8th September 2017
Oil Drilling Activity
Drillers hold onshore rigs flat at 923. Across the three major unconventional oil basins, the rig total increased to 500 (up 3). Growth remains weak in the major oil basins with crude prices holding below US$50 WTI. Hurricane Harvey had little to no impact on US rig activities; the US Gulf Coast refinery utilization took the brunt of the storm.
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Natural Gas – The Egyptian renaissance?
GCA this week co-hosted a seminar in London on the outlook for natural gas in Egypt, which has been receiving increasing attention recently amid signs that its gas sector is not only recovering, but delivering higher volumes than expected.
The gas sector has now sustained nearly 10 years of disruption, caused largely by inadequate economic incentives to invest in new developments, a very rapid build out of domestic gas infrastructure and new connections, coupled with significant subsidies. The resulting fall in domestic gas production is well understood in this environment. Many investors in the upstream saw gas diverted from exports into the domestic market, the eventual shut down of the LNG export plants, and a complex array of disputes and credit issues.
However, with the return of more stable governance, significant economic and regulatory reforms, and the passage of Law 196 (which sets the course for a market based gas value chain), a return of investor confidence seems likely.
Analyzing the latest production data and interaction with the key upstream companies active in Egypt, GCA’s current assessment suggests that self-sufficiency in natural gas might be achieved as early as the end of 2017, with a gas surplus arising more rapidly than previously thought. One of the topics of interest at the seminar was the implications this would have for the resumption of significant LNG exports and what impact this might have on the FSRU (Floating Storage Regasification Unit) bound import cargoes already contracted for 2018.
While the timing and scale of the contribution from Zohr (dotted line below) remains to be seen, the country appears well on its way to not only matching but exceeding production volumes which reached a peak around a decade ago.
A number of the demand side perspectives were also set out at the seminar, including the strong drivers behind growth in gas fired power generation, which appears to be a strong source of economically sustainable demand. Longer term, GCA analysis suggests this will absorb any medium term gas surplus with a likely return to LNG imports.
The discussion at the seminar suggested that futher interest in Egypt is indeed growing and any readers interested in hearing more, or seeing the seminar materials, are encouraged to contact GCA directly.
Crude Oil – Hurricane Harvey demand jolt
Oil prices were little changed after a slightly bigger-than expected US crude inventory build and as the restart of US refiners after Hurricane Harvey was being countered by the threat of Hurricane Irma. EIA data indicated that weekly crude stocks increased 4.6 million barrels last week, topping analysts forecast of a 4.0-million-barrel build. Reflecting the impact of Harvey, the EIA data showed that US oil refinery utilization rates slumped 16.9 percentage points to 79.7% last week, the lowest rate since 2010. US Gulf Coast utilization rates dropped to 63.4%, the lowest rates since the EIA began collecting the data in 2010.
The impact of Hurricane Harvey is clearly visible in the EIA data this week. The data reversed a five-month trend of declining US crude inventories and further rises are likely in the weeks ahead as crude supply recovers ahead of refinery restarts. The big drop in refinery utilization almost assures crude stockpiles will continue to rise.
US Gulf Coast facilities are slowly recovering from the devastating effects of Harvey, which had shutdown key infrastructure in the heart of the US oil and natural gas industry. About 3.8 million barrels of daily refining capacity, or 20% of the US total, was shut in, though a number of refineries and petroleum-handling ports are in the process of restarting.
With the official end of “driving season” on Labor Day, crude oil enters a lower demand period of the year when crude inventories begin to build as refinery slow in response to weaker demand. The weaker demand and ample crude supply will continue to exert downward pressure on prices in the near term.
The “lower for longer” and prices below US$50 WTI continues!
Oil Drilling Activity
Total US rig count (including the Gulf of Mexico) stands at 944, up 1 this week with rigs targeting oil down 3. The horizontal rig count stands at 793, down 1.
The total number of active onshore rigs remained at 923. 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 increased to 500, with Permian up 2, Eagle Ford flat and Williston up 1.
Crude Oil Price
Brent, the global benchmark for oil, rose US$2.24 to US$54.72 a barrel, reflecting a gain of 4.27% on the week.
WTI crude increased US$2.19 to US$49.04 a barrel, up 4.67% on the week.
US Crude Oil Supply and Demand
US crude oil refinery inputs averaged 14.5 million barrels per day, with refineries at 79.7% of their operating capacity last week. This is 3.3 million barrels per day less than the previous week’s average.
US gasoline demand over past four weeks was at 9.5 million, down 1.0% from a year ago. Total commercial petroleum inventories increased 7.0 million barrels last week.
On the supply side, EIA data indicated that total domestic crude production decreased 749,000 barrels to 8.781 million barrels a day. The Lower 48 crude production now stands at 8.287 million barrels per day, down 783,000 this week.
US crude imports averaged 7.1 million barrels per day last week, a decrease of 822,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 8.0 million barrels per day, 2.8% below the same four-week period last year.
Crude oil inventories increased 4.6 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) increased 0.8 million barrels; total storage is 58.0 million barrels (~65% utilization).
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