who are using DNA-derived technology to develop novel solutions in energy, food production, healthcare and other areas.
One of the promising technologies is the redesign of algae to enable scalable biofuels to compete with conventional fossil fuels such as oil and natural gas. Producing synthetic diesel and jetfuel directly from sunlight and biological action is one of the early wins that is hoped for, and the technology is also based on salt water growing of modified microalgae to prevent more demand being placed on scarce global freshwater supplies.
While the world is coping with the impact of the virus, it is good to balance these anxieties with the knowledge that understanding the science of micro-biology can also provide solutions to climate change and the energy transition.
Crude Oil – Fear not the oil price war
The oil industry keeps getting worse and it is now facing the weakest oil price since February 2002. The coronavirus pandemic has caused global travel to collapse, eating into the world's once-insatiable thirst for oil, which powers the economy. Countless flights canceled. The cruise industry is at a standstill. Highways are empty and many factories are dark.
Demand for exports from the US Gulf Coast will collapse. US exports had steadily increased in the last four years to more than 4 million barrels per day, but that is certainly to end with the flood of cheaper Saudi oil.
Refiners in trouble, exporters in trouble, producers in trouble. This situation calls for very fast and brutal action by the US energy industry.
A lack of options for storage, as well as rising freight costs as Saudi Arabia ramps up shipments, are making for a difficult market. Saudi Arabia’s Bahri shipping unit has booked up to 40 tankers, some of which are for storage.
Tanks in Cushing, Oklahoma, one of the biggest storage hubs in the world and the delivery point for benchmark US crude futures, are expected to fill to capacity as early as May.
Yes, the oil market is crashing but this is not the time to be scared away from oil. Oil is not just a number on your screen, but a physical commodity that consumers will buy with cheap prices. With Saudi Arabia offering large discounts, it will not just be speculators buying. Chinese refiners and the Chinese government, as well as other importers, will take advantage to purchase large amounts of physical oil for refining or storage.
Low oil prices over the next few months will function essentially as a stimulus for a struggling Chinese economy that has started their recovery from the Covid-19 virus and will show as higher demand numbers, most likely in early May.
The current drop in oil price is unrelated to long-term structural weakness like peak oil demand, alternative energy technologies, or rising electric-vehicle use. Peak demand is a theory that may prove true someday, but it is no more likely today than it was at the start of 2020.
The events that caused extremely low oil prices are based solely on factors that will self-correct eventually. There is plenty of fear in the world today and oil price should not be on the top.
Total US rig count (including the Gulf of Mexico) stands at 772, down 20 last week. The horizontal rig count stands at 696, down 17. US rig activity continues to show constraint and is 246 rigs below (-24%) last year’s total.
US Crude Oil Supply and Demand
Crude oil inventories increased by 2.2 million barrels from the previous week, compared with last week’s build of 7.7 million barrels. The crude stored at Cushing (the main price point for WTI) increased 0.5 million barrels; total stored is 38.4 million barrels (~43% utilization). Total US commercial crude stored stands at 453.7 million barrels (~58% utilization).
US crude oil refinery inputs averaged 15.8 million barrels per day, with refineries at 86.4% of their operating capacity last week. This was 119,000 barrels per day more than last week’s average.
US gasoline demand over the past four weeks was at 9.3 million barrels, up 2.1% from a year ago. Total commercial petroleum inventories decreased by 7.7 million barrels last week.
US crude net imports averaged 2.2 million barrels per day last week, down by 841,000 barrels per day from the previous week. Over the past four weeks, crude oil net imports averaged 2.45 million barrels per day, 32.2% less than the same four-week period last year.
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