3rd November 2017
Oil Drilling Activity
The downward trend in onshore drilling rig activity continues with a drop of 9 to 879. Across the three major unconventional oil basins, the rig total was flat, a pattern of stalled growth now extended to 22 weeks. Rigs targeting oil decreased by 8, with the total now at 729 indicating US onshore operators are showing patience and keeping a keen eye on their balance sheets.
Natural Gas – One Belt One Road
GCA took part in a major event in Beijing this week, featuring the Chinese initiative known as “One Belt One Road” the new trade bridge with the countries to the West. With the tremendous potential for gas fired power generation, and with many Chinese EPC companies looking to provide solutions for clients in Middle East/North Africa (MENA), Latin America, ASEAN countries and other parts of Africa, the topic gained considerable interest from a wide group of attendees.
Perhaps the topic of greatest interest was around financing, where Chinese companies appear to be looking at strategic partnerships, and are more inclined to entertain equity positions in gas and power projects. This is a change from previous years, partly because of lower than expected profitability, and to tap in to international expertise to contain risk, and avoid some of the pitfalls that some Chinese companies have experienced in recent years.
The competition between renewables and gas was discussed extensively. While the challenge from wind and solar is gaining momentum, especially with some of the cost improvements in PV generation, which are set to reduce even further, gas was considered the solution of choice at least in the medium term. This was underlined with some of the turbine efficiencies available from some of the latest designs.
However, gas fired power remains top of the agenda for many Chinese EPC countries, especially with the increasing delink between gas and oil prices, with many developing economies wanting to build gas fired power plant, to take advantage of the current supply situation.
Crude Oil – Prices near two-year highs
Oil prices steadied near two-year highs as supply cuts by OPEC and other major exporters tightened fundamentals. An effort this year lead by the OPEC and Russia to hold back about 1.8 million barrels per day in oil production tighten markets. Compliance with the OPEC-led pact to curb supplies remains strong, and overall, oil markets have been slightly undersupplied this year, resulting in crude inventory drawdowns.
US crude oil inventories fell by 2.4 million barrels in the week to Oct. 27 to 454.9 million barrels, according to data from the EIA. US crude inventories are back on a downward trend after disruptions from hurricane Harvey caused a small build. This came despite a 46,000 bpd increase in US production to 9.55 million barrels per day. US crude output is now up over 13 percent since mid-2016.
US oil production growth of 0.8 million to 0.9 million barrels per day at year-end 2017 would put 2017 exit output at 9.6-9.7 million barrels per day, close to its highest for at least three decades.
In December 2015, Congress made a historic decision to lift its ban on crude oil exports that had been in place for 40 years. Aside from the exemption of exports to Canada, the ban essentially isolated US oil production from the rest of the world. Since the ban's removal, exports have been trending upwards, with a significant spike in September. The spread between the international oil benchmark, Brent, and the US-based West Texas Intermediate (WTI) expanded to a two-year high of over US$6 per barrel, providing a significant incentive for international oil importers to purchase US oil in preference to alternative light sweet crude supplies.
In Northwest Europe, closing this week of the Chrysaor purchase of a major Shell UK portfolio and EU regulatory approval of Neptune’s planned purchase of Engie’s upstream assets highlights the major moves by private equity backed firms into North Sea producing assets. Existing private equity backed Point Resources and Siccar Point Energy are both formally accepted as oil/gas field operators in Norway and UK respectively, heralding the long awaited “changing of the guard” of asset ownership for both mature assets and fields awaiting development.
Oil Drilling Activity
Total US rig count (including the Gulf of Mexico) stands at 898, down 11 this week with rigs targeting oil down 8. The horizontal rig count stands at 764, down 5.
The total number of active onshore rigs decreased to 879 (down 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 was flat, it stands at 488, with Permian up 1, Eagle Ford flat and Williston down 1.
Crude Oil Price
Brent, the global benchmark for oil, rose US$1.84 to US$61.03 a barrel, reflecting a gain of 3.11% on the week.
WTI crude increased US$2.15 to US$54.75 a barrel, up 4.09% on the week.
US Crude Oil Supply and Demand
US crude oil refinery inputs averaged 16.0 million barrels per day, with refineries at 87.1% of their operating capacity last week. This is 10,000 barrels per day less than the previous week’s average.
US gasoline demand over the past four weeks was at 9.3 million barrels, up 2.8% from a year ago. Total commercial petroleum inventories decreased 5.8 million barrels last week.
On the supply side, EIA data indicated that total domestic crude production increased 46,000 barrels to 9.553 million barrels a day. The Lower 48 crude production now stands at 9.046 million barrels per day, up 43,000 barrels this week.
US crude imports averaged 7.6 million barrels per day last week, a decrease of 552,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 7.7 million barrels per day, unchanged from 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).
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