May 18, 2018

May 18, 2018

18th May 2018

Oil Drilling Activity

Onshore US drilling activity increased by 2 to reach a total of 1023 rigs; those targeting oil was flat with the total at 844. Across the three major unconventional oil basins, the oil rig total was 588, with Permian up 4, Eagle Ford and Williston each down 1.

From January 2017 to April 2018, US crude oil and other liquids inventories decreased by 162 million barrels while OECD inventories decreased by 234 million barrels.

Natural Gas – Critical year sets LNG industry path

2018 could be a critical year that will indicate the path that the LNG industry is on for the next decade. The last two years have seen record low sanctioned LNG capacity since the late 1990s. 2016 and 2017, respectively, had 6.3 MMtpa and 3.4 MMtpa of LNG capacity sanctioned compared to 20+ MMtpa in each of the years between 2011 and 2015.

The annual APPEA conference this week in Adelaide was perhaps the first litmus test of opinion since the surprise upturn in demand and price firming that has been witnessed over this last heating season, with many buyers, sellers and LNG developers expressing their views.

With many commentators now taking an about-face on their comments just a year ago, when they were predicting a long running overhang in supply, the mood is definitely shifting among LNG project developers.  There is also an increasing degree of nervousness among some of the large buyers that they may need to start to secure supply before it is too late.

A return to twenty years, take or pay oil-indexed contracts seems highly unlikely, but some kind of middle ground, with more flexibility for buyers, coupled with adequate volume certainty for sellers, seems likely to emerge in 2018.

However, the one thing that the market will be looking out for, more than anything else, is that the first quarter year on year increase in Chinese LNG demand, coming in at a staggering 59% more than 2017, is a solid trend.

Total and Shell announced this week a new tight gas condensate project development onshore Oman with a related investment in a 1 MMTPA LNG ship bunkering terminal to be built alongside existing export facilities.  More such niche LNG developments will be required if the world’s maritime trade is to continue moving further away from heavy fuel oil consumption.

The famous quote by Aristotle, that one swallow does not a summer make, was referred to in this column back in the early New Year, in response to the first signs of a spot price recovery in LNG.  At this point, that single swallow looks to be turning into a flock, technically known as a “gulp” of swallows.  It is hard to know who is taking the biggest gulp right now ... LNG sellers, hoping for signs of a solid uptake, or LNG buyers, wondering whether to take the plunge and commit to new supply. 

Crude Oil – Billion barrels of lost oil pushes crude to $80

The recent rise in prices sends a strong signal about the need for more production and slower growth in oil consumption. In the next few months, the narrative will increasingly turn to boosting supply and restraining demand to stabilize inventories and return the market to balance.

Between 2014 and 2017, oil market “rebalancing” meant restricting production, stimulating demand and cutting excess inventories. For the rest of 2018 and 2019, rebalancing will mean precisely the opposite.

The oil industry has always been subject to deep and prolonged cycles of boom and bust, and there is no reason to think the next few years will be any different. Cyclical behavior is the single most important distinguishing characteristic of oil markets and prices, and is deeply rooted in the industry’s structure. The price cycle is driven by the low responsiveness of production and consumption to minor changes in prices.

The behavior of many oil producers and consumers exhibits a strong backward-looking component, so decisions tend to be based on where prices have been recently rather than where they are likely to go.

The sacrifice of almost a billion barrels in lost oil output for the global crude market to remove a deep supply surplus, but oil prices have now hit a level of $80 a barrel. Brent crude futures reached an intraday high of $80.18 on Thursday, breaching the $80 a barrel level for the first time since November 2014.

A vast overhang of unwanted crude stocks has now vanished; investors are buying into the oil price rally more than at any time in the last four years and market spectators are beginning to talk about oil prices returning to $100 per barrel.

WTI futures market is responding, with trades above $60/Bbl well into 2020, permitting smaller E&P developers to underwrite their planned 2018, 2019 capital investments whilst at the same time the major players can take on the trading risk as they gear up for their very large tight oil investment programs.

Weekly Recap

Drilling Activity

Source: BHGE Rotary Rig Count

Total US rig count (including the Gulf of Mexico) stands at 1046, up 1 this week. The horizontal rig count stands at 919, up 1 this week.

Compared to a November 2014 figure of 1,876 active rigs, the current level is firmly above 50% of the 2014 high. The rig market for highest spec rigs is tight (90%+ utilization) with the largest land rig providers targeting upgrades to some of the modest specification AC rigs to permit efficient pad drilling of long laterals.  However, if modest improvements in rig day rates are swallowed up by higher operating costs, there will be little margin left to fund large-scale investment in refurbished or new-build rigs.

Crude Oil Price

Brent, the global benchmark for oil, increased $2.09 to $79.34 a barrel, reflecting a gain of 2.71% on the week.

WTI crude rose $0.16 to $71.33 a barrel, up 0.22% on the week.

US Crude Oil Supply and Demand

Sources: EIA Weekly Update and GCA Analysis

US crude oil refinery inputs averaged 16.6 million barrels per day, with refineries at 91.1% of their operating capacity last week. This is 149,000 barrels per day more than the previous week’s average.

US gasoline demand over the past four weeks was 9.4 million barrels, up 0.7% from a year ago. Total commercial petroleum inventories decreased by 0.7 million barrels last week.

On the supply side, EIA data indicated that total domestic crude production increased 20,000 barrels to 10,723 million barrels a day. The Lower 48 crude production now stands at 10,221 million barrels per day, an increase of 20,000 barrels this week.

US crude imports averaged 7.6 million barrels per day last week, up by 0.278 million barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 8.0 million barrels per day, 4.3% less than the same four-week period last year.

US crude exports averaged 1.566 million barrels per day last week, an increase of 689,000 barrels per day from the previous week. Over the last four weeks, crude oil exports averaged 2.231 million barrels per day, 152.7% more than the same four-week period last year.

Crude oil inventories decreased 1.4 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) was unchanged; total stored is 37.2 million barrels (~41% utilization).

Authors

May 18, 2018

P. Kevin Galvin

Principal Advisor - Sr. Manager Facilities/Cost Engineering Advisor - kevin.galvin@gaffney-cline.com
May 18, 2018

Nick Fulford

Global Head of Gas and LNG - nick.fulford@gaffney-cline.com

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