September 15, 2017

September 15, 2017

15th September 2017

Oil Drilling Activity

Drillers deceased onshore rigs by 8, total stands at 915. Across the three major unconventional oil basins, the oil rig total decreased to 495 (down 5), rig growth remains weak in the major oil basins with crude prices at US$50 WTI. Crude prices could rise on expectations of the market rebalancing; however, the extent of any price rally will be determined by the US shale oil rig response. As prices rise, US onshore drillers should respond to fill the supply gap.

Sources: EIA Weekly Update and GCA analysis

Natural Gas 

Our recent blogs as well as global media coverage have been heavily focused on Harvey, Irma and even the milder Aileen on the other side of the Atlantic.  All have wreaked havoc and disrupted the normal course of life and business.  In less literal terms, gathering storms clouds are also very much a feature of the LNG industry these days.

It’s become clear that LNG suppliers and buyers who insist on following the conventions of the past 40 plus years, are having limited success in structuring end to end projects, especially hamstrung by the changes in LNG price, quickly becoming more and more commoditised.

At the start of 2017, GCA formulated a view that there were 5 pricing trends that were expected to drive gas and LNG over the next 15-20 years.  These were the impact of LNG exports, demand from electrification of developing economies, delinking from oil, and its potential to crowd out domestic gas developments in some countries, and finally the effect of buyer power on LNG contract terms.

Nine months on, the pace of change has surprised many, and recent trends point towards entities willing to make firm volume commitments, but without the risks associated with oil indexation, particularly those in the growing LNG trader/aggregator segment.  For example,

  • The ExxonMobil deal to cut the oil indexed slope of LNG supplied under long term contract to Petronet, but with volumes anticipated to increase by 1 MMtpa
  • Angola LNG selling volumes to both RWE Supply & Trading and Vitol
  • Gunvor taking volumes from the Equatorial Guinea deep-water floating LNG project and also offering financing for state-owned Sonagas’ stake in the $2 billion scheme, building further on Gunvor’s LNG long term supply portfolio with first volumes from Yamal expected later this year
  • Pakistan and Bangladesh also expect to feature in the news in coming months regarding new infrastructure for LNG imports as well as supply contracts, with Trafigura looking to build on their first project with a second

The days where LNG buyers took on both volume and (oil) price risk have already gone by the wayside in the major markets of North America and Europe, and it looks as though the rest of the world are following.

Ultimately, increased LNG trading should bring greater liquidity, flexibility and efficiency to the market, and in the long run the increased competition will be in the interest of both sellers and end users of LNG.  The four main emerging LNG traders (Trafigura, Vitol, Gunvor and Glencore) are expected to deliver around 25 million tonnes of LNG in 2017, more than 3 times as much as just 2 years ago in 2015.  Whilst LNG trading margins have fallen from a few years ago, those involved appear to be compensating by taking bigger positions. 

It looks increasingly likely that the “traders” or those with a trading mind set are most likely to capture value in these rapidly evolving markets.   Whatever emerges, just like the weather, disruptive storms are fast becoming the new norm in the LNG world.

Crude Oil – Recovery from Hurricane Harvey continues

US crude stockpiles rose sharply last week and gasoline inventories fell the most on record as refineries continued their recovery from Hurricane Harvey. Crude inventories rose 5.9 million barrels, compared with analysts' expectations for an increase of 3.2 million barrels. The EIA also said refinery utilization rates fell by 2 percentage points to 77.7 percent, the lowest rate since 2008, as crude runs fell 394,000 barrels per day. Countering the crude inventory increase was gasoline stocks which fell 8.4 million barrels, the largest draw on record.

The IEA revised upwards its estimates of global oil demand growth in 2017, this time by 100,000 barrels per day to 1.6 million barrels per day. The forecast combines the impact of very strong demand numbers in June from countries in the Organization for Economic Cooperation and Development and the effect of Hurricanes Harvey and Irma on US energy demand in this year’s third quarter. With these revisions, IEA’s estimate of global oil demand is now 97.7 million barrels per day for 2017. Its forecast for 2018 is 99.1 million barrels per day. Global oil demand rose 1.2 million barrels per day year-over-year in this year’s first quarter and accelerated to 2.3 million barrels per day in the second quarter because of a combination of very strong consumption by OECD countries and solid non-OECD demand. US oil demand was extremely strong in this year’s second quarter, supported by healthy economic growth, high employment, increasing traffic, freight transportation, and industrial activity. In addition, relatively low oil prices for more than 2 years have supported growth.

With the IEA growing more confident that shifting fundamentals are enabling demand to catch up with supply, the data in the IEA report strongly indicates that a rebalancing of the market is underway. Hurricane Harvey has reduced oil product stocks and had the opposite effect on crude holdings. It will take several weeks before its full impact on stocks is completely understood.

Hurricane Harvey is estimated to have shut in roughly 200,000 barrels per day of crude oil production in August and 300,000 barrels per day in September. While lost production from the Gulf of Mexico was small compared with previous hurricanes, onshore Texas output was more severely impacted. Forecast non-OPEC supply growth is essentially unchanged from last month’s IEA data, as a higher outlook for Canada and the North Sea offset weaker US and Brazilian estimates. IEA’s supply growth is forecast to average 700,000 barrels per day in 2017 and nearly 1.5 million barrels per day in 2018.

OECD crude stocks could move below the five-year average, depending on how quick the US energy sector recovers from their two recent hurricanes. Crude prices could rise on expectations of the market rebalancing, however, the extent of any price rally will be determined by the US shale oil rig response.

Sources: EIA Weekly Update and GCA analysis

Weekly Recaps

Oil Drilling Activity

Total US rig count (including the Gulf of Mexico) stands at 936, down 8 this week with rigs targeting oil down 7. The horizontal rig count stands at 795, up 2.

The total number of active onshore rigs deceased to 915(down 8).  When compared to a November 2014 figure of 1,876 active rigs, the current level remains 50% below the 2014 high.

Across the three major unconventional oil basins, the oil rig total decreased to 495, with Permian and Eagle Ford down 2 and Williston down 1.

Crude Oil Price

Brent, the global benchmark for oil, rose US$0.89 to US$55.61 a barrel, reflecting a gain of 1.63% on the week.

WTI crude increased US$0.77 to US$49.81 a barrel, up 1.57% on the week.

US Crude Oil Supply and Demand

Sources: EIA Weekly Update and GCA analysis

US crude oil refinery inputs averaged 14.1 million barrels per day, with refineries at 77.7% of their operating capacity last week. This is 394,000 barrels per day less than the previous week’s average.

US gasoline demand over past four weeks was at 9.6 million, up 0.2% from a year ago. Total commercial petroleum inventories increased 1.7 million barrels last week.

On the supply side, EIA data indicated that total domestic crude production increased 572,000 barrels to 9.35 million barrels a day. The Lower 48 crude production now stands at 8.87 million barrels per day, up 582,000 this week.

US crude imports averaged 6.5 million barrels per day last week, a decrease of 603,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 7.6 million barrels per day, 7.4% below the same four-week period last year.

Crude oil inventories increased 5.9 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) increased 1.1million barrels; total storage is 59.1 million barrels (~66% utilization).

Authors

September 15, 2017

Nick Fulford

Global Head of Gas and LNG - nick.fulford@gaffney-cline.com
September 15, 2017

P. Kevin Galvin

Principal Advisor - Sr. Manager Facilities/Cost Engineering Advisor - kevin.galvin@gaffney-cline.com
September 15, 2017

Ryan Pereira

Principal Commercial Manager, Global Gas and LNG - ryan.pereira@gaffney-cline.com
September 15, 2017

Bob George

Global General Manager - bob.george@gaffney-cline.com

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