October 27, 2017

October 27, 2017

27th October 2017

Oil Drilling Activity

The downward trend in onshore drilling rig activity continues with a drop of 4 to 888. Across the three major unconventional oil basins, the rig total dropped to 488, a pattern of stalled growth now extended to 21 weeks.  This reflects the consequence of oil field cost pressures broadly tracking the modest increases in WTI crude prices. Rigs targeting oil increased by 1, with the total now at 737.

Sources: EIA Weekly Update and GCA analysis

Natural Gas – Winds of Change

“One swallow does not a summer make” was one of many philosophical remarks attributed to Aristotle, and so it is that one departure from traditional LNG contract terms means little on its own.  However, the news flows this week on natural gas is littered with new ideas that suggest that buyers and sellers are exploring innovative ways to bridge the gap between their respective positions.

First, we have Jera, signing a three-year supply deal with Petronas, signaling a foreshortening of the usual term that sellers typically press for and potentially sending a shiver around the lending community who take a lot of comfort from the typical 15-25 years that has been the norm.

Texas LNG, based in Brownsville, has set out a “variable” LNG tolling fee, offering LNG buyers/shippers the opportunity to cut their costs at times of low energy prices.

Tellurian, at the forefront of the “new wave” of LNG liquefaction from the Gulf Coast have already laid down the gauntlet to many of the competing projects by offering a “fixed price” LNG sales arrangement, originally estimated at US$8/MMBtu, but now said to be nearer US$6/MMBtu, potentially coupled with offering buyer’s equity at US$1,500 per tonne/annum of capacity.

One of the more interesting observations is that, with the exception of the Petronas deal, many of these new ideas are coming from US based new entrants to the traditionally conservative LNG industry.  With London and Singapore being the traditional centers for LNG finance, and legal input, some of the innovations originating in Houston may yet put them in the shade.

Crude Oil – Prices close to or above 2017 highs

Oil prices had persisted mainly flat, but WTI passed US$53 per barrel during Friday 27th, approaching the highest mark for WTI reached early in 2017. While Brent crude futures, the global benchmark, crossed over US$60 barrel in late trading on London’s Intercontinental Exchange this week, made a new high for the year.  The forward market is still predicting price softening into 2018, so capital budgets for next year will need to remain flexible.

Saudi Arabia and Russia have indicated that they want to extend an OPEC-led deal to curb global oil production through the end of next year. Extending the agreement through the end of 2018 may ensure a smooth exit and limit market disruption. There are other members of OPEC that have indicated that the cut should be extended until the end of next year.

The OPEC and some major producers outside the cartel, including Russia, first agreed late last year to cap production at around 1.8 million barrels a day lower than peak October 2016 levels. The deal was extended in May through to March 2018. A possible further extension of the agreement is expected to be debated at OPEC’s next official meeting in Vienna on November 30th.

There are indications that global crude inventory levels are falling and demand is strong, but Brent crude price has struggled to move up.  The ceiling is partly due to uncertainty of crude supplies after March 2018 when the current OPEC deal ends.

Preliminary data and early reads on supply and demand indicated a slight drain in U.S. crude oil inventories. However, the EIA data indicated a surprise 856,000 build, reversing a four-week streak of declines. Traders are watching supply and demand metrics closely in anticipation of a balancing market.

US crude production rose 1.1 million barrels per day last week to 9.5 million barrels per day after a decline due to Hurricane Nate, while US crude oil exports hit a new record four-week average of 1.7 million barrels per day. Higher US crude supply has been balanced by uncertainties over crude exports from the Middle East due to geopolitical tensions.

Last but not least, ExxonMobil report third quarter earnings that increased 50%; however, although their US production grew by nearly 4%, their US upstream lost US$ 238 million. An indicator that current US crude price level has hindered oil rig growth. 

Weekly Recaps

Oil Drilling Activity

Total US rig count (including the Gulf of Mexico) stands at 909, down 4 this week with rigs targeting oil up 1. The horizontal rig count stands at 769, down 2.

The total number of active onshore rigs decreased to 888 (down 4).  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 down 1, it now stands at 488, with Permian up 1, Eagle Ford flat and Williston down 2.

Crude Oil Price

Brent, the global benchmark for oil, rose US$2.05 to US$59.19 a barrel, reflecting a gain of 3.59% on the week.

WTI crude increased US$1.53 to US$52.60 a barrel, up 3.00% on the week.

US Crude Oil Supply and Demand

Sources: EIA Weekly Update and GCA analysis

US crude oil refinery inputs averaged 16.0 million barrels per day, with refineries at 87.8% of their operating capacity last week. This is 586,000 barrels per day more than the previous week’s average.

US gasoline demand over past four weeks was at 9.3 million, up 1.6% from a year ago. Total commercial petroleum inventories decreased 8.7 million barrels last week.

On the supply side, EIA data indicated that total domestic crude production increased 1.101 million barrels to 9.507 million barrels a day. The Lower 48 crude production now stands at 9.003 million barrels per day, up 1.109 million barrels this week.

US crude imports averaged 8.1 million barrels per day last week, an increase of 640,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 7.6 million barrels per day, 3.2% above the same four-week period last year.  In comparison, China has imported an average of 8.54 million barrels a day for the first 9 months of 2017, in part to sustain filling of their strategic reserve stockpile.

Crude oil inventories increased 0.9 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) decreased 0.3 million barrels; total storage is 63.7 million barrels (~72% utilization).

Authors

October 27, 2017

Nick Fulford

Global Head of Gas and LNG - nick.fulford@gaffney-cline.com
October 27, 2017

P. Kevin Galvin

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

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