17th May 2019
Oil Drilling Activity
Onshore US drilling activity was down 3 with a total active count of 961 rigs; those targeting oil down 3, with the total at 802. Across the three major unconventional oil basins, the oil rig count decreased by 3, with Permian down 3, Williston and Eagle Ford flat.
Total US domestic crude output decreased by 100,000 barrels per day; US crude oil production stayed below the record level of 12.3 million barrels per day reached two weeks ago. This week’s domestic crude oil production estimate incorporates a re-benchmarking that affected estimated volumes by less than 50,000 barrels per day, which is about 0.4% of this week’s estimated production total. US crude inventories showed a significant increase of 5.4 million barrels last week, compared to an expected decrease of 0.8 million barrels. US production and inventories are expected to help offset declines elsewhere in the world.
The number of babies born in the US last year fell to a 32-year low, deepening a fertility slump that is reshaping America’s future workforce.
Carbon Management – Hidden cost of electric vehicles
Last year worldwide oil consumption increased by 600 million barrels. Globally 80 million new gasoline and diesel vehicles were purchased, compared to 1 million new electric vehicles (EV). Whilst there are various views of EV growth, what is certain is that the market and policies in China will be critical - with EV sales currently growing much faster than the rest of the world combined. Impacts on global oil consumption are highly dependent on these outcomes.
However, there have been recent developments in the US too. A group of electric companies is planning the 1400-mile West Coast Electric Highway that will provide an interconnected network of charging stations for EVs along the Interstate 5 corridor from Canada to Mexico. At the moment, it is comprised of lower cost 50kW chargers, funded through private-public partnerships and fees on vehicle registration. But costs will likely increase substantially to install fast charging systems and make the necessary changes to the electricity grid infrastructure that can cope, but no details are available on how this will be fully funded.
The difficulty in the integration of EVs into existing infrastructure and markets has also been recently highlighted in a proposed increase in Illinois’ annual vehicle registration fee. For EVs the annual cost is proposed to be raised from $17.50 to $1000, a 60-fold increase. Whilst the proposal also includes a 100% increase in gasoline and diesel tax, and a 50% increase in registration fees for gasoline and diesel vehicles, these increases are vastly lower than that for EVs as the state tries to make-up the shortfall in the loss of fuel tax. The ‘fuel’ cost of an EV is anywhere between 29-74% cheaper than a gasoline vehicle based on average state or regional gasoline prices and average retail utility electricity prices.
Society will therefore need to find sustainable and transparent mechanisms that will fund the new infrastructure needed and make up the shortfall in required tax revenues that EV growth causes.
So what has this got to do with Carbon Management for oil and gas? There are low carbon alternatives to EVs that do not result in infrastructure and market disruptions. These include efficiency improvements in the internal combustion engine, the supply of lower carbon intensity oil, and even carbon offsets available at the pump. The latter of which is readily available today at low cost; for example, a large SUV produces about 0.16 tonnes of CO2 per tank, and the cost of offsetting this is a mere 2% of the cost of the fuel (i.e., $1 per fill-up).
Natural Gas – Argentinian beef...seasoned with a dash of Brazilian pre-salt
Anyone in the gas industry must be aware by now of not one, but two big gas stories in South America – Argentina’s gas prone Vaca Muerta, and Brazil’s oil prone pre-salt. Whether the biggest story from these developments is oil or gas remains to be seen. However, with the LNG momentum growing in Argentina, and the arrival and commissioning of the newly named “Tango” Exmar barge, LNG could be flowing from the Vaca Muerta before very long.
In the same way that the Permian has such strong economics driven by oil, with gas very much a bi-product, so it is with the pre-salt in Brazil. The gas will need to be dealt with, whether its reinjected, used to fuel E&P operations, or exported to shore through a series of planned new pipelines. The veritable fleet of FPSOs that are on their way to Brazil will be dealing with huge quantities of gas, condensate and oil – with liquids production expected to reach around 4 million barrels a day from the pre-salt alone.
The first effect of the wave of gas coming from the pre-salt is likely to be changes to Brazil’s LNG imports. With ministry figures predicting an increase in gross gas production of around 5 bcfd (with nearly 3 bcfd being reinjected), and the potential for LNG exports from a source “next door,” there are clearly major opportunities for regional collaboration.
Adding in the potential to aggregate gas for export, benefit from gas and power swaps between Argentina, Brazil and other countries in the region, and an optimized capital program for major energy infrastructure, the confluence of Vaca Muerta and pre-salt starts to define a gas story of global proportions. It may take a few years before a grand plan starts to take shape, but between Argentina and Brazil, there is a new engine room set to start driving the economies of South America.
Crude Oil – Conflict in the Middle East
Oil prices rose for a third day running as fears of supply disruption amid heightened tensions in the Middle East overshadowed growth in US crude inventories. Damage to the hulls of three oil tankers in waters close to an oil export terminal on the Indian Ocean, in addition to drone attacks on Saudi’s East-West pipeline link to the Red Sea, reminds all of us on the substantial reliance on Middle East oil supplies even without any disruptions in the Straits of Hormuz.
US crude oil inventories hitting their highest level since 2017 provided downward pressure on crude prices, though EIA’s data pointed to a smaller increase than API’s data. Also keeping prices in check is uncertainty about whether OPEC and other producers will continue into the second half of the year supply cuts that have boosted prices more than 35% in 2019.
OPEC indicated on Tuesday that world demand for its oil would be higher than expected this year. The OPEC+ group of producers, which includes Russia, meets next month to review whether to maintain the pact beyond June.
In the face of continuing trade tensions between the US and China, which have weighed on the demand outlook, the crude market is focused on tight supply. There is more supply at risk to a new US war in the Middle East than demand at risk to the continuation of the trade war.
Crude Oil Price
Brent, the global benchmark for oil, increased $2.09 to $72.68 a barrel, reflecting a gain of 2.96% on the week.
WTI crude rose $1.46 to $63.17 a barrel, up 2.37% on the week.
Total US rig count (including the Gulf of Mexico) stands at 987, down 1 this week. The horizontal rig count stands at 866, down 6 this week. US rig activity continues to show constrained growth for 45 of the last 48 weeks and is 56 rigs below (-5.4%) last year’s total. Crude prices drive US shale operators to focus on well productivity (i.e., well completion) and operational efficiency over rig growth. Capital discipline over production growth is the driller’s single motivation.
US Crude Oil Supply and Demand
Crude oil inventories increased 5.4 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) increased 1.8 million barrels; total stored is 47.8 million barrels (~53% utilization).
US crude oil refinery inputs averaged 16.7 million barrels per day, with refineries at 90.5% of their operating capacity last week. This is 271,000 barrels per day more than the previous week’s average.
US gasoline demand over the past four weeks was at 9.4 million barrels, up 0.5% from a year ago. Total commercial petroleum inventories decreased by 14.6 million barrels last week.
US crude net imports averaged 4.265 million barrels per day last week, down by 106,000 barrels per day from the previous week. Over the past four weeks, crude oil net imports averaged 4.477 million barrels per day, 22.2% less than the same four-week period last year.
US crude imports averaged 7.6 million barrels per day last week, up by 919,000 barrels per day from the previous week. Over the past four weeks, crude oil imports averaged 7.2 million barrels per day, 9.6% less than the same four-week period last year.
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