September 28, 2018

September 28, 2018

28th September 2018

Oil Drilling Activity

Onshore US drilling activity increased by 1 with a total active count of 1029 rigs; those targeting oil decreased 3, with the total at 863. Across the three major unconventional oil basins, the oil rig count deceased 2 and stands at 608, with Permian down 2, Eagle Ford and Williston flat.  

Sources: EIA Weekly Update and GCA Analysis

EIA reported last week’s total US domestic crude output at 11.1 million barrels a day, raising above the record high reached five weeks ago.  Higher oil prices have led to expanded capital expenditure on E&P in the first half of 2018 with EIA estimates of an additional US$6-7 Billion spend as well as a large increase in M&A activity.  All this investment has global ramifications, as much of the increased crude volumes are for overseas markets, placing US third after Russia and Canada in non-OPEC export volumes.  Tariff wars with China could mean some of these barrels have to find new customers. 

Global crude oil supply is still delicately poised, with IEA reporting increased exports from Libya and Iraq balancing export declines from Venezuela and Iran.

The US Federal Reserve raised interest rates on Wednesday and left intact its plans to steadily tighten monetary policy, as it forecast that the US economy would enjoy at least three more years of growth. The Fed sees the economy growing at a faster-than-expected 3.1% this year and continuing to expand moderately for at least three more years, amid sustained low unemployment and stable inflation near its 2% target.

Natural Gas – I can hear the train a comin’

If the state of the global LNG industry were measured by the number of column inches that are written about it each week, then anyone would judge that it was in rude health right now.

Although the last land-based, large-scale, LNG project to secure FID was the Yamal LNG facility, back in 2013, if announcements and rumor are anything to judge by, this year could be a bumper harvest for a whole new crop.  Possibly encouraged by the headwinds that are buffeting the US LNG sector, owing to the trade dispute with China and the tariffs imposed last Monday (see last week’s Monitor), a number of new projects are inexorably getting closer to reality.

In Qatar, the 3-train FEED study, being done by Chiyoda in support of a new tranche of exports from the huge North Field, has been extended to a fourth train, bringing total proposed output to 110 million tonnes per annum (MTPA).  The economies of scale, central location  and low cost gas resource are likely to make this some of the most competitive gas globally, undoubtedly cheaper than US gas to Asia, with or without a tariff.

Canada is flexing its muscles too, again benefitting from a better trade relationship with China.  LNG exports are seen as part of the Canadian federal government strategy of diversifying its oil and gas sales away from decades of dependence on its neighbor to the South.  Shell’s LNG Canada project seemed to be flirting with FID earlier this year, following which various steps have been taken to improve competitiveness and the fiscal terms that govern it.  Speculation is rife that the next few days could see an announcement; but then, starting with Petronas and their conditional FID back in 2015 that eventually petered out in summer 2017, the history of Canadian LNG exports has been a chequered one.  Whether it was the improvement in competitiveness (versus the US) brought on by Chinese tariffs, or simply the result of years of hard work, if the project does move ahead, it will bring another new and important entrant into the LNG space. 

Meanwhile, things are heating up in Mozambique, with two potential projects both nearing critical stages of approval, and another emerging project is moving on quickly in Senegal/Mauritania.

With the industry’s largest proponent, Qatar, doubling down on LNG, the prospect of Canada joining the club, and three major African projects closing in, it does indeed seem a proverbial freight train is coming down the track.  Many LNG customers will no doubt be able to hear it a comin’.

Crude Oil – Traffic on US highways has stopped growing

The volume of traffic on US highways has stopped growing, and with it gasoline consumption, as rising prices curb driving behavior. Traffic volumes in July were 0.3% lower than a year earlier, after seasonal adjustments, according to the Federal Highway Administration. Traffic growth has been negative in two months so far this year, the first readings below zero since the start of 2014.

Volumes were up by less than 0.3% in the three months from May to July compared with the same period a year earlier, down from annual growth of 2-3% throughout 2015 and 2016.

There has been a correlation between traffic volumes and the cyclical rise and fall in oil and gasoline prices since at least the early 1990s. The decline in oil prices between the middle of 2014 and early 2016 provided a stimulus to vehicle use.

As oil prices recovered over the last 30 months, that stimulus has faded and traffic growth has slowed to a crawl. The average cost of gasoline purchased by US motorists surged by more than 55% between February 2016 and September 2018.

If oil prices continue to rise over the next 12 months, as many traders and hedge funds expect, traffic volumes and gasoline consumption are both likely to turn progressively negative. The flattening of US gasoline consumption resembles the run up to oil price peaks in 2007/08, 2011/12 and the first half of 2014.

The US is scheduled to impose targeted crude sanctions against OPEC's third-largest oil producer in just five weeks' time. And, the sanctions are widely expected to have an immediate impact on Iran's oil exports, although estimates of exactly how much of the country's oil will disappear from November 4 vary.

Some energy market analysts expect around 500,000 barrels per day to disappear once US sanctions against Iran come into force, while others have warned as much as 2 million barrels per day could come offline over the coming months.

At its 2018 peak earlier this summer, Iran exported around 2.7 million barrels per day of crude oil — that's the equivalent to almost 3% of daily global consumption.

Weekly Recap

Drilling Activity

Source: BHGE Rotary Rig Count

Total US rig count (including the Gulf of Mexico) stands at 1054, up1 this week. The horizontal rig count stands at 922, up 3 this week. US rig activity has shown no growth for 17 of the last 19 weeks and is up 12% above last year’s total.

Compared to a November 2014 figure of 1,876 active rigs, the current level is just above 50% of the 2014 high.

Crude Oil Price

Brent, the global benchmark for oil, increased US$2.57 to US$82.25 a barrel, reflecting a gain of 3.23% on the week.

WTI crude rose US$1.11 to US$72.15 a barrel, up 1.56% on the week.

US Crude Oil Supply and Demand

Sources: EIA Weekly Update and GCA Analysis

US crude oil refinery inputs averaged 16.5 million barrels per day, with refineries at 90.4% of their operating capacity last week. This is 901,000 barrels per day less than the previous week’s average.

US gasoline demand over the past four weeks was at 9.5 million barrels, up 0.4% from a year ago. Total commercial petroleum inventories increased by 4.5 million barrels last week.

US crude imports averaged 7.8 million barrels per day last week, down by 222,000 barrels per day from the previous week. Over the past four weeks, crude oil imports averaged 7.8 million barrels per day, 9.8% more than the same four-week period last year.

US crude exports averaged 2.64 million barrels per day last week, an increase of 273,000 barrels per day from the previous week. Over the last four weeks, crude oil exports averaged 2.086 million barrels per day, 149% more than the same four-week period last year.

Crude oil inventories increased 1.9 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) increased 0.5 million barrels; total stored is 22.8 million barrels (~25% utilization).

    

Authors

September 28, 2018

P. Kevin Galvin

Principal Advisor - Sr. Manager Facilities/Cost Engineering Advisor - kevin.galvin@gaffney-cline.com
September 28, 2018

Nick Fulford

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

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