OPEC and Russia Ponder their Next Move; Gas Needs a Bigger Slice

OPEC and Russia Ponder their Next Move; Gas Needs a Bigger Slice

19th May 2017

Drillers added 14 onshore rigs, increasing activity for a 17th week in a row and bringing the total to 878. Onshore rigs now stand at 497 rigs above the same period a year ago.  

US Crude Production Heading Higher

The market is expecting OPEC to extend their production cuts until the end of this year and has hinted at extending the deal into early 2018, citing producers’ resolve to do whatever it takes to rebalance the crude market.

OPEC and Russia may have to do more than extend output cuts to reduce global inventories. At its next meeting on May 25, OPEC is expected to extend its deal to reduce output by over 1 million barrels a day to try to bring global inventories back to their five-year average.

Russia, which is among 11 non-OPEC producers that are also part of the deal, joined with Saudi Arabia to call for the cuts to be extended through March 2018. However, the IEA has warned that extending cuts may not be enough to dent global stockpiles. Even if the cuts are extended into the second half of this year, the IEA indicated that stocks at the end of 2017 may not fall to the five-year average.

Global oil demand is expected to exceed supply in the second quarter, and even more so until the end of the year, assuming that OPEC extends their production cuts. It is starting to become clear that the objective of the OPEC cuts - to tip the market from surplus into deficit - is now slowly beginning to manifest itself.

The IEA has indicated that the market needs time to reflect a significant drawdown of stocks and has expected an implied deficit of 500,000 barrels per day for the first half of 2017 at current supply and demand fundamentals. In its April Oil Market Report, the IEA noted that the market is already very close to balance, although this will become clearer as more data surfaces.

With OPEC’s cuts extended through the end of this year, the supply deficit will deepen in the second half of 2017. However, crude prices could continue to come under pressure as US crude production could surge and hit a 48-year high in 2018.

The EIA’s latest STEO estimates that US crude production will average 9.3 million barrels per day in 2017, 1% higher than their previous estimates. Additionally, it estimates that US crude production will average ~10 million barrels per day in 2018, 0.6% higher than previous estimates.

The rebound in WTI prices to ~US$50 in recent months continues to boost drilling and this has lifted US crude production to levels last seen in mid-2015. 

Sources: EIA Weekly Update and GCA analysis

Natural Gas – Taking a reading…

This week, GCA had two opportunities to take a snapshot of industry views on natural gas, from both sides of the Atlantic.  Through participation in the AIPN International Petroleum Summit in Houston, GCA’s Global Head of Gas and LNG, Nick Fulford, was on a Wednesday panel discussing “The Bright Future of Natural Gas”. 

Nick Fulford - GCA, Global Head of Gas and LNG

Nick asked attendees their expections for how long the LNG oversupply was likely to last, the potential for a global price mechanism, and the impact of the recent trade deal between the US and China. Meanwhile, on Thursday in London, GCA held a seminar on “Value Creation in the Current Market”, discussing similar themes, albeit with a more European focus.

Although both gatherings had a very international flavor, an interesting slant on the two events was to compare and contrast a London perspective as an established center for global gas, and a Houston view, representing the “new kid on the block”, although that definition seems light for a country about to be catapulted to the number three LNG exporter within just a few years (behind Australia and Qatar).

US views, based on decades of a sophisticated wholesale market for gas, tend to focus less on oil indexation and take or pay, both concepts disappeared in North America some 30 years ago.  Whereas, for many of those more comfortable in the “old world” of LNG, these are still core values that are not easily left behind.  This tension is probably felt most strongly in the finance arena, with lenders still seemingly struggling with how to finance projects, which have novel pricing associated with them and less credit worthy offtakers.

However, at the AIPN event, about half the delegates were confident that some kind of global pricing mechanism would emerge for gas, the majority voting for a 2025 timeframe for its development, also the timeframe most people thought would be needed to bring supply and demand into balance.

Interestingly, in spite of the press hype given to the US trade accord with China, featuring US LNG exports as #4 of a 10-point plan, few believed this would make much material difference to the volumes of gas sold to China. Perhaps this is because those in the industry know that a significant number of cargoes have already made their way there without a diplomatic deal to support them.

In London and Houston, thoughts around gas are in step when it comes to the types of gas project coming in the near term – smaller, quicker to market, and often aimed at emerging power requirements.

Overall, though, one thing is clear from both the Houston and London events:  Gas is going to take a larger slice of investment than ever before, and as it comes out of the shadow of oil, new pricing mechanisms, new contract structures, and new ways of financing are on their way.

Weekly Recaps

Oil Drilling Activity

Total US rig count (including the Gulf of Mexico) stands at 901, up 16 last week, with rigs targeting oil up 8. The horizontal rig count increased to 759, up 17 last week.

The total number of active onshore rigs increased to 878.  When compared to a November 2014 figure of 1,876 active rigs, the current level remains 53% below the 2014 high.

Across the three major unconventional oil basins, the oil rig total increased to 482 (up 6 last week), with Permian up 4, Eagle Ford up 2 and Williston flat.

Crude Oil Price

Brent, the global benchmark for oil, increased $2.24 to US$53.18 a barrel, reflecting a gain of 4.40% on the week.

WTI crude rose $2.08 to US$49.92 a barrel, up 4.35% on the week.

US Crude Oil Supply and Demand

Sources: EIA Weekly Update and GCA analysis

US crude oil refinery inputs averaged 17.1 million barrels per day, with refineries at 93.4% of their operating capacity last week. This is 363,000 barrels per day more than the previous week’s average.

US gasoline demand over past four weeks was at 9.3 million, down 2.6% from a year ago. Total commercial petroleum inventories increased by 4.3 million barrels last week.

On the supply side, EIA data indicated that total domestic crude production decreased 9,000 barrels to 9.305 million barrels a day. The Lower 48 crude production now stands at 8.795 million barrels per day, up 12,000 this week.

US crude imports averaged 8.6 million barrels per day last week, an increase of 970,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 8.3 million barrels per day, 9.3% above the same four-week period last year.

Crude oil inventories decreased 1.8 million barrels from the previous week and persist at historically high levels. The crude stored at Cushing (the main price point for WTI) was flat; total storage is 66.3 million barrels (~73.7% utilization).

Authors

OPEC and Russia Ponder their Next Move; Gas Needs a Bigger Slice

Nick Fulford

Global Head of Gas and LNG - nick.fulford@gaffney-cline.com
OPEC and Russia Ponder their Next Move; Gas Needs a Bigger Slice

P Kevin Galvin

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

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