September 29, 2017

September 29, 2017

29th September 2017

Oil Drilling Activity

Drillers increased onshore rigs by 3, total stands at 916. Across the three major unconventional oil basins, the oil rig total remained flat at 495, rig growth remains weak in the major oil basins reflecting crude prices hovering around US$50 WTI. Rigs targeting oil increased by 6 reversing a six week declining trend. Recent demand numbers and the jump above US$50WTI on market tightness offers some light on the horizon for rig growth.

Sources: EIA Weekly Update and GCA analysis

Natural Gas – Jera throws down a challenge

Australia’s Curtis Island LNG exporters will be breathing a sigh of relief after dodging a bullet (see last week’s bulletin) by cutting a deal with government to take steps to alleviate the gas shortages in Eastern Australia, for which they were largely blamed.   Australian Prime Minister Malcolm Turnbull announced the agreement on Wednesday, which has been some six months in the making.

But things don’t stay still in the LNG industry these days and, just as one door opens, another closes.  It was the turn of Yuji Kakimi, head of Jera, the largest LNG buyer in the world, to shake up LNG exporters with his warning on the need for greater contract flexibility for LNG sellers to fully capitalize on the market opportunities available to them.  In an interview that was well publicized, he celebrated the US entry into the global LNG sector and the positive benefits, including price and destination flexibility, that he perceived had come from that.  With the advent of plentiful shale gas resources, he articulated in very straightforward terms that these days, if buyers didn’t like the terms that new projects were offering for LNG “We can just ask America to make some more”.  A strong indication, if any were needed, that US Gulf Coast LNG is likely to set a price ceiling for greenfield LNG for some time to come (adjusted for freight, of course).

Jera (a JV formed to procure LNG for Tokyo Electric and Chubu Electric) has also been one of the main protagonists in the moves to remove destination clauses from exiting LNG contracts, thereby freeing up LNG buyers in Japan (and potentially Korea and China as well).  Mr. Kakimi has already taken steps to beef-up Jera’s trading capability in Singapore, with the addition of EdF’s coal and freight business, and he is clearly intent on capturing some of that trading margin that has for many years typically been the preserve of the suppliers.

There is an adage that change happens slowly…until it happens quickly, and in some ways the LNG industry, after years of relatively slow change especially in Asia, may be about to find that out.

Crude Oil – “lower for …. perhaps not quite so long now?”

Crude prices rallied this week after crude stockpiles unexpectedly dropped with US refiners coming back online following Hurricane Harvey. The effects of that storm, as well as Hurricane Irma which struck Florida earlier this month, may dampen demand in the short term, potentially increasing gasoline inventories while crude stocks could be drawn down due to renewed US refining activity.

Oil prices are rising because demand has been increasing. The market players have consistently underestimated demand for oil and its refined products. The International Energy Administration increased its global oil demand forecast for 2017 for the third time in three months. It receives much less publicity, but this week's petroleum supply report from the US EIA showed motor gasoline product supplied rose 0.6% on a year-on-year basis last week.  Product supplied is the closest indicator to actual US gasoline consumption, and after running at or slightly below zero growth for much of 2017 that indicator has turned solidly positive in recent weeks.

The IEA confirms that growth outside the US is rising and the EIA confirms that US demand for petroleum products is rising.  While demand was weak for much of the first half of 2017, June hit the highest demand level since 2007.  Preliminary weekly indicates that July and August were also big months and, if this demand increases last more than a month or two, oil prices will logically continue to rise.

On the supply side, the middle of this year has seen US shale producers dial back drilling activity, but they are sitting on a backlog of uncompleted wells, which could be turned to production if prices remain above the US$50WTI price. This is also likely to be bolstered by the big increase in hedging over the past month, locking in through 2018 the recent price jump.

Despite the prospect of this potential production inflow, if US demand remains a bullish factor and OPEC continues to restrain their production, with the apparent tightness in the market signaled by the jump on the back of the Kurdistan referendum and threat that 500,000 barrels per day could come off the market, the possibility that oil price can push US$60 (with Brent almost reaching that point this week) looks brighter than it did not so many months ago. 

Sources: EIA Weekly Update and GCA analysis

Weekly Recaps

Oil Drilling Activity

Total US rig count (including the Gulf of Mexico) stands at 940, up 5 this week with rigs targeting oil up 6. The horizontal rig count stands at 794, up 4.

The total number of active onshore rigs increased to 915(up 3).  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 was flat at 495, with Permian down 1 and Eagle Ford flat and Williston up 1.

Crude Oil Price

Brent, the global benchmark for oil, rose US$0.99 to US$57.54 a barrel, reflecting a gain of 1.75% on the week.

WTI crude increased US$0.99 to US$51.44 a barrel, up 1.96% on the week.

US Crude Oil Supply and Demand

Sources: EIA Weekly Update and GCA analysis

US crude oil refinery inputs averaged 16.2 million barrels per day, with refineries at 88.6% of their operating capacity last week. This is 1.0 million barrels per day more than the previous week’s average.

US gasoline demand over past four weeks was at 9.4 million, up 0.6% from a year ago. Total commercial petroleum inventories decreased 5.1 million barrels last week.

On the supply side, EIA data indicated that total domestic crude production increased 37,000 barrels to 9.547 million barrels a day. The Lower 48 crude production now stands at 9.064 million barrels per day, up 16,000 this week.

US crude imports averaged 7.4 million barrels per day last week, an increase of 59,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 7.1 million barrels per day, 9.3% below the same four-week period last year.

Crude oil inventories decreased 1.8 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) increased 1.1 million barrels; total storage is 60.9 million barrels (~67% utilization).

Authors

September 29, 2017

Nick Fulford

Global Head of Gas and LNG - nick.fulford@gaffney-cline.com
September 29, 2017

P. Kevin Galvin

Principal Advisor - Sr. Manager Facilities/Cost Engineering Advisor - kevin.galvin@gaffney-cline.com
September 29, 2017

Bob George

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

Signup to receive our latest articles

We're here to help