November 17. 2017

November 17. 2017

17th November 2017

Oil Drilling Activity

Onshore drilling increased activity with an addition of 5 rigs (all targeting gas) to 893. Across the three major unconventional oil basins, the oil rig total increased by 4. US rigs targeting oil was flat, with the total standing at 738.

Sources: EIA Weekly Update and GCA analysis

Natural Gas - Total

This week’s news that Total is to acquire all the LNG assets of Engie (former Gaz de France) for between US$1.5-2 bn is interesting, for no other reason than Total appears to have taken the view that the timing is right.  With the recent uptick in spot LNG prices in Asia reported in last week’s bulletin, some of the doom and gloom surrounding the LNG oversupply and low prices for years to come seems to have taken a bit of a battering lately.  

Of course, the other interesting feature of the Total deal is that by putting around 40 million tons per annum of LNG under Total’s control it creates another LNG giant to rival Shell, following their acquisition of BG, which took place in a very different pricing environment, and still looks to be a highly priced transaction. With ExxonMobil moving from #1 to #3 in the LNG stakes over the last two years, the Total acquisition also changes the dynamic among the major global players, and may signal more M&A activity in the LNG space. Other majors may start to vie for position, and create the economies of scale and shipping synergies that these massive LNG portfolios start to generate.  In an environment where margins continue to be wafer thin, some of the efficiencies inherent in a global portfolio start to matter more and may put increasing pressure on the LNG trading model that has made such headway over the last few years. 

LNG is still set to grow considerably, expected to more than double over the next two decades, largely on the back of gas to power demand from developing economies.  For many traditional LNG players, used to very long lead times and project cycles, the prospect of a few years of a soft markets will not put them off the long game.  Total have made their move, even with an LNG overhang still likely to be with us for a few years, but they will be betting on reaping the benefit over the next couple of decades or more.

Crude Oil – Undisputed leader of global production growth

Oil prices were steady on Thursday, November 16 as rising US production and inventories threatened to undermine a rally inspired in recent months by OPEC’s curbs on output. The EIA data crude inventories rising for a second week in a row, building by 1.9 million barrels in the week to November 10 to 459 million barrels. Analysts had expected a decrease of 2.2 million barrels. US crude oil production has hit a new record of 9.65 million barrels per day for 2017, output has risen by almost 15 percent since its mid-2016 low.

Expectations that a meeting of the Organization of the Petroleum Exporting Countries (OPEC) in Vienna on November 30 would result in OPEC nations and other big exporters extending their pact to tighten supply has offset some of the pressure on prices.

OPEC and non-OPEC exporters including Russia agreed a year ago to cut crude output by 1.8 million barrels per day between January 2017 and March 2018.

The IEA this week indicated that US oil production is predicted to account for more than 80 percent of global oil production growth in the next 10 years and it will produce 30 percent more gas than Russia by that time. The US, whose upstream energy industry has seen a resurgence with the development of fracking technology, would become the undisputed leader of oil and gas production worldwide.  With many North American oil/gas companies informing their stakeholders they are seeking better returns on capital rather than purely volume growth, it remains to be seen if these forecasts are matched by sufficient investment capital and positive free cash flow to achieve the lofty production growth that IEA project.

The IEA expected oil markets to rebalance in 2018 if oil demand remained as robust as it was in 2017, especially if the Organization of the Petroleum Exporting Countries and its allies extended output cuts to the end of 2018 or beyond.  These countries are refocusing some of their investments into gas and petrochemical projects, whilst still maintaining sufficient oil production capacity to meet future adjustments in OPEC quotas.

The IEA cut its oil demand forecast in its latest monthly report by 100,000 barrels per day to an estimated 1.5 million barrels per day in 2017 and 1.3 million barrels per day in 2018. The IEA also indicated that oil inventories in the developed world fell by 40 million barrels in September, dropping below 3.0 billion barrels for the first time in two years.

OPEC indicated that global inventories were 154 million barrels above the five-year average in September. OPEC states have said they want to reduce stocks to their five-year average.

Weekly Recaps

Oil Drilling Activity

Total US rig count (including the Gulf of Mexico) stands at 915, up 8 this week with rigs targeting oil flat. The horizontal rig count stands at 776, flat this week.

The total number of active onshore rigs increased to 893 (up 5).  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 oilrig total increased 4; it stands at 498, with Permian up 5, Eagle Ford flat and Williston down 1.

Crude Oil Price

Brent, the global benchmark for oil, dropped US$2.18 to US$61.84 a barrel, reflecting a loss of 3.41% on the week.

WTI crude decreased US$1.30 to US$55.90 a barrel, down 2.27% 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 91.0% of their operating capacity last week. This is 334,000 barrels per day more than the previous week’s average.

US gasoline demand over the past four weeks was at 9.4 million barrels, up 1.5% from a year ago. Total commercial petroleum inventories increased 2.8 million barrels last week.  Future of distillate demand, especially for truck transportation remains solid, even though Tesla and others are demonstrating all electric powered trucks as an option for the future, albeit without formally naming price tags for such vehicles.

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 7.9 million barrels per day last week, an increase of 521,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 7.7 million barrels per day, 2.8% less than the same four-week period last year.

Crude oil inventories increased 1.9 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) decreased 1.5 million barrels; total storage is 63.1 million barrels (~72% utilization).

Authors

November 17. 2017

P. Kevin Galvin

Principal Advisor - Sr. Manager Facilities/Cost Engineering Advisor - kevin.galvin@gaffney-cline.com
November 17. 2017

Nick Fulford

Global Head of Gas and LNG - nick.fulford@gaffney-cline.com
November 17. 2017

Ryan Pereira

Principal Commercial Manager, Global Gas and LNG - ryan.pereira@gaffney-cline.com

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