Rigs Up, Oil Down while Poland Imports US LNG

Rigs Up, Oil Down while Poland Imports US LNG

9th June 2017

Drillers added 13 onshore rigs, increasing activity for a 21th week in a row and bringing the total to 902. Onshore rigs now stand 514 rigs above the same period a year ago, 413 of these targeting oil; in stark contrast, offshore rigs stand 1 rig above the same period last year.

However, despite the OPEC and alliance producers agreeing to extend their cuts into 2018, the recovery in oil prices has stalled and prices today are no higher than they were a year ago. Drilling activity and WTI prices each exhibit a pronounced cycle and are closely correlated; experience indicates the oil rig count is likely to peak in June or July unless the price expectations for WTI crude starts rising again above US$50 per barrel. 

Sources: EIA Weekly Update and GCA Analysis

Crude – Abundant Supplies Remain

Oil prices plunged in North American trading on Wednesday, and continued down on Thursday, after the EIA’s data showed that US crude supplies rose for the first time in nine weeks, underlining uncertainties over a global supply glut.

The EIA’s data in its weekly report indicated that crude oil inventories rose by 3.3 million barrels in the week ended June 2. Market analysts expected a crude-stock decline, with the American Petroleum Institute late Tuesday reporting a supply-drop of about 4.6 million barrels. The EIA’s report also showed that gasoline inventories increased by 3.3 million barrels, disappointing market expectations.

Last month, OPEC and some non-OPEC producers extended a deal to cut 1.8 million barrels per day in supply until March 2018. Market concerns that the ongoing rebound in US shale production could negate efforts by major producers to rebalance global oil supply remain in focus.

Adding to concern about supply outstripping demand, on Wednesday Royal Dutch Shell lifted force majeure on exports of Nigeria's Forcados crude, bringing all the country's oil grades fully online for the first time in 16 months. The market has also come under pressure from news of rising output from Libya, which together with Nigeria is exempt from the production cut made by OPEC and non-OPEC partners.

Natural Gas – Let Battle Commence

When the US State Department issues a congratulatory statement following the announcement of a natural gas deal, you know it’s no ordinary trade.  Such was the case this week when the first LNG cargo from Louisiana arrived in Poland, a country that has been striving for decades to escape from Russian gas dominance.  While 4 Bcf of gas is not going to move many needles in terms of Central European gas, the delivery is symbolic.

One of the more interesting dynamics that is expected to be played out over the next few years is the likely battle for European markets between the oversupplied LNG segment, and Europe’s traditional source in the form of Russian pipeline deliveries.  Around two thirds of Europe’s gas needs are met by imports, a figure that is rising steadily.  However, even with this backdrop the percentage met by LNG dropped from around 30% in 2011 to only around 20% in 2013, and has not moved a great deal since then.  This means that there is more than enough re-gas capacity to bring in additional LNG and in effect around a quarter of the European gas market, well over 100 Bcm (~4 TCF), could become the focus of a battle between Russia (and of course Norway) and global LNG suppliers.

As the world is starting to realize, natural gas sales add up to big bucks even in these times of lower prices.  At a US$6/MMBtu assumed delivered price, we are talking US$24Bn in revenues for one side or the other in that battle for market share.  For Russia, that amount of foreign currency is enough to move their needle, and you can rest assured the US State Department’s congratulatory statement will have been noted at the highest levels in the Kremlin.

Weekly Recaps

Oil Drilling Activity

Total US rig count (including the Gulf of Mexico) stands at 927, up 12 last week, with rigs targeting oil up 9. The horizontal rig count increased to 780, up 9 last week.

The total number of active onshore rigs increased to 902.  When compared to a November 2014 figure of 1,876 active rigs, the current level remains 52% below the 2014 high.

Across the three major unconventional oil basins, the oil rig total increased to 490 (up 2 last week), with Permian up 4, Eagle Ford down 2 and Williston flat.

Crude Oil Price

Brent, the global benchmark for oil, decreased US$1.77 to US$47.92 a barrel, reflecting a loss of 3.56% on the week.

WTI crude fell US$1.73 to US$45.70 a barrel, down 3.65% 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 94.1% of their operating capacity last week. This is 283,000 barrels per day less than the previous week’s average.

US gasoline demand over past four weeks was at 9.6 million, down 0.7% from a year ago. Total commercial petroleum inventories decreased by 5.2 million barrels last week.

On the supply side, EIA data indicated that total domestic crude production decreased 24,000 barrels to 9.318 million barrels a day. The Lower 48 crude production now stands at 8.815 million barrels per day, down 20,000 this week.

US crude imports averaged 8.3 million barrels per day last week, an increase of 356,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 8.3 million barrels per day, 8.8% above the same four-week period last year.

Crude oil inventories increased 3.3 million barrels from the previous week and persist at historically high levels. The crude stored at Cushing (the main price point for WTI) deceased 1.4 million barrels; total storage is 63.4 million barrels (~70.44% utilization).

Authors

Rigs Up, Oil Down while Poland Imports US LNG

P Kevin Galvin

Principal Advisor, Field Development Planning - kevin.galvin@gaffney-cline.com
Rigs Up, Oil Down while Poland Imports US LNG

Nick Fulford

Global Head of Gas and LNG - nick.fulford@gaffney-cline.com

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