November 10. 2017

November 10. 2017

10th November 2017

Oil Drilling Activity

The downward trend in onshore drilling rig activity reversed with an addition of 9 to 888. Across the three major unconventional oil basins, the oil rig total increased by 6; bringing to an end a 22-week flat growth period. US rigs targeting oil increased by 8, with the total now at 738.

US oil is reaching new highs each month as shale drillers achieve more with fewer rigs. How much of this improvement is due to technology gains and how much is due to the focusing on sweet spots continues to encourage debate across the industry.

Sources: EIA Weekly Update and GCA analysis

Natural Gas – Clock is ticking on LNG Price Renegotiations

Another sign of the changing balance between buyer and seller was evident this week with news that Petronet has renegotiated their LNG price with Exxon for Gorgon LNG deliveries.   Oil indexation remains the basis, but a drop from 14.5% Brent to 13.9% brings the contract more into line with the current market for such contracts.  The change from FOB to DES puts the freight cost onto Exxon, adding a further motivation for Petronet.

Petronet has been one of the most aggressive negotiators of the big buyers, seeking price renegotiation based on available spot LNG at much lower prices, after having cut a deal on their Qatar deliveries last year.

Although LNG prices took a leap upwards this week, on the back of high demand from China and India, with JKM quoted at US$9.35 earlier this week, the outlook is still for an increasing oversupply, which will eventually push prices down.

With both India pushing hard for renegotiation of their long-term oil-indexed contracts, and China already having revisited some of their Australian contracts too, one wonders how long it will be before Japan finally enters the fray.  While Japan has been a stalwart supporter of the idea that LNG is a long-term business, the recent legal challenge to destination clauses and other features suggests that even there, a price renegotiation may not be too far off.  While we can expect a much less public process, it does seem it’s time. 

Crude Oil – Higher Brent price fetches more US crude production

US crude production continues to expand, showing the resilience of American shale oil drillers. The US produced an estimated 9.62 million barrels of oil a day last week and is fast approaching the all-time high of 10.0 million barrels a day briefly achieved in 1970.  If one includes US NGL production, then total liquids produced reaches new highs almost every week.  EIA data showed a doubling of NGL plant production in the last 10 years, reaching 3.7 million barrels per day in August 2017.

These trends continue to delay efforts to reduce global crude stockpiles, though US stocks excluding those in the SPR are around 100 million barrels lower than their peak in mid-2016.  

As US crude production increases, particularly in regions like the Permian basin, so does the need for more transportation infrastructure to accommodate it. However, the rate of production growth and the scale and timing of additional pipeline capacity coming online is not always synchronized.

The transportation constraints between inland domestic crude oil production and the Gulf Coast have resulted in relatively high levels of crude oil inventories in Cushing. The inventory builds at Cushing has pushed its inventories 51% higher than the five-year average, while US Gulf Coast total crude oil inventories are only 10% higher than their respective five-year average. Without pipeline constraints, moving crude oil from Cushing to the US Gulf Coast typically costs US$3.50 per barrel, but it has gotten more expensive as transport bottlenecks have developed.

The WTI price spread with Brent reflects the transportation costs associated with bringing crude oil from Cushing to the US Gulf Coast and with exporting crude oil to Asia, the marginal market in which Brent and WTI crude oils compete.

In its November Short-Term Energy Outlook (STEO), the EIA forecasts the price difference between West Texas Intermediate (WTI) crude oil priced at Cushing, Oklahoma and Brent to remain at $6 per barrel through the first quarter of 2018.

EIA forecasts the Brent-WTI spread will begin to narrow to around $4 per barrel in the second quarter of 2018, when increased transportation capacity between inland crude oil production and the Gulf Coast will come online.

These projects include the 0.4 million barrel per day Midland-to-Sealy pipeline that will increase crude oil flows out of the Permian to the US Gulf Coast.  Other pipeline projects will increase Midwest refineries' access to crude oils in the Permian region, potentially resulting in lower crude oil stocks at Cushing.

EIA expects that the additional transportation capacity between domestic crude oil production and the US Gulf Coast will result in the Brent-WTI spread reverting to an underlying US$4 per barrel, based on estimated inland transportation costs (US$3.5 per barrel) and the costs of exporting to Asia (US$0.5 per barrel).

Assuming that higher Brent prices pull WTI higher, then eventually that should bring additional US crude production pulling in the opposite direction.

Weekly Recaps

Oil Drilling Activity

Total US rig count (including the Gulf of Mexico) stands at 907, up 9 this week with rigs targeting oil up 9. The horizontal rig count stands at 776, up 12.

The total number of active onshore rigs increased to 888 (up 9).  Compared to a November 2014 figure of 1,876 active rigs, the level remains 50% below the 2014 high.

Across the three major unconventional oil basins, the oil rig total increased 6, it stands at 494, with Permian up 6, Eagle Ford and Williston flat.

Crude Oil Price

Brent, the global benchmark for oil, rose US$2.99 to US$64.02 a barrel, reflecting a gain of 4.90% on the week.

WTI crude increased US$2.45 to US$57.20 a barrel, up 4.47% on the week.

US Crude Oil Supply and Demand

Sources: EIA Weekly Update and GCA analysis

US crude oil refinery inputs averaged 16.3 million barrels per day, with refineries at 89.6% of their operating capacity last week. This is 290,000 barrels per day more than the previous week’s average.

US gasoline demand over the past four weeks was at 9.3 million barrels, up 3.0% from a year ago. Total commercial petroleum inventories decreased 9.1 million barrels last week.

On the supply side, EIA data indicated that total domestic crude production increased 67,000 barrels to 9.620 million barrels a day. The Lower 48 crude production now stands at 9.11 million barrels per day, up 65,000 barrels this week.

US crude imports averaged 7.4 million barrels per day last week, a decrease of 194,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 7.6 million barrels per day, 0.6% more than the same four-week period last year.

Crude oil inventories decreased 2.4 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) increased 0.1 million barrels; total storage is 63.8 million barrels (~72% utilization).

Authors

November 10. 2017

P. Kevin Galvin

Principal Advisor - Sr. Manager Facilities/Cost Engineering Advisor - kevin.galvin@gaffney-cline.com
November 10. 2017

Nick Fulford

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

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