March 9, 2018

March 9, 2018

9th March 2018

Oil Drilling Activity

Onshore US drilling activity increased by 4, and stands at 967.  Rigs targeting oil decreased by 4, standing at 796. Across the three major unconventional oil basins, the oilrig total increased 5; stands at 550, with Permian up 2, Eagle Ford unchanged and Williston up 3.  

Crude production from the US is expected to increase more than in any other country. US production forecast to average 10.3 million barrels per day in 2018, marking the highest annual average production in US history, surpassing the previous record of 9.6 million barrels per day set in 1970.

Source: EIA Weekly Update and GCA Analysis

Natural Gas – Lots of promise, but still little action

The annual CERA gathering in Houston has once again generated many headlines, with natural gas once again being held up as the future of the industry.  Lower carbon footprint, low cost, abundant… and yet still there are no real signs of new FIDs being close to fruition in the LNG sector.  Buyers like Jera are warning of a potential shortage if project decisions are not taken soon, yet buyers are unwilling to go back to the days of long-term take or pay contracts linked to oil.  There is definitely a sense of a standoff…waiting to see who will blink first, buyers or developers of LNG.

Following hot on the heels of a very positive assessment of the LNG sector, Shell’s CEO speculated that the company would be producing three times as much gas as crude oil by 2050 and also announced ambitious emissions reduction related plans, which included this pivot to natural gas.

While much of the discussion was positive, a topical theme of Wednesday’s discussion was the potential steel import tariffs that have been floated by the Trump administration.  Oil and gas executives appear to be largely united in criticizing the move, saying that it would have a damaging effect on the tight oil boom that the US is currently enjoying, and would also threaten the viability of LNG exports from the US.

It was also interesting to note that after some months of relative quiet, some of the Canadian LNG projects appear to be resurfacing, with a number of CERAWeek speakers starting to point out the benefits of the large resource and proximity to Asia, albeit hamstrung by access to market and pipeline infrastructure constraints that still need to be addressed.

Once again, the gas story is one of promise, but with the prospect of a long wait in store, with only those companies with patience and a strong balance sheet likely to stay the course.

Crude Oil – The next move in oil prices

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.

It is not obvious the next move in oil prices will be higher in the near term, with variations in analyst forecast prices for 2019 driven by alternate views on US production growth.

Strong demand is the main reason for the rebound in oil prices, however, if the global economy falters, crude could tumble back towards US$40 a barrel as supply outstrips the demand shock. Cuts by OPEC countries have helped, but current global economic expansion is what is driving crude demand at levels higher than recent history.

Production from US shale, particularly the Permian Basin in Texas, is capturing most demand growth and should continue to do so to 2020, the International Energy Agency said this week. When crude demand starts to tail off and Permian production remains strong, a different rebalancing of the market could be required. Once again, OPEC could be looking at how to manage future demand shocks; lose market share or let price adjust crude supply.

Despite the bullish sentiment that dominates talk about oil prices, the rally that started at the end of June 2017 seems to have run out of momentum. Front-month Brent futures prices peaked in January and have since been on a declining trend. Crude Prices are back to levels they reached in December 2017 confirming there has been no real increase for three months.

In the oil market, actions speak louder than words, and fund managers have turned more cautious over the last six weeks. The critical question is whether this is merely a pause, and the rally will resume shortly, or whether it marks a peak and the period for crude price discovery is over. Brent prices have averaged just over US$67 per barrel so far in 2018, which is not far from the forecast of US$65 predicted by energy professionals in a survey at the start of the year.

Recent news flow has been mixed; with oil consumption rising strongly, but production forecasts also being revised higher. OPEC leaders have reiterated their commitment to curb output throughout this year and seem to be preparing to toughen their five-year inventory target. The organization’s members, led by Saudi Arabia, could be informally targeting a Brent price level above US$70 per barrel in 2018.

The EIA now forecasts total US crude and liquids production will hit 18.4 million barrels per day by the end of 2018. The forecast has been revised repeatedly upwards from the 17.2 million barrels per day predicted nine months ago. US oil and liquids production is now forecast to grow by 2.0 million barrels per day this year - an upward revision from the 1.3 million barrels per day increase predicted in December.

Weekly Recaps

Drilling Activity

Total US rig count (including the Gulf of Mexico) stands at 984, up 3 this week with rigs targeting oil down 4. The horizontal rig count stands at 848, up 1 this week.

The total number of active onshore rigs increased by 4 and stands at 967.  Compared to a November 2014 figure of 1,876 active rigs, the current level is slightly above 50% of the 2014 high.

Across the three major unconventional oil basins, the oilrig total increased 5; stands at 550, with Permian up 2, Eagle Ford unchanged and Williston up 3. 

Source: BHGE Rotary Rig Count

Oilrig activity is moving in the wrong direction to support production growth forecast hence the EIA’s estimate of 7,600 drilled but uncompleted (DUC) well inventory will need to be reduced if production is to grow significantly.

Operator focus on sweet spots in the Bakken and Eagle Ford is helping to increase yield per well drilled to combat legacy declines, but the yield per well in the Permian Basin will be critical to overall US production growth if the rig count stays flat.  Aggressive 5-year growth targets from the Majors and larger independents, employing laterals of up to12,000 ft, suggests the Permian may once again meet the challenge.

Crude Oil Price

Brent, the global benchmark for oil, increased US$1.07 to US$64.60 a barrel, reflecting a gain of 1.68% on the week.

WTI crude rose US$0.04 to US$60.93 a barrel, up 0.07% 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% of their operating capacity last week. This is 53,000 barrels per day more than the previous week’s average.

US gasoline demand over the past four weeks was 9.0 million barrels, up 3.3% from a year ago. Total commercial petroleum inventories were unchanged last week.

On the supply side, EIA data indicated that total domestic crude production increased 86,000 barrels to 10,369 million barrels a day. The Lower 48 crude production now stands at 9.852 million barrels per day, an increase of 80,000 barrels this week.

US crude imports averaged 8.0 million barrels per day last week, an increase of 721,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 7.5 million barrels per day, 4.2% less than the same four-week period last year.

Crude oil inventories increased 2.4 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) decreased 0.6 million barrels; total storage is 28.2 million barrels (~31% utilization).


March 9, 2018

P. Kevin Galvin

Principal Advisor - Sr. Manager Facilities/Cost Engineering Advisor -
March 9, 2018

Nick Fulford

Global Head of Gas and LNG -
March 9, 2018

Ryan Pereira

Principal Commercial Manager, Global Gas and LNG -

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