30th November 2018
Oil Drilling Activity
Onshore US drilling activity decreased 1 with a total active count of 1051 rigs; those targeting oil increased 2, with the total at 887. Across the three major unconventional oil basins, the oil rig count increased 1 and stands at 619, with Permian and Williston flat, Eagle Ford up 1.
EIA reported last week’s total US domestic crude output at 11.7 million, flat from the previous week. Crude stocks at Cushing, Okla., oil’s US trading hub, had a large build again according to EIA’s data and domestic-crude supplies rose more than expected. A big jump in oil imports offset higher refinery runs, leading to a 10th consecutive build to crude inventories.
Strong consumer spending reported by the Commerce Department most likely keeps the US central bank on track to raise interest rates next month for the fourth time this year. But moderating inflation, if sustained, could temper expectations on the pace of rate hikes in 2019.
Natural Gas - You can’t even give it away
When it comes to the point that you can’t even give something away, you know you’re in trouble. Last week, that was briefly the case for Permian Associated gas sellers, who had to pay for their gas to be delivered at the Waha hub, to make it worth someone’s while to displace something else. While the headlines just a week earlier were heralding a breakthrough in natural gas prices, not all gas is created equal, and if you are stuck behind a pipeline bottleneck, you had better not count on a windfall. It’s not just Waha where we have seen producers having to pay to get rid of gas. Back in May, the same thing happened at AECO, repeating a brief negative pricing period the previous October, and it’s a phenomenon that is familiar to Norwegian producers too, having to pay to get their gas delivered into the UK.
The events at Waha and AECO share a common thread, which is that liquids are much more valuable than gas right now, and for many liquids rich gas resources, having to pay to have the gas dealt with represents only a minor impact on overall economics. With today’s constraints around flaring, producers are starting to have to think about more imagination and productive ways of dealing with gas production, and service companies are coming up with more effective ways to provide solutions. Small scale CNG, even LNG solutions are now emerging which serve two purposes. They provide a more cost effective solution to the producer, a more sustainable solution for the natural gas, and profitable business for those providing the means to create a viable value chain.
The Permian happens to be today’s source of excess gas production, but by the time the next gas bottleneck occurs, perhaps the lessons learned there will be put into practice more quickly, and more efficiently.
Crude Oil – “Deja Vu” …... Oil prices could fall further in 2019
Oil prices were hit by another wave of heavy selling this week, with fears of climbing production dragging the two most popular benchmarks to lows not seen in more than a year. The continuing stream of figures showing rising global oil inventories served to pile further pressure on prices with the EIA’s weekly data indicating a larger rise in US oil stocks than market participants had expected.
Prices had climbed to nearly four-year highs in early October only to plunge into a bear market on fears of a global glut and concerns about world economic growth. The drop has left crude off around 30% from their peaks.
The market outlook is strikingly similar to 2014, with production from US shale strong while consumption growth slows as the global economy falters. But in one respect the situation is even more uncomfortable because Saudi Arabia’s official foreign reserves are down to just over US$500 billion, from almost US$750 billion in June 2014.
The kingdom likely needs to keep several hundred billion dollars’ worth of reserve assets on hand to maintain confidence in its fixed exchange-rate peg to the US dollar. Therefore, the kingdom can ill-afford another slump in oil revenues so soon after the last one, which suggests it may have to cut production, while trying to compel other OPEC and non-OPEC countries to share the burden.
One of the lessons of the last few years is that given new forces in the market, particularly US shale oil, OPEC countries must join with others if they are going to be able to affect a significant enough cut to oil markets to notably raise prices and restore balance.
Oil’s price could get another knock soon, depending on the outcome of the next OPEC meeting on Dec. 6. Some variant of any of the usual three outcomes is possible: a real deal, rhetoric about a deal, or no deal. But the market will be particularly sensitive to the result.
Total US rig count (including the Gulf of Mexico) stands at 1076, down 3 this week. The horizontal rig count stands at 934, up 5 this week. US rig activity continue to show constrained growth for 24 of the last 27 weeks and stands 16% above last year’s total.
Crude Oil Price
Brent, the global benchmark for oil, decreased US$4.63 to US$58.74 a barrel, reflecting a loss of 7.31% on the week.
WTI crude fell US$3.80 to US$50.57 a barrel, down 6.99% on the week.
US Crude Oil Supply and Demand
US crude oil refinery inputs averaged 17.6 million barrels per day, with refineries at 95.6% of their operating capacity last week. This is 698,000 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 0.9% from a year ago. Total commercial petroleum inventories increased by 2.4 million barrels last week.
US crude imports averaged 8.2 million barrels per day last week, up by 608,000 barrels per day from the previous week. Over the past four weeks, crude oil imports averaged 7.7 million barrels per day, 0.8% less than the same four-week period last year.
US crude exports averaged 2.442 million barrels per day last week, an increase of 473,000 barrels per day from the previous week. Over the last four weeks, crude oil exports averaged 2.217 million barrels per day, 77.3% more than the same four-week period last year.
Crude oil inventories increased 3.6 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 36.5 million barrels (~41% utilization).
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