28th November 2016
The onshore rig count increased 5 this week, bringing the total to 570 compared with 714 a year ago (down 20%), but up ~51% since the low in late May 2016. Rigs targeting oil increased 3, standing at 474, up 49 % (158) since May.
In contrast to oil directed drilling activity, the number of rigs targeting gas in the U.S. was down to 92 in late September and not nearly enough to keep natural gas production growing. As a result, total production in late September had fallen to ~ 80 Bcfd, down 2 Bcfd from a year earlier.
As would be expected, this reflected U.S. natural gas prices which had stayed below US$2 much of the early part of the year. However, they have now mounted something of a comeback, with Henry Hub (HH) prices having doubled from their early March lows, breaking through US$3 for the first time in more than 18 months. Shrinking supply and surging demand have helped the fundamentals; however, natural gas prices above US$3 could change the competitive situation in the power generation sector. Additionally, the supply side also warrants some careful examination. Although gas drilling activity remains muted, a return of the oil drilling activity lifted by higher WTI prices is picking up the pace and with the expected higher oil production, there will come an increase in associated gas volumes.
The Permian basin, where oil drillers have been piling in the past 6 months, is not only a prolific oil play; it is also a major gas producer, with output ~ 7 Bcfd in September. Permian gas production is about 40% of the Marcellus’s output and appears to be headed higher in the months to come as new wells are completed and brought online. Additionally, gas production volumes will pick up in the Bakken and Eagle Ford plays once oil drilling activity growth returns.
Sources: EIA’s Data and GCA analysis
Gas at $2 HH is probably not sustainable; but $3 HH gas and $60 WTI could be enough to sustain U.S. production growth. That supply growth will underpin an emergent LNG export industry that some are expecting to reach around 7 Bcfd of LNG export capacity by 2020 and also fill around 8 Bcfd of new pipelines carrying gas into Mexico.
Over the next few weeks we will address how Henry Hub prices and international LNG markets are likely to interact, and whether or not an increasing US gas price will put a dent in these projected export volumes. However, even with these increases in Henry Hub, the full cycle costs of US exports remain under pressure, given the price likely to be realized by US LNG in export markets.
Oil Drilling Activity
The total number of active onshore rigs increased to 570. When compared to a November 2014 figure of 1,876 active rigs, the current level is approximately 70% below the 2014 high.
Across the three major unconventional oil basins, the oil rig total increased to 293 (down 3 last week), with Eagle Ford flat, Permian and Williston each down 1.
Total U.S. rig count (including the Gulf of Mexico) stands at 593, up 5 last week, with rigs targeting oil up 3. The horizontal rig count increased to 475, up 5 last week.
Brent, the global benchmark for oil, was up $1.99 to US$48.31 a barrel, reflecting a gain of 4.30% on the week.
WTI crude rose $1.96 to US$47.12 a barrel, up 4.34% on the week.
U.S. Supply and Demand
Sources: EIA Weekly Update and GCA analysis
U.S. crude oil refinery inputs averaged 16.4 million barrels per day, with refineries at 90.8% of their operating capacity last week. This is 271,000 barrels per day more than the previous week’s average.
U.S. gasoline demand over past four weeks was at 9.2 million, down 0.6% from a year ago. Total commercial petroleum inventories decreased by 0.1 million barrels last week.
On the supply side, EIA data indicated that total domestic crude production increased 9,000 barrels to 8.690 million barrels a day. The Lower 48 crude production now stands at 8.179 million barrels per day.
U.S. crude imports averaged about 7.6 million barrels per day last week, an decrease of 0.845 million barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 8.1 million barrels per day, ~13.3% above the same four-week period last year.
Crude oil inventories decreased 1.3 million barrels from the previous week and remain at historically high levels. The crude stored at Cushing (the main price point for WTI) was down 0.1 million barrels; total storage is 59.1 million barrels (~65% utilization).
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