May 25, 2018

May 25, 2018

25th May 2018

Oil Drilling Activity

Onshore US drilling activity climbed by 13 to reach a total of 1036 rigs; those targeting oil soared by 15 with the total at 859. Across the three major unconventional oil basins, the oil rig increased by 13; total now stands at 601, with Permian up 10, Eagle Ford up 2 and Williston up 1.

The expansion in US production continued unabated; US production rose by 2,000 barrels a day to 10.725 million barrels. China will most likely import record volumes of US crude after Beijing signaled to state-run refiners’ purchasers that they should start buying more.

Source: BHGE Rotary Rig Count and GCA Analysis

Natural Gas – First LNG-fueled fishing vessel

The world’s first LNG-fueled fishing vessel has been commissioned this week. An 86-meter trawler, equipped with a MAN 6L51/60DF engine and a LNG fuel-gas system consisting a 350 cubic meter fuel tank, will be built by Cemre Shipyard in Istanbul for the Norwegian fishing group. Though the engine can also run on fuel-oil, the primary motivation behind this order is to signal to the world that natural gas is the fuel of the future to support an environmentally-friendly shipping industry.

While it is a first as a fuel for fishing vessels, natural gas, specifically LNG, is on the path to becoming the most dominant shipping fuel. Because of its much milder carbon footprint, emitting 25% less CO2 than other fuel options, LNG is being adopted by many shipping companies around the world as the primary fuel choice. Aside from lower CO2 emissions, LNG also leads to lower SOx and NOx emissions. With stricter environmental regulations affecting the global shipping industry, the transition to LNG-fueled propulsion is being accelerated.

During this transition period, conversion of ship engines to dual-fuel designs, which can accept either fuel oil or natural gas, is becoming a common practice. These engines allow the ships to use the cleaner and safer natural gas while supply is available and resort to bunker fuel to maintain operations when gas supply runs low. LNG carriers already use dual-fuel engines, and at times even tri-fuel designs, as a standard, so it is only a matter of time before the entire shipping industry follows.

Forecasts for the LNG bunkering sector vary greatly, but with each new vessel commissioned to take LNG, and with each new bunkering facility that starts up, confidence is growing that LNG bunkering will take a larger and larger share of the ship fuel market. Some forecasts suggest it could account for 20-30MTPA by the 2030s ... enough to account for one fairly substantial LNG export project, and almost 10% of today’s market for LNG.

Crude Oil – Crude demand responds to price changes

Letter to the US president on oil price.

Relatively higher crude oil spot prices, strong gasoline demand, and falling gasoline inventories are all factors contributing to higher gasoline prices.

As prices at the gas pump approach $3 a gallon for regular gasoline, oil markets should be beginning to wonder how much higher prices can rise before demand slackens. Real prices are now close to the average level for the whole of the last gasoline price cycle that lasted from 1998 to 2016. When the price moves nearer to its next peak, consumers will respond by closing their wallets.

The trick is guessing the price at which demand destruction begins. Some put the price at $80 a barrel for Brent while others are looking at a Brent price of $100 a barrel. While opinions vary widely, the fact remains that oil consumption does respond to price changes and there is no hard threshold that marks when that response begins.

Heading into the 2018 Memorial Day weekend, regular gasoline prices averaged $2.92 per gallon (gal) nationally on May 21, up from last year’s price of $2.40/gal before the holiday weekend. This year marks the highest price ahead of the Memorial Day weekend since 2014, when the national average price of regular gasoline was $3.67/gal.

EIA forecasts that gasoline prices will be higher this summer compared with last summer primarily because EIA expects Brent crude oil prices to average $22 per barrel higher than last summer. US gasoline prices have been more closely tied to Brent crude oil prices than to West Texas Intermediate prices. The Brent price has increased significantly in 2018, averaging $78.17 per barrel the week of May 18, 2018, which is a year-over-year $26.41 per barrel (51%) increase from the same week in 2017.

Weekly Recap

Drilling Activity

Source: BHGE Rotary Rig Count

Total US rig count (including the Gulf of Mexico) stands at 1059, up 13 this week. The horizontal rig count stands at 926, up 7 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 is tighter than it appears because many older rigs have been scrapped, cannibalized for spare parts, or are simply unsuitable for drilling the very long wells now favored by shale producers.

Crude Oil Price

Brent, the global benchmark for oil, decreased $2.35 to $76.99 a barrel, reflecting a loss of 2.96% on the week.

WTI crude fell $2.52 to $68.81 a barrel, down 3.53% 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 91.8% of their operating capacity last week. This is 7,000 barrels per day less than the previous week’s average.

US gasoline demand over the past four weeks was 9.5 million barrels, up 1.0% from a year ago. Total commercial petroleum inventories increased by 6.7 million barrels last week.

On the supply side, EIA data indicated that total domestic crude production increased 2,000 barrels to 10,725 million barrels a day. The Lower 48 crude production now stands at 10,245 million barrels per day, an increase of 24,000 barrels this week.

US crude imports averaged 8.2 million barrels per day last week, up by 0.558 million barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 7.9 million barrels per day, 3.5% less than the same four-week period last year.

US crude exports averaged 1.748 million barrels per day last week, a decrease of 818,000 barrels per day from the previous week. Over the last four weeks, crude oil exports averaged 2.085 million barrels per day, 183.4% more than the same four-week period last year.

Crude oil inventories increased 5.8 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) decreased 0.9 million barrels; total stored is 36.1 million barrels (~40% utilization).

 

Authors

May 25, 2018

P. Kevin Galvin

Principal Advisor - Sr. Manager Facilities/Cost Engineering Advisor - kevin.galvin@gaffney-cline.com
May 25, 2018

Nick Fulford

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

Signup to receive our latest articles

We're here to help