October 6, 2017

October 6, 2017

6th October 2017

Oil Drilling Activity

Drillers decreased onshore rigs by 3, total stands at 913. Across the three major unconventional oil basins, the oil rig total remained flat four weeks running at 495; rig growth remains weak in the major oil basins reflecting crude prices hovering at the US$50 WTI level. Rigs targeting oil decreased by 2, total stands at 748.

Are investors taking aim at US shale producers, pushing them to stop spending billions on new wells and instead use increase cash flow on dividends and stock buybacks? This shift could dampen spending on increase rigs and impact US production growth; however, it could help the OPEC strategy to constrain crude supply.

Sources: EIA Weekly Update and GCA analysis

Natural Gas – Lebanon – a new gas giant?

It has been hard to miss the flurry of activity in the Eastern Mediterranean over the last couple of years.  The major gas discoveries of Tamar and Leviathan in Israeli waters are now well under development, and continued progress is being made in Cyprus with the Aphrodite discovery and a new licensing round. Last but definitely not least is the giant Zohr gas field in Egyptian waters with first production just months away is the final ingredient in what is now one of the major gas focused regions of the world.

However, the story may not finish there.  After several years of government paralysis, Lebanon will finally be entering the gas race next week when bids are due on their first licensing round for blocks within their exclusive economic zone (EEZ).  While there remains some uncertainty about exactly where Lebanese jurisdiction extends, the majority of the area is clear of dispute.  From a geological perspective, much of their offshore area appears to be on the same trend line as some of the other major discoveries in the area.  While it may be some time before gas in the Eastern-med can find a viable market, either through LNG or pipeline connections, between demand growth in Egypt and diversification away from Russian gas in Western Europe, the longer term picture looks quite healthy.

For Lebanon, with its nascent oil and gas agencies and regulatory capability, the journey will be a long one, but potentially transformational.  For a heavily indebted economy still struggling with rebuilding its economy after the recent troubles, their entry into natural gas next week could prove a turning point.

Crude Oil – One more time? …. OPEC, GOM Hurricanes, and Exports soar!

Saudi Arabia and OPEC are lobbying Russia to stay on board with their efforts to raise oil prices amidst signals that Moscow wants to end its participation. The efforts culminate Thursday with a meeting between Saudi King Salman and Russian President Vladimir Putin in the first-ever visit by a Saudi monarch to Moscow.

Tropical Storm Nate has formed off of Nicaragua, threatening to shut oil and gas rigs in the Gulf of Mexico. The storm’s forecast track has it scraping the eastern edge of Mexico’s Yucatan Peninsula before becoming a hurricane south of Louisiana on Sunday. Nate could come ashore anywhere from Louisiana to Florida’s Panhandle.

Sources: National Weather Service

In August, Hurricane Harvey temporarily shut down about 25 percent of oil and natural gas production in the Gulf and as much as 20 percent of U.S. refining capacity. A few weeks later, Hurricane Irma devastated Florida. Offshore rigs and platforms in the Gulf of Mexico account for about 17 percent of US crude oil output and 4 percent of gas production. About 45 percent of petroleum refining capacity and 51 percent of gas processing is along the coastline.Offshore operators are minimizing staff in the eastern Gulf and taking steps to secure facilities. BP Plc is evacuating non-essential staff from its Thunder Horse and Na Kika crude and gas production platforms.

Energy markets are expected to handle increase supplies of US shale oil next year as demand is rising and deals between Russia and Saudi Arabia have helped stabilize crude prices around US$50WTI.

Saudi Arabia and Russia, the world’s biggest producers of crude, helped secured a deal between OPEC and 10 rival suppliers to cut output until the end of March 2018. Both have indicated the need for increase US shale oil supplies as global demand for crude was on the rise. The market should absorb the US shale oil incremental supply with little impact to current prices. We have seen a steady reduction in inventories and as we enter the fourth quarter with supply less than demand: inventories should continue declining around the world.

US crude exports are soaring, approaching a level that is almost as much as Kuwait sends abroad. US crude exports surged to a record 1.984 million barrels a day last week– an increase of close to 500,000 barrels a day from the previous week’s level and a rate more than twice as high as it was a month ago. The primary reason for the rapid increase is US crude price. Last month WTI, the US benchmark, fell to as much as US$6.80 below Brent, the global benchmark.

Weekly Recaps

Oil Drilling Activity

Total US rig count (including the Gulf of Mexico) stands at 936, down 4 this week with rigs targeting oil down 2. The horizontal rig count stands at 792, down 2.

The total number of active onshore rigs decreased to 913 (down 3).  When compared to a November 2014 figure of 1,876 active rigs, the current level remains 50% below the 2014 high.

Across the three major unconventional oil basins, the oil rig total was flat at 495, with Permian down 2 and Eagle Ford up 2 and Williston flat.

Crude Oil Price

Brent, the global benchmark for oil, fell US$1.57 to US$55.97 a barrel, reflecting a loss of 2.73% on the week.

WTI crude decreased US$1.94 to US$49.50 a barrel, down 3.77% 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 88.1% of their operating capacity last week. This is 145,000 barrels per day less than the previous week’s average.

US gasoline demand over past four weeks was at 9.5 million, up 1.3% from a year ago. Total commercial petroleum inventories decreased 6.1 million barrels last week.

On the supply side, EIA data indicated that total domestic crude production increased 14,000 barrels to 9.561 million barrels a day. The Lower 48 crude production now stands at 9.064 million barrels per day, flat this week.

US crude imports averaged 7.2 million barrels per day last week, a decrease of 213,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 7.1 million barrels per day, 10.7% below the same four-week period last year.

Crude oil inventories decreased 6.0 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) increased 1.6 million barrels; total storage is 62.5 million barrels (~70% utilization).

Authors

October 6, 2017

Nick Fulford

Global Head of Gas and LNG - nick.fulford@gaffney-cline.com
October 6, 2017

P. Kevin Galvin

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

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