11th May 2018
Oil Drilling Activity
Onshore US drilling activity increased by 10 to reach a total of 1021 rigs; those targeting oil increased by 10 to 844. Across the three major unconventional oil basins, the oil rig total was 586, with Permian up 4, Eagle Ford down 1 and Williston flat.
The EIA increased its 2018 domestic crude production forecast by 0.3% to 10.72 million barrels per day. It also lifted its 2019-output forecast by 3.6% to 11.86 million barrels a day. Ascending crude prices (WTI above $71/Bbl) are incentivizing upstream and midstream companies to sustain the growth in onshore tight oil (and associated gas) production.
Natural Gas – LNG’s best friends...Time and Patience
While most commentators would agree that the longer-term prospects for the international gas sector are very strong, the LNG world reminds us time and time again that these projects are some of the most challenging and complex things to put together. With so many diverse stakeholders needing to gain sufficient confidence and trust in the agreements and structures put in place, to invest billions of dollars of capital and a multi-decade commitment, most LNG projects require years to bring to FID, sometimes even decades.
We have seen a few examples of such projects this week. Tanzania, for example, has understood the huge potential of its natural gas resource base for many years now, but numerous factors have meant that there is still no definitive project proposal, or firm buyers for the gas. To take a fresh look, the government is about to move to a new phase of study, supported by suitable advisors.
On the re-gas side, it appears that Croatia is studying alternatives once more for a re-gas terminal on Krk Island, this time based on a smaller, less ambitious proposal, which will use an FSRU, instead of land-based re-gas units and storage tanks. In spite of EU support as a Project of Special Interest, and political support from the US State Department as part of its policy to encourage competition for Russian gas, the key commercial terms to underpin such a project have so far proved insufficient to justify a larger terminal.
In Cyprus, plans for a major liquefaction plant for exports had to be abandoned owing to a complex array of headwinds, including doubts about whether sufficient gas resources could be sourced from the Republics EEZ, and the changing international LNG market dynamics. A switch to short term FSRU based imports as a stopgap also proved challenging, and a longer term, more permanent FSRU based arrangement is now being developed. Cypriot gas is being considered for export by pipeline to existing Egyptian facilities, potentially allowing some/most of the gas to LNG exports.
The LNG sector is littered with projects, both liquefaction and re-gas, that have managed to survive for years in some form or another, without quite managing to achieve that significant transition to a fully sanctioned project. And as we reflect on the multi-year struggle to make some of these projects go, we are reminded of Tolstoy’s words from War and Peace, that might have been written with LNG in mind.... “The strongest of all warriors are these two — Time and Patience.”
Crude Oil – Geopolitical risks rise
Logistical constraints, in particular insufficient pipeline capacity at the heart of the US shale boom in west Texas, are limiting how quickly American companies will be able to replace any lost Iranian crude exports taken off the global oil market.
Given these constraints, EIA estimates that WTI Midland will trade at a significant discount to Brent until new planned takeaway capacity comes online. The large price discounts are expected to moderate production growth in the Permian basin in 2018, limiting the impact on US crude oil production growth and expected oil inventory builds.
In April, the EIA estimates that utilization of takeaway capacity out of the Permian was above 95% despite a new 500,000 barrels per day Midland to Sealy line coming on line early in 2018. EIA estimates that growing Permian crude oil production will exceed takeaway capacity for much of the second half of 2018 and into the first quarter of 2019.
EPIC Midstream has just this week announced partnerships supporting a new 590,000 barrels per day pipeline system terminating at Corpus Christi, backed by tight oil players in Texas and New Mexico with start up in H2 2019. At least 1 million barrels per day of additional capacity is currently in Open Season tendering.
Refiners along the Gulf Coast are reportedly chock full of light sweet crude from these plays; thus, much of this new oil pipeline capacity is likely to go towards exports.
Although EIA forecasts gradually declining crude prices in 2019, price movements can be more abrupt than projected. If geopolitical risks do not result in oil supplies being removed from the market, prices have the potential to fall sharply. The sooner a correction happens; the lower any expected inventory builds would be in 2019.
If any barrels are removed from the market, prices could move higher. This reduction in global oil supply would likely contribute to higher US crude oil production growth in 2019. The effect on overall global balances is unclear because both the timing and magnitude of any net global oil supply reduction would have to be measured against US production response and pipeline buildout triggered by higher crude prices.
Growth in US crude oil production will contribute to global oil inventories that are now forecast to grow by 0.6 million barrels per day in 2019, an increase of 0.5 million barrels per day compared with last month EIA’s STEO. This compares with a relatively balanced market expected in 2018 and the expected inventory growth in 2019 gives support to EIA's forecast of declining prices in 2019.
Total US rig count (including the Gulf of Mexico) stands at 1045, up 13 this week. The horizontal rig count stands at 918, up 5 this week.
Compared to a November 2014 figure of 1,876 active rigs, the current level is firmly above 50% of the 2014 high.
Crude Oil Price
Brent, the global benchmark for oil, increased $3.57 to $77.25 a barrel, reflecting a gain of 4.85% on the week.
WTI crude rose $2.63 to $71.17 a barrel, up 3.84% on the week.
US Crude Oil Supply and Demand
US crude oil refinery inputs averaged 16.5 million barrels per day, with refineries at 90.4% of their operating capacity last week. This is 75,000 barrels per day less than the previous week’s average.
US gasoline demand over the past four weeks was 9.5 million barrels, up 2.2% from a year ago. Total commercial petroleum inventories reversed and decreased by 1.5 million barrels last week.
On the supply side, EIA data indicated that total domestic crude production increased 84,000 barrels to 10,703 million barrels a day. The Lower 48 crude production now stands at 10,201 million barrels per day, an increase of 91,000 barrels this week.
US crude imports averaged 7.3 million barrels per day last week, down by 1.226 million barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 8.1 million barrels per day, 1.0% less than the same four-week period last year.
US crude exports averaged 1.877 million barrels per day last week, a decrease of 1271,000 barrels per day from the previous week. Over the last four weeks, crude oil exports averaged 2.026 million barrels per day, 174.9% more than the same four-week period last year.
Crude oil inventories decreased 2.2 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) increased 1.4 million barrels; total stored is 37.2 million barrels (~41% utilization).
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