19th October 2018
Oil Drilling Activity
Onshore US drilling activity increased by 7 with a total active count of 1044 rigs; those targeting oil increased 4, with the total at 873. Across the three major unconventional oil basins, the oil rig count increased 3 and stands at 611, with Permian up 1, Eagle Ford up 2 and Williston flat.
EIA reported last week’s total US domestic crude output at 10.9 million barrels a day, a decrease of 300,000 barrels for the past week. The reduced production is due to the impact of Hurricane Michael and the shut-in of 40% of GOM oil platforms. US crude situation was dominated by a jump in oil inventories (+6.5 million Bbl) due to the net crude oil imports accelerated 1 million barrels per day from multi-year low the previous week and refinery runs remained low due to seasonal maintenance.
According to minutes released from the Fed's most recent policy meeting, central bank officials remain convinced that continuing to gradually increase interest rates is the best formula to preserve a steady US economy.
Natural Gas - Scramble for market access
Three announcements this week have underlined how important it is in today’s global gas market to control the whole value chain, right down to the customer. First, Exxon is investing in a major new re-gas facility in China, at Huizhou, Guangdong region, and have also announced new LNG sales with Zhejiang Provincial Energy Group, the first such purchase by that company. The LNG will come from Exxon’s portfolio.
In a similar move to create market access, Total is joining up with the Adani group in India to develop LNG offtake infrastructure including access to the growing transport market, and will invest in a planned LNG terminal at Dhamra in Odisha. As if to emphasize why the transport market is becoming so important to the LNG sector, IVECO announced this week that an LNG fueled truck left London and completed a journey or 1728km on a single tank of fuel, with a claimed 40% saving over the equivalent diesel cost.
The third example of a move to increase control over the value chain came with an announcement this week of a JV between Novatek and Fluxys, who plan to build a terminal in Rostock, Germany. This will be designed for mid-scale LNG vessels, potentially as a fuel supplier to the growing number of LNG powered vessels in the Baltic.
Both LNG spot prices in Asia and LNG carrier freight rates are still running at the highest levels for many months. However, with the announcement that Ichthys LNG had delivered their first cargo, and with further Australian and US projects set to start up in 2019, we are reminded that the analysis of supply and demand is pointing to a surplus of LNG capacity, over demand being highly likely for the next few years.
At least in the medium term, those LNG suppliers who have control of re-gas infrastructure may fare better than those without, and this week’s news suggests that many of the leading players are taking steps to give market access a priority.
Crude Oil – Prices soften significantly
Crude oil prices tumble to their lowest level in nearly a month, with US WTI edging below US$70/Bbl for the first time since Sept. 21 after domestic crude stockpiles rose last week by a larger than expected 6.5M barrels. It was the fourth straight weekly increase in US crude supplies, with recent production levels hit by hurricane-related shutdowns in the Gulf of Mexico.
The declines come amid tension between the US and Saudi Arabia following the apparent murder of a Saudi journalist at the kingdom’s consulate in Turkey, as well as growing concerns about the outlook for global growth.
Although US refinery runs have declined in recent weeks because of typical seasonal maintenance, refineries continue to operate at a high level for this time of year. The high level of refinery runs and an increase in distillate fuel yields have contributed to higher refinery output of distillate fuel and an increase in distillate stocks.
The EIA expects strong US refinery runs and distillate margins, each of which encourage refiners to maximize distillate production, to continue through the winter. The EIA projects US refinery production of distillate fuel to average 5.1 million barrels per day during the winter of 2018-19, which would be up from an average of 5.0 million barrels per day last winter.
The EIA expects US heating oil prices to be higher this winter than last winter because of higher crude oil prices and higher distillate fuel margins (the price difference between wholesale distillate fuel and crude oil). EIA forecasts that the Brent crude oil price, which is the most significant crude oil price in determining US petroleum product prices, will average US$79/Bbl this winter. This price would be US$15/Bbl higher than last winter. The higher forecast Brent crude oil prices this winter are the result of gradually tightening global oil balances and concerns about potential supply disruptions in the coming months.
The EIA expects that average US household bills for most major energy sources of home heating will rise this winter. The increased expenditures are largely driven by higher energy prices, although in some regions colder forecasts for winter also drive up some expenditure.
Iran's exports have not declined as much as predicted a couple of months ago and it is now clear they will not fall to zero, even after US sanctions are re-imposed next month.
Refiners in Turkey, India and possibly China are reportedly negotiating with US officials over waivers to enable them to continue purchasing at least some Iranian oil into November.
At the same time, Saudi Arabia and other Gulf producers have boosted their exports in response to the earlier rise in prices and pressure from the US to cool the market.
Total US rig count (including the Gulf of Mexico) stands at 1067, up 4 this week. The horizontal rig count stands at 926, down 1 this week. US rig activity has shown constrained growth for 20 of the last 22 weeks and stands 17% 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$0.95 to US$80.10 a barrel, reflecting a loss of 1.17% on the week.
WTI crude fell US$2.64 to US$69.16 a barrel, down 3.68% on the week.
US Crude Oil Supply and Demand
US crude oil refinery inputs averaged 16.3 million barrels per day, with refineries at 88.8% of their operating capacity last week. This is 77,000 barrels per day more than the previous week’s average.
US gasoline demand over the past four weeks was at 9.1 million barrels, down 2.8% from a year ago. Total commercial petroleum inventories increased by 3.0 million barrels last week.
US crude imports averaged 7.6 million barrels per day last week, up by 218,000 barrels per day from the previous week. Over the past four weeks, crude oil imports averaged 7.7 million barrels per day, 3.5% more than the same four-week period last year.
US crude exports averaged 1.782 million barrels per day last week, a decrease of 794,000 barrels per day from the previous week. Over the last four weeks, crude oil exports averaged 2.18 million barrels per day, 33% more than the same four-week period last year.
Crude oil inventories increased 6.5 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) increased 1.7 million barrels; total stored is 26.9 million barrels (~32% utilization).
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