October 5, 2018

October 5, 2018

5th October 2018

Oil Drilling Activity

Onshore US drilling activity decreased by 3 with a total active count of 1026 rigs; those targeting oil decreased 2, with the total at 861. Across the three major unconventional oil basins, the oil rig count decreased 2 and stands at 606, with Permian down 1, Eagle Ford flat and Williston down 1.  

Sources: EIA Weekly Update and GCA Analysis

EIA reported last week’s total US domestic crude output at 11.1 million barrels a day, flat for the past week and remain above the record high reached six weeks ago. US crude situation was dominated by a jump in oil inventories (+8.0 million Bbl) caused by crude exports slowing by 0.9 million barrels per day and imports accelerating by 0.2 million barrels per day.

US job growth surged in September to its highest level in seven months as the economy put up another show of strength. US hiring cooled in September by more than forecast, wage gains eased slightly and the jobless rate fell to a 48-year low, illustrating a tight labor market as well as the impact of Hurricane Florence.

Natural Gas – “Largest ever investment in Canada”... Trudeau

For those who have followed the ups and downs of Canadian LNG export projects, this week will go down in history.  Confounding the critics, winning over First Nations, and weaving a path through environmentalists, carbon taxes, and steel tariffs, LNG Canada and its international group of stakeholders has finally got to the finish line, at least in terms of reaching Final Investment Decision (FID).

In a press conference on October 2, Canadian Prime Minister Justin Trudeau proudly proclaimed that the project, with its US$40bn price tag, was the biggest private sector investment in Canada in history, and not just in the oil and gas sector, but in any part of the Canadian economy. 

With the unprecedented acceleration in shale gas production in the US, pushing Canadian gas out of markets even in Eastern Canada, the Canadian Federal Government realized too late that diversifying its oil and gas export markets was vital to maintain investments in the sector, especially in Alberta and BC.  Equally, with China emerging as one of the major consumers of natural gas over the next few decades, exports from Canada’s pacific coast make complete sense.  When the Petronas sponsored Pacific Northwest project faltered, and eventually collapsed back in 2017, LNG Canada became the front-runner of the multiple Canadian projects that have all been vying to reach the finish line first.  What Petronas lacked in terms of a viable site for its project, it made up for in ample supplies of liquids rich gas from its acquisition of Progress Energy in 2012.  In many ways, therefore, their entry into LNG Canada earlier this year was entirely logical.  With Petrochina and KOGAS also part of the Shell-led investor group, and Mitsubishi’s participation, a balance of experience and buyer presence was achieved, which will have provided both alignment and strong credit, that will have enhanced the project considerably.

While reaching FID has been a major milestone, constructing the plant on time and on budget will be the next major focus of the companies involved; but with this now being the flagship project north of the 45th parallel, there will be considerable interest in making sure that it goes smoothly.

The fact that this announcement came three days after a last minute agreement on the new trade relationship between the US and its neighbors to the north and south, Canada and Mexico, may not be a coincidence either.  With LNG exports having been solely a US activity for so long, the Canadian government will no doubt have been keen to show that it too can be part of the global gas community.  Furthermore, with Canadian LNG not being subject to the 10% import tariff announced by China two weeks ago, who knows how much that too might have helped Canada in its recent success.

With the US’s shale gas producing neighbor now joining the LNG export club, the next question for the gas community is how long it will be before the other shale gas producer in the Americas, south of the equator, follows suit.  Its seems likely that Argentina, whose government representatives also spoke of becoming a major LNG exporter just last week, will take considerable comfort from Canada achievement.  They may be celebrating their own record-breaking investment before very long.

Crude Oil – Inventories at Cushing decrease significantly

Oil prices took a breather from their rapid ascent, but continued to hover near four-year highs.

Crude oil prices continue to climb notwithstanding efforts by oil producers to reassure the market about availability and the existence of spare production capacity to offset oil lost as a result of US sanctions on Iran. Recent price moves bear a strong resemblance to previous price spikes in 2007-2008 and 2010-2012.

Aggressive implementation of US sanctions on Iran has left refiners and traders concerned about the future availability of crude and curious whether OPEC has enough spare capacity to meet future crude demand. OPEC and its allies became fixated on cutting oil inventories down to the five-year average and may have waited far too long to start exiting from production constraints, causing the market to overtighten. Additionally, oil consumption has grown faster than most analysts forecast at the start of the year.

As of September 28, 2018, crude oil inventories at Cushing were 24.5 million barrels, which is 22.1 million barrels lower than at the start of the year and 21.8 million barrels lower than the hub’s five-year (2013–17) average for this time of year.

The relatively low level of crude oil inventories at Cushing does not indicate scarcity of crude oil in the United States. Total US commercial inventories and Midwest inventories, excluding Cushing, have not decreased at nearly the same rate as inventories at Cushing. Total US inventories are 87,000 barrels lower than their five-year average of 404.1 million barrels.

The level of inventories held at Cushing is a closely watched market indicator, because Cushing is the market hub for West Texas Intermediate (WTI) crude oil and is the physical delivery point for crude oil futures contracts traded on the New York Mercantile Exchange.

In response to robust domestic and international demand for motor gasoline and distillate fuel oil, US refineries have recently been running at record levels. High refinery runs can lower Cushing inventories because major refining centers are closely connected to Cushing via large pipelines.

In addition to strong demand for crude oil by refineries, US crude oil exports have risen steeply year over year. US crude oil exports increased by 787,000 barrels per day, or more than 80%, from the first half of 2017 to the first half of 2018 and set a new monthly record of 2.2 million barrels per day in June.

Weekly Recap

Drilling Activity

Source: BHGE Rotary Rig Count

Total US rig count (including the Gulf of Mexico) stands at 1052, down 2 this week. The horizontal rig count stands at 919, down 3 this week. US rig activity has shown no growth for 18 of the last 20 weeks and is up 12% 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, increased US$2.24 to US$84.49 a barrel, reflecting a gain of 2.72% on the week.

WTI crude rose US$2.31 to US$74.46 a barrel, up 3.20% on the week.

US Crude Oil Supply and Demand

Sources: EIA Weekly Update and GCA Analysis

US crude oil refinery inputs averaged 16.6 million barrels per day, with refineries at 90.4% 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 9.3 million barrels, down 1.5% from a year ago. Total commercial petroleum inventories increased by 8.0 million barrels last week.

US crude imports averaged 8.0 million barrels per day last week, up by 163,000 barrels per day from the previous week. Over the past four weeks, crude oil imports averaged 7.8 million barrels per day, 10.2% more than the same four-week period last year.

US crude exports averaged 1.723 million barrels per day last week, a decrease of 917,000 barrels per day from the previous week. Over the last four weeks, crude oil exports averaged 2.14 million barrels per day, 65% more than the same four-week period last year.

Crude oil inventories increased 8.0 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 24.5 million barrels (~27% utilization).

Authors

October 5, 2018

P. Kevin Galvin

Principal Advisor - Sr. Manager Facilities/Cost Engineering Advisor - kevin.galvin@gaffney-cline.com
October 5, 2018

Nick Fulford

Global Head of Gas and LNG - nick.fulford@gaffney-cline.com

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