13th January 2017
Cold weather/maintenance supporting gas pricing
The onshore rig count decreased 7 this week bringing the total down to 634, but still ten above the 624 a year ago. After ten straight weeks of adding onshore rigs, operators could be taking a breather and hoping that the OPEC production cut agreement will sustain and perhaps grow further recent price rises, providing better returns tomorrow. With a WTI price perhaps above US$55 being required to provide the cash flow for additional incremental rigs above today’s level, a key indicator to watch will be operators’ 2017 capital budget forecasts.
Meanwhile, the EIA raised their short term (Q1 17) gas forecast to US$3.65 amid continued volatility in the NYMEX strip.
Gas recovery or flash in the pan?
Throughout December and early January global gas prices have risen quite significantly. Asian spot prices are up more than US$3 above mid 2016, with February trading currently around US$9.70/MMBtu, NBP is back up to over 55p/therm (US$6.71/MMBtu) and Henry Hub is up at US$3.39/MMBtu, with the EIA’s latest forecast for Q1 up 29 cents, to US$3.65/MMBtu from December’s estimate in spite of a slightly lower demand outlook.
Examining HH differentials and export markets for US gas, Asia remains the most profitable destination for US LNG, but even a hop across the Atlantic, especially with low cost spot chartered ships, has the potential to generate positive cashflow for US exporters.
Moving to the fundamentals, with a number of shut-ins, maintenance periods and temporary shipping aberrations easing off, and the exceptionally cold weather in Europe and parts of the US giving way to milder forecasts, the longer term support for gas prices doesn’t look quite so rosy.
With more US and Australian LNG due to come onto the market in 2017, and some of the maintenance and supply issues resolved, it may be that Q1 17 will prove to be a temporal aberration, followed by a return to a largely oversupplied market and lower prices.
Looking out over the next couple of years, many of the emerging gas and LNG importing nations who may be questioning their faith in low cost gas supplies to secure low cost power and economic growth right now, should expect to see a return to a more affordable supply of fuel. The increasing importance of overseas markets for US exporters can also be seen reflected in US federal government policy. A major initiative to create a more informed and sustainable LNG export and import/gas-to-power sector in Africa has been pursued by the US Dept of Energy over the last several months, culminating in a recently published LNG Handbook for African governments which is now available on their website.
Gaffney, Cline & Associates was privileged to be part of the small group invited to contribute to this major publication, and will be continuing to support the initiative to encourage sustainable gas policies, regulatory oversight, and appropriate risk allocation between all stakeholders; including host government and their citizens, oil and gas companies, and gas buyers and lenders.
As part of the Energy and National Security Program, the Center for Strategic Studies (CSIS) in Washington, DC will be hosting an event on January 18, 2017 from 1000-1130 AM DC (Eastern) time, based on the LNG Handbook. The webcast can be viewed at: https://www.csis.org/events/power-africas-understanding-natural-gas-lng-options.
Crude Markets Remain Over Supplied
The EIA’s weekly data points to the crude oil market remaining unbalanced. Product inventories as well as crude oil stocks continue to increase. Net imports will have to fall in order for domestic inventory levels to fall and crude refinery input coverage to return to a normalized level of 23 days.
On the bright side, refinery utilization jumped 160 basis points to a more normal level for the season. This follows several weeks were utilization levels were suppressed to reduce inventory levels of products. This also explains the increase in product stocks reflected this week, but makes the rise in crude oil inventories more concerning. Higher refinery input demand yet a surge in imported oil; net imports increased by 1.828 million barrels per day, a very big jump.
Domestic production increased by 176,000 bpd, which at first glance is very significant. The 176,000 bpd weekly increase did not happen over a week, but it’s the difference between the production number of the EIA’s monthly report and the production number of the weekly report for the previous week. The total monthly increase in domestic production for the month ended with this weekly report was 150,000 barrels per day.
U.S. crude production averaged an estimated 8.9 million barrels per day in 2016 and is forecast to average 9.0 million barrels per day in 2017. Rising tight oil production, which results from increases in drilling activity, rig efficiency, and well-level productivity, significantly contributes to forecast U.S. production growth.
Oil Drilling Activity
The total number of active onshore rigs decreased to 634. When compared to a November 2014 figure of 1,876 active rigs, the current level is 66% below the 2014 high.
Across the three major unconventional oil basins, the oil rig total remained at 340 (flat last week), with Permian up 1, Eagle Ford flat and Williston down 1.
Total U.S. rig count (including the Gulf of Mexico) stands at 659, down 6 last week, with rigs targeting oil down 7. The horizontal rig count increased to 537, up 3 last week.
Brent, the global benchmark for oil, was down $1.64 to US$55.56 a barrel, reflecting a loss of 2.87% on the week.
WTI crude fell $1.65 to US$52.50 a barrel, down 3.14% on the week.
U.S. Supply and Demand
Sources: EIA Weekly Update and GCA analysis
U.S. crude oil refinery inputs averaged 17.1 million barrels per day, with refineries at 93.6% of their operating capacity last week. This is 418,000 barrels per day more than the previous week’s average.
U.S. gasoline demand over past four weeks was at 8.9 million, up 0.7% from a year ago. Total commercial petroleum inventories increased by 13.4 million barrels last week.
On the supply side, EIA data indicated that total domestic crude production increased 176,000 barrels to 8.946 million barrels a day. The Lower 48 crude production now stands at 8.431 million barrels per day, an increase of 190,000 barrels per day last week.
U.S. crude imports averaged about 9.1 million barrels per day last week, an increase of 1.9 million barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 8.2 million barrels per day, 6.3% above the same four-week period last year.
Crude oil inventories increased 4.1 million barrels from the previous week and remain at historically high levels. The crude stored at Cushing (the main price point for WTI) was down 0.6 million barrels; total storage is 66.9 million barrels (~75% utilization).
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