4th May 2018
Oil Drilling Activity
Onshore US drilling activity increased by 13 to reach a total of 1011 rigs; those targeting oil increased by 9 to 834. Higher crude prices are compelling the US to further ramp up crude production from shale fields and the rising oil rig numbers point to further increases in US crude production.
The expansion in US production continued unabated, to 10.6 million barrels per day. The ongoing expansion in US crude added to market concerns after the EIA reported Monday that US oil production rose to a record 10.264 million barrels a day in February.
Bill Cline has been elected the 2019-2020 president of the Association of International Petroleum Negotiators (AIPN). AIPN is the preeminent organization for professionals involved in the commercial and legal aspects of the international oil and gas industry business. It comprises more than 4,000 members in 110 countries representing international oil and gas companies, service companies, national oil companies, law firms and academic institutions.
Natural Gas – LNG revival may be closer than thought
Turn the clock back one year, and many within the global gas sector had firmly concluded that the prospects for world-scale multi-million tonne LNG export facilities had slowed to a stop, pending the “glut” being used up. Today, many of those same experts are changing their tune. Even this week, we have seen a slew of announcements that suggest that investors, especially those with deep pockets and a longer term outlook, are starting to take action.
First, it was announced that Shell’s Canadian export project at Kitimat in BC had selected their EPC contractor, suggesting that an FID may be in the offing. This would indeed be a major victory for the Canadian Government and the Provincial Government in BC, where years of negotiations have been going on, as well as within the First Nations community, who have also been engaged in detailed negotiations around a series of community and land rights questions.
Also, it has been reported in the BC press that Petronas are to take a stake in LNG Canada, having abandoned their own Pacific Northwest project last summer in the face of difficult environmental hurdles and economics. With Petronas’ acquisition of Canadian upstream company Progress Energy and Shell’s position in the Montey, access to low cost high quality acreage producing liquids rich gas will be greatly facilitated, if the reports prove accurate.
As reported earlier, LNG exports from Canada have been going on “under the radar” with ISO containers filled with LNG making their way by ship to China, but of course this trade represents a fraction of the planned Kitimat production of 26MTPA.
Other notable news this week concerns Exxon’s apparent decision to work with Rosneft on additional LNG exports from Sakhalin, reported to be clear of the Russian sanctions, which have affected other aspects of Exxon’s relationship with that company.
In Mozambique, the Anadarko project was reported this week to have sufficient sales lined up to move to FID, although some of those arrangements are at Head of Agreement stage and need to be fully termed.
And one final landmark this week was the first delivery by the Golar facility in Cameroon, a landmark for West Africa, being the first such facility to go into operation there.
With all that activity in one week, the impression is very much of a sector that is marching forwards with confidence. Whether these green shoots turn into FIDs remains to be seen, but directionally they all seem promising.
Crude Oil – Banks raise oil price forecast ... but,
The EIA indicated crude supplies rose 6.2 million barrels for the week ended April 27, largely concentrated on the West Coast, which added 5 million barrels. Analysts surveyed had forecast a climb of 1.8 million barrels, while the American Petroleum Institute on Tuesday reported an increase of 3.4 million barrels. Gasoline stockpiles also climbed by 1.2 million barrels for the week, while distillate stockpiles fell by 3.9 million barrels.
Better-than-expected global demand strength, in hand with OPEC production cuts, and tightened global [supply and demand] balances are paving the way for higher crude prices in the near term. The spread between Brent, the benchmark for crude in Europe, and WTI, the benchmark for crude in North America, has been widening. Earlier last week, WTI crude was trading at a US$4.97-discount to Brent; it is trading at a discount of US$5.17 and it might go wider still, because of the Permian basin bottleneck in pipeline infrastructure.
A headwind for oil markets has been the idea that Permian shale production will flood the market and knock prices from the US$60-70 level back down to US$50. However, that headwind has now turned into a tailwind for Brent and global crudes because of pipeline takeaway capacity constraint in the Permian basin.
Rising oil prices over the last two years have put the issue of demand destruction back in focus, as producers, traders and analysts try to estimate how consumers will respond. Demand destruction normally becomes a topic of discussion during this stage of the price cycle, and the current discussion resembles previous episodes of high and rising prices in 2005-2008 and 2011-2014.
There is a continuum of consumer responses to price - ranging from demand stimulation to demand destruction. The lower prices fall and the longer they are expected to stay there, the more consumption tends to be stimulated. The higher prices rise and the longer they are predicted to stay up, the more consumption tends to be destroyed.
The escalation of oil prices since the start of 2016 has probably started to restrain consumption growth (compared with a baseline in which prices had remained at US$30 per barrel). The demand restraint from increasing prices has been offset by synchronized global growth. If prices continue to increase, however, there will come a point at which consumption growth starts to slow in a much more pronounced fashion.
Experience suggests the extent of the demand deceleration will only become apparent after it is already well underway. In addition, the slowdown in consumption growth will continue even once prices stop rising, given the long lags in the system.
Between 2011 and 2014, when oil prices averaged over US$100 per barrel, declining consumption in the OECD and slowing consumption growth in the non-OECD created the conditions for the last oil slump. If oil prices continue to increase, the same scenario could play out again between 2019 and 2021.
Total US rig count (including the Gulf of Mexico) stands at 1032, up 11 this week. The horizontal rig count stands at 913, up 12 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.
Across the three major unconventional oil basins, the oil rig total increased 7; standing at 582, with Permian up 6, Eagle Ford flat and Williston up 1.
Crude Oil Price
Brent, the global benchmark for oil, decreased US$0.79 to US$73.68 a barrel, reflecting a loss of 1.06% on the week.
WTI crude rose US$0.81 to US$68.54 a barrel, up 1.20% on the week.
US Crude Oil Supply and Demand
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 60,000 barrels per day less than the previous week’s average.
US gasoline demand over the past four weeks was 9.3 million barrels, up 1.2% from a year ago. Total commercial petroleum inventories increased by 5.4 million barrels last week.
On the supply side, EIA data indicated that total domestic crude production increased 33,000 barrels to 10,619 million barrels a day. The Lower 48 crude production now stands at 10,110 million barrels per day, an increase of 25,000 barrels this week.
US crude imports averaged 8.5 million barrels per day last week, up by 80,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 8.4 million barrels per day, 2.2% more than the same four-week period last year.
US crude exports averaged 2.148 million barrels per day last week, a decrease of 183,000 barrels per day from the previous week. Over the last four weeks, crude oil exports averaged 1.858 million barrels per day, 152.5% more than the same four-week period last year.
Crude oil inventories increased 6.2 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) increased 0.4 million barrels; total stored is 35.8 million barrels (~39% utilization).
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