16th November 2018
Oil Drilling Activity
Onshore US drilling activity increased 1 with a total active count of 1058 rigs; those targeting oil increased 2, with the total at 888. Across the three major unconventional oil basins, the oil rig count increased 3 and stands at 620, with Permian up 1, Eagle Ford up 2 and Williston flat.
EIA reported last week’s total US domestic crude output at 11.7 million barrels, an increase of 100,000 barrels per day from the previous week and 2 million barrels a day greater than the same week one year ago. Crude stocks at Cushing, OK, oil’s US trading hub, had a large build again and US production was up again to another all-time record.
Despite achieving record levels of oil production, EIA’s estimated drilled but uncompleted wells in the US continues to grow, led by the Permian and Anadarko regions; reaching 8,545 wells in October 2018, an increase of over 2,000 in the last year. In contrast, API reports a year on year 19% increase in oil completions in Q3 2018, so the completions/frac crews are working hard to keep up with the drillers.
Former Federal Reserve Chairman Alan Greenspan said a rising US debt burden could derail the current expansion and warned the tight labor market could lift inflation. Inflation measured by the Fed’s preferred gauge of price pressures was 2% -- at the central bank’s target -- in the 12 months through September after running mostly below that threshold since 2012. Unemployment has fallen to 3.7%, the lowest level since 1969, and average hourly earnings are creeping up.
Natural Gas – Borrowing money for gas infrastructure
In the old days, limited recourse finance for gas projects was a straightforward affair; you just needed an AAA credit buyer and a long-term contract linked to oil. Nowadays, it has become a bit more complicated.
With the duration of long-term gas sale and purchase contracts now tumbling down, and buyers increasingly uneasy about taking oil price risk on gas contracts, these former pillars of project finance have not only started to crumble, they are practically in ruins already. For the very largest of companies, direct funding for LNG projects is often the simplest answer, but for even large investors, balance sheet finance is unsustainable, and external financing is a pre-requisite.
When the move towards gas-on-gas pricing started in Europe, many banks were loath to offer financing, based on a revenue flow which depended on something they did not understand as well (such as NBP), and which did not have the same long history to fall back on. There were even some that suggested that the funding for major projects would simply dry up. The fact is, of course, that the idea of a liquid wholesale market for gas, with price determined by gas market dynamics rather than oil, has rapidly caught on, and of course financing of North Sea infrastructure, continues, but on different terms.
The idea of funding an LNG project without a cast iron long-term offtake agreement is still a little way off, but we appear to be moving in that direction. With offtake arrangements sometimes being a blend of affiliates of project investors, and third parties, the risk profile is changing. In practical terms, these days it is always possible to sell an LNG cargo at some kind of market clearing price, so a lender should be able to guarantee sufficient debt service coverage, even if the equity holders are left high and dry.
The lending community, therefore, appears to be in transition. The old ways of offsetting risk through long-term oil contracts are largely over, and yet a proper market clearing price, complete with a history on the basis of which some kind of risk can be quantified, has not quite evolved. Success for the next generation of LNG projects, especially those that need external finance, may depend on finding new ways to address these risks, and lenders with an open mind, and who are prepared to be creative, may do well in the next round of projects.
Crude Oil – Snookered by Trump…. Supply glut returns!
The International Energy Agency (IEA) and OPEC this week both indicated in their reports of a sizeable oil surplus at least in the first half of 2019, and possibly beyond, given the pace of growth in non-OPEC production and slower demand in heavy consumers such as China and India.
China's economic conditions deteriorated materially in the third quarter of 2018 and China is the world's biggest oil importer and the second-largest crude consumer.
The oil price has lost about a quarter of its value in only six weeks in the face of soaring global production led by the US as well as a slowing global economy. Oil prices rose, but concern over the prospect of an oversupplied market next year remained in spite of OPEC's message that it may cut crude output.
The Organization of the Petroleum Exporting Countries, led by Saudi Arabia, is considering a cut of up to 1.4 million barrels per day next year to avoid the kind of build-up in global inventories that prompted the oil price to crash between 2014 and 2016.
Oil prices have fallen considerably in recent weeks and that has already had an impact on gasoline prices, which is good news for motorists looking to travel. Since the beginning of October, gasoline prices have fallen more than 20 cents on average and may continue to drop further.
While drivers are saving money at the pump, other trends in the energy sector could be hurting them. There is an abundant supply of light crude; however, the heavier form of crude is harder to come by thanks to the tensions in Iran and capacity issues in Canada. Heavy crude is used to produce diesel fuel and heating oil.
The total number of wells producing crude oil and natural gas in the US fell to 991,000 in 2017, down from a peak of 1,039,000 wells in 2014. This recent decline in the number of wells reflects advances in technology and drilling techniques.
Even with fewer wells, US oil production grew from 8.7 million barrels per day in 2014 to 9.3 million barrels per day in 2017. During that same period, US natural gas gross withdrawals increased from about 78.7 billion cubic feet per day to 83.4 billion cubic feet per day.
With increased US natural gas demand, coupled with rising gas pipeline and LNG exports plus a cold snap has led to US gas storage being 600 Bcf below the 5-year average. Henry Hub prices duly responded to over US$4/MMBtu at the same time as oil prices were in decline, further demonstrating the de-linkage of gas and oil pricing.
Total US rig count (including the Gulf of Mexico) stands at 1082, up 1 this week. The horizontal rig count stands at 939, up 4 this week. US rig activity continues to show constrained growth for 23 of the last 26 weeks and stands 18% above last year’s total.
Crude Oil Price
Brent, the global benchmark for oil, decreased US$1.64 to US$68.08 a barrel, reflecting a loss of 2.35% on the week.
WTI crude fell US$1.99 to US$57.57 a barrel, down 3.34% on the week.
US Crude Oil Supply and Demand
US crude oil refinery inputs averaged 16.4 million barrels per day, with refineries at 90.1% of their operating capacity last week. This is 24,000 barrels per day more than the previous week’s average.
US gasoline demand over the past four weeks was at 9.2 million barrels, down 1.5% from a year ago. Total commercial petroleum inventories decreased by 1.4 million barrels last week.
US crude imports averaged 7.5 million barrels per day last week, up by 195,000 barrels per day from the previous week. Over the past four weeks, crude oil imports averaged 7.5 million barrels per day, 3.1% less than the same four-week period last year.
US crude exports averaged 2.05 million barrels per day last week, a decrease of 355,000 barrels per day from the previous week. Over the last four weeks, crude oil exports averaged 2.28 million barrels per day, 50.6% more than the same four-week period last year.
Crude oil inventories increased 10.3 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) increased 1.2 million barrels; total stored is 35.5 million barrels (~39% utilization).
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