Oil Market Déjà Vu

Oil Market Déjà Vu

5th May 2017

Drillers added 4 onshore rigs, increasing activity for a 16th week in a row and bringing the total to 853. Onshore rigs now stand 465 rigs above the same period a year ago. 

Gasoline Glut Accelerates

The market is banking on US drivers to help reduce excess oil stocks but gasoline demand may in practice be lower than is being anticipated by refinery runs. Refiners are gobbling up over 970,000 more barrels of oil per day than they did at this time last year, according to the EIA and US oil stockpiles dropped by 0.9 million barrels last week. 

That should have been great news for oil markets.  However, the barrels of gasoline that went into storage tanks instead of vehicles last week are giving the market the jitters and oil markets tumbled this week after the EIA reported another unexpected increase in gasoline stockpiles. The potential resulting gasoline glut has weighed on investors sentiment because it could means US refiners slowing down their purchases of crude in the near future.

Something like this happened also early last year. Refiners ramped up gasoline output and more fuel flooded into the US from overseas. Even though demand hit a record high, drivers couldn’t soak it all up. Refining margins tumbled, and some fuel makers reduced their buying of crude.

Sources: EIA Weekly Update and GCA analysis

Natural Gas – Every gas customer also has a vote…

How much should consumers have to pay for their natural gas?  It seems a simple enough question, but governments all over the world continue to struggle with it.  Perhaps it’s because behind each gas customer is a voter, and governments always want to please the electorate… 

As gas prices become ever more connected through global markets, the consequences of government intervention become more unpredictable, and so do the risks.  Taking action to prioritise domestic markets and pricing over exports can have huge consequences for investors and lenders, and yet governments continue to succumb to temptation.  A recent analysis of global LNG projects that have experienced major disruption showed that, measured by volume, the consequences of changing allocations between domestic and export markets was the most common cause. 

In Egypt, gasification of all the major cities over the last decade, combined with a number of other factors, led to a decision to prioritise subsidized domestic markets over LNG exports, which ceased completely (though limited LNG exports have now been approved).  Echoes of this debacle resurfaced in Australia last week, where a panic over domestic supply and the spectre of high prices led to a government proposal to place constraints over LNG exports.  Investors like Shell who have major LNG projects in both countries will be hoping this isn’t a case of déjà vu all over again !  Meanwhile traditional exporters like Trinidad and Oman are suffering the same dilemma…insufficient gas to meet both domestic and export requirements, and hard policy decisions about whether, and how, to intervene.

Even in the UK, the pioneer for unregulated wholesale gas markets in Europe, the question of whether to expose domestic customers to the ebb and flow of global wholesale prices has reared its head once again.  After twenty years of competitive pricing, next month’s general election has tempted the ruling Conservative party into proposing a cap on domestic energy bills.  Of course, the recent price hike in gas and electricity prices had little to do with whether customers were fairly treated by their energy provider, and much more to do with the fall in the value of the pound after Brexit.  Somehow it’s easier to blame it on suppliers.

While high taxation of gasoline and diesel is commonplace, domestic energy bills appear to be too well correlated with voter behaviors to receive similar treatment.  For investors and lenders on major gas projects, who accept commercial risks that can span several successive governments, these temptations to artificially skew markets and pricing are a perennial concern.  Too much tinkering can quickly try their patience, and capital tends to flow to where the risks are lowest.

As many emerging export countries, such as Mozambique, Senegal and Mauritania, develop their own approach for managing the compromise between exports and domestic gas, these global experiences are valuable learning opportunities.   When each gas customer is also a voter, these pricing and market compromises can matter a great deal for the government of the day….but also those eyeing up investments in the gas sector.

Weekly Recaps

Oil Drilling Activity

Total US rig count (including the Gulf of Mexico) stands at 877, up 7 last week, with rigs targeting oil up 6. The horizontal rig count increased to 734, up 4 last week.

The total number of active onshore rigs increased to 853.  When compared to a November 2014 figure of 1,876 active rigs, the current level remains 54% below the 2014 high.

Across the three major unconventional oil basins, the oil rig total increased to 467 (up 5 last week), with Permian up 7, Eagle Ford and Williston down 1.

Crude Oil Price

Brent, the global benchmark for oil, declined $3.26 to US$48.42 a barrel, reflecting a loss of 6.31% on the week.

WTI crude dropped $3.96 to US$45.44 a barrel, down 8.02% on the week. 

US Crude Oil Supply and Demand

Sources: EIA Weekly Update and GCA analysis

US crude oil refinery inputs averaged 17.2 million barrels per day, with refineries at 93.3% of their operating capacity last week. This is 108,000 barrels per day less than the previous week’s average.

US gasoline demand over past four weeks was at 9.2 million, down 2.7% from a year ago. Total commercial petroleum inventories increased by 1.3 million barrels last week.

On the supply side, EIA data indicated that total domestic crude production increased 28,000 barrels to 9.293 million barrels a day. The Lower 48 crude production now stands at 8.767 million barrels per day, up 25,000 this week.

US crude imports averaged about 8.3 million barrels per day last week, a decrease of 0.648 million barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 8.2 million barrels per day, 4.9% above the same four-week period last year.

Crude oil inventories decreased 0.9 million barrels from the previous week and persist at historically high levels. The crude stored at Cushing (the main price point for WTI) was down 0.7 million barrels; total storage is 66.7 million barrels (~74% utilization).

Authors

Oil Market Déjà Vu

Nick Fulford

Global Head of Gas and LNG - nick.fulford@gaffney-cline.com
Oil Market Déjà Vu

P Kevin Galvin

Principal Advisor, Field Development Planning - kevin.galvin@gaffney-cline.com

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