3rd March 2017
The onshore rig count continued to rise, albeit just barely, up 1 this week and posting its 17th increase in 18 weeks. This brings the total to 734, approximately 60% above the 463 a year ago. US drillers have added a total of 293 oil rigs in 37 of the past 40 weeks, averaging a weekly gain of ~7.3 rigs.
Natural Gas – has winter fizzled out already?
The global gas market was propped up by three factors this winter season, providing some much needed relief from the low prices of mid 2016: the LNG outage at Gorgon, the cold European winter, and a number of French nuclear reactors being taken offline while safety checks were carried out.
The daffodils are coming out in Europe, and North America is basking in record breaking late February temperatures. March and April gas prices are heading rapidly downward.
By Northeast city gate prices falling by over a half after the March bid week, US prices fell significantly in response to this anticipated lower demand. Through the increasing global linkages established by LNG flowing between centres of demand, we can expect to see these falls reflected elsewhere.
Already UK prices for April delivery fell from a high of 51.5p/therm on February 2nd to 44.2p/therm by the last day of the month. With Wheatstone and Ichthys slated to add to Australian LNG exports, and 2017 export volumes expected to be up 63% from 2016, downward pressure on prices in Asia can also be expected.
Natural gas looks to be very much the fuel of choice for the foreseeable future, especially for developing economies with a thirst for affordable power. Meanwhile, between slack demand and a burgeoning 2017 supply, bargain basement stray cargoes of LNG may soon be a familiar sight in both the Atlantic and Pacific oceans looking for a buyer. Gas sellers will of course be hoping for an early spring to turn into an early summer, bringing the air conditioning load to the rescue; although this year’s weather has been anything but predictable so far where natural gas prices are concerned.
Crude Oil – US Fundamentals Impacts OPEC Strategy?
US crude oil production is rising with the increased shale drilling, as well as a rising offshore output from the Gulf of Mexico. Production averaged almost 9 million barrels per day in the four weeks to February 24. Production has been on an upward trend since hitting a cyclical low of 8.5 million barrels per day in August. Weekly production numbers are estimates based on a combination of hard data and modelling so there is some uncertainty around them. However, the weekly estimate provides a good indicator for trends.
Sources: EIA Weekly Update and GCA analysis
The most recent EIA monthly statistics show output declining by 91,000 bpd in December, mostly due to exceptionally cold weather in North Dakota. With this weather-driven decline, which should be temporary, production was still 216,000 barrels per day above the cyclical low reported in September by the EIA.
The most recent weekly estimates suggest production increased again during January and February. The rise in production is consistent with the increase in the number of rigs drilling for oil since May 2016.
Rising output explains the increase in US crude exports and the continued high level of domestic crude stocks. US crude exports have averaged ~900,000 barrels per day during the last four weeks, up from ~500,000 barrels per day in September. Exploration and production companies report shale breakeven prices ~$50 per barrel and may continue to add rigs provided prices remain ~$55 per barrel.
The reappearance of shale production poses a direct challenge to OPEC's attempt to rebalance the global oil market while protecting its market share. In the short term, OPEC may downplay the renewed growth in shale output and emphasize its own compliance with announced production cuts.
In the end, OPEC will be faced with a familiar dilemma: sacrifice market share to protect prices or defend market share and allow prices to find their own level.
Saudi Arabia has resumed its periodic role as swing producer in the oil market, shouldering the largest share of output cuts. So long as the shale revival remains small-scale, the benefit from higher prices outweighs the cost. But if US output continues to increase at the current rate, OPEC may be forced to reassess its production cuts and start protecting its market share.
Oil Drilling Activity
The total number of active onshore rigs increased to 734. When compared to a November 2014 figure of 1,876 active rigs, the current level is 60% below the 2014 high.
Across the three major unconventional oil basins, the oil rig total increased to 410 (up 9 last week), with Permian up 2, Eagle Ford up 5, and Williston up 2.
Total US rig count (including the Gulf of Mexico) stands at 756, up 2 last week, with rigs targeting oil up 7. The horizontal rig count increased to 633, up 9 last week.
Crude Oil Price
Brent, the global benchmark for oil, was down $0.51 to US$55.63 a barrel, reflecting a loss of 0.91% on the week.
WTI crude fell $0.88 to US$53.19 a barrel, down 1.63% on the week.
US Crude Oil Supply and Demand
Sources: EIA Weekly Update and GCA analysis
US crude oil refinery inputs averaged 15.7 million barrels per day, with refineries at 86% of their operating capacity last week. This is 393,000 barrels per day more than the previous week’s average.
US gasoline demand over past four weeks was at 8.7 million, down 6.2% from a year ago. Total commercial petroleum inventories decreased by 11 million barrels last week.
On the supply side, EIA data indicated that total domestic crude production increased 31,000 barrels to 9.032 million barrels a day. The Lower 48 crude production now stands at 8.515 million barrels per day, up 32,000 this week.
US crude imports averaged about 7.6 million barrels per day last week, an increase of 0.3 million barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 8.2 million barrels per day, 5.1% above the same four-week period last year.
Crude oil inventories increased 1.5 million barrels from the previous week and remain at historically high levels. The crude stored at Cushing (the main price point for WTI) was up 0.5 million barrels; total storage is 63.5 million barrels (~70.6% utilization).
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