12th October 2018
Oil Drilling Activity
Onshore US drilling activity increased by 11 with a total active count of 1037 rigs; those targeting oil increased 8, with the total at 869. Across the three major unconventional oil basins, the oil rig count increased 2 and stands at 608, with Permian up 4, Eagle Ford down 1 and Williston flat.
EIA reported last week’s total US domestic crude output at 11.2 million barrels a day, an increase of 100,000 barrels for the past week and reaching another record high. This week’s domestic crude oil production estimate incorporates a re-benchmarking that raised estimated volumes by 84,000 barrels per day, which is less than 0.8% of this week’s estimated production total. US crude situation was dominated by a jump in oil inventories (+6.0 million Bbl) due to a continuing seasonal decline in refinery input demand and an increase in US production.
The number of Americans filing for unemployment benefits unexpectedly rose last week but remained near a 49-year low, and the increase appeared unlikely to remove the view that the US labor market remains strong. The labor market is viewed as being near or at full employment and fueling expectations the Federal Reserve will increase interest rates again in December.
Natural Gas – Headwinds emerging for US LNG
As we look at the tug of war that is developing between aspirational LNG suppliers to meet the next wave of growth coming out of Asia, there are signs that things might not be going entirely in favor of US projects. There are three factors at work, which may start to undermine US efforts to dominate the LNG space within the next few years.
Trade barriers and diversity
Most of the readers of this bulletin will be familiar with the Chinese tariffs recently imposed on US LNG. These could well end up very short lived compared to the decade long horizons that LNG investors normally think in terms of; but if they continue into the medium term, they are enough to make a difference. China is expected to account for most of the growth in LNG demand in the next few years, and even though the tariffs only affect a small portion of LNG today, it will become more meaningful over time. Additionally, it has been reported that Tokyo Gas has taken a decision to cap the quantities of LNG it buys from the US, supposedly to maintain sufficient diversity in their portfolio, and avoid over-dependence on a single country (a policy that has governed many Japanese buyer’s behaviors for many decades). Whether for reasons of tariff, or the simple approach of managing supply risk, buyers will always be interested in supplies from countries other than the US, especially in uncertain times.
Henry Hub price risk
The US wholesale gas market is the most liquid and deeply traded market of its kind globally, by a long way. As a result, it is possible to see natural gas prices far into the future, at least from the lens of willing buyers and sellers. For many months now, the ten-year strip for US gas has been largely steady, at prices not so different from where gas has traded over the last year or so...more or less in a band from US$2.50 to US$3/MMBtu. Although trading beyond about 5 years is typically too thin to be reliable, LNG buyers may have assumed that US$3 was a dependable long-term assumption. Recent tightness in the market, and the potential for even more LNG demand from new export projects, are all reminders that the US natural gas market is not immune to new demands placed on what is ultimately a limited resource. Couple that with the inevitable decline from high quality “sweet spots” in all the key shale gas basins, and the need to move to lower quality rock, and you have the recipe for rising prices... and rising costs of US LNG.
Freight costs and the Panama Canal
In the same way that excess LNG seems to have been soaked up with relative ease over the last 18 months or so, the same is true for the LNG shipping sector. Ship owners have suffered grievously for many months now from low freight rates, and one-way charters that leave the vessel unfunded on the ballast journey. With spot charter rates picking up, and ships becoming harder to come by, US LNG will face much higher charges to reach Asia, than has been the case. The industry has become accustomed to LNG reaching Asia for around US$1/MMBtu, when the long-run marginal cost should be more than double. If you add in the prospect of the Panama Canal capacity for LNG carriers being reached, and much longer voyages being needed, US projects could face a disproportionate added cost, compared to suppliers closer to Asian centers of demand.
While the US LNG sector has many undeniable advantages, it is useful to reflect that it continues to face significant competition globally, and the economic and strategic factors that govern buyer behavior can shift relatively quickly. Conversely, with the approval of LNG Canada, there could be a significant impact on Canadian hub gas prices and a stimulus to drilling in the large gas resource base in the Montney and Duvernay.
Crude Oil – Brief impact from Hurricane Michael
In the US Gulf of Mexico, producers have cut daily oil production by roughly 42% due to Hurricane Michael. The cuts represent 718,877 barrels per day of oil production. While production has been cut because of the hurricane, down time is expected to be brief and Gulf of Mexico output accounts for a comparatively small portion of total US production.
The US Energy Information Administration raised its 2018 and 2019 price forecasts on West Texas Intermediate and Brent crude oil prices and US production expectations for this year and next. In its monthly energy outlook report, the EIA forecast an average WTI price of US$68.46 a barrel for this year, up 2.1% from the forecast issued in September. For 2019, it forecast US$69.56, up 3.3%. The EIA also raised its average Brent forecast by 2.2% to US$74.43 this year, and by 1.9% to US$75.06 next year. The EIA increased the domestic crude output forecast by 0.8% to 10.74 million barrels a day this year, and lifted the 2019 view by 2.2% to 11.76 million barrels a day.
A monthly OPEC report showed the 15-nation producer group's output rose by 132,000 barrels per day in September to 32.8 million barrels per day. Production hikes by Saudi Arabia and Libya offset a sharp output decline in Iran.
Escalating oil prices, rising interest rates, an appreciating dollar, and growing uncertainty about the outlook for international trade are proving to be difficult for global growth. Economic growth and corporate earnings have remained strong in the US; but in much of the rest of the world, momentum has been slackening since the start of the year. Strong and synchronized growth in 2017 has been replaced by an unbalanced expansion that increasingly relies on US consumers and businesses to be sustained.
Oil prices have risen strongly, especially when expressed in terms of currencies other than the US dollar, and are now at levels that have preceded recessions in the past for countries outside the US. Higher oil prices are helping to lubricate upstream and midstream asset trading globally, especially in mature hydrocarbon provinces. There is a diversity of new and established players participating, whilst Majors, near Majors continue to rationalize out of their non-core assets.
The International Monetary Fund cut its forecasts for global economic growth for both this year and next, citing trade protectionism and instability in emerging markets. A slowdown in economic growth would likely crimp oil demand, which analysts say is already at risk from rising oil prices. Overall, the global economy shows sign of being at a relatively late stage in the business cycle.
OPEC added to the doldrums by revising down the estimated demand growth to below 1.6 million barrels per day for 2018. Overall, OPEC lowered its global oil demand growth forecasts for this year and next, by 80,000 barrels a day and 50,000 barrels a day, respectively. The revisions were mainly the result of slower global economic growth.
Total US rig count (including the Gulf of Mexico) stands at 1063, up 11 this week. The horizontal rig count stands at 927, up 8 this week. US rig activity has shown constrained growth for 19 of the last 21 weeks and is up 14% above last year’s total.
Compared to a November 2014 figure of 1,876 active rigs, the current level is just above 50% of the 2014 high.
Crude Oil Price
Brent, the global benchmark for oil, decreased US$3.44 to US$81.05 a barrel, reflecting a loss of 4.07% on the week.
WTI crude fell US$2.66 to US$71.80 a barrel, down 3.57% on the week.
US Crude Oil Supply and Demand
US crude oil refinery inputs averaged 16.2 million barrels per day, with refineries at 88.8% of their operating capacity last week. This is 352,000 barrels per day less than the previous week’s average.
US gasoline demand over the past four weeks was at 9.2 million barrels, down 2.6% from a year ago. Total commercial petroleum inventories increased by 11.3 million barrels last week.
US crude imports averaged 7.4 million barrels per day last week, down by 568,000 barrels per day from the previous week. Over the past four weeks, crude oil imports averaged 7.8 million barrels per day, 5.3% more than the same four-week period last year.
US crude exports averaged 2.576 million barrels per day last week, an increase of 853,000 barrels per day from the previous week. Over the last four weeks, crude oil exports averaged 2.327 million barrels per day, 64% more than the same four-week period last year.
Crude oil inventories increased 6.0 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) increased 2.4 million barrels; total stored is 26.9 million barrels (~30% utilization).
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