We have a Problem!

We have a Problem!

28th April 2017

Drillers added 15 onshore rigs (9 targeting oil), increasing activity for a 15th week in a row, bringing the total to 849. This extends the recovery into a 12th month as operators continue to boost spending on new onshore production. Onshore rigs now stand 458 rigs, ~120% above the same period a year ago, with Eagle Ford adding ~20% over the past 4 weeks.

US Gasoline Demand Raising Concerns

Lackluster gasoline demand is once again raising concerns that the oil market won't be able to escape the blues. Demand for U.S. gasoline has recovered since January, but remains below 2016 levels. Weak consumption will cause gasoline stockpiles to build and eventually result in weaker crude oil demand. 

US crude prices fell below $49 a barrel, reflecting demand concerns as refiners emerge from the winter maintenance season and prepare to turn out more gasoline. US crude looked like it was on a path to trade around $50 a barrel after sinking to about $47 last month. However, it now appears that any disappointing news could send the commodity tumbling towards $45.

Part of the problem is a tough comparison with extraordinarily low gasoline prices last year. The national average gasoline price on Monday was nearly 28 cents above last year's level. Last year may have been a little bit of the anomaly; gasoline was so cheap that people drove a little bit more almost without rhyme or reason.

In a troubling sign, US gasoline station operators have reported that their sales are down 1.5 to 2 percent this year. When you hear retailers telling you that their demand is down; it’s just a matter of time before the weakness hits crude demand. This trend may carry through for the balance of 2017 causing crude stockpiles to remain high.

Crude oil prices are down about 8 percent this year as rising US production caps rallies fueled by short-selling and expectations that the Organization of the Petroleum Exporting Countries and other producer nations will extend a six-month deal to constrain output.

Sources: EIA Weekly Update and GCA analysis

African Gas is on its way!

Two significant gas events coincided around ten years ago.  One was the beginnings of the US shale gas boom, with the first signs that George Mitchell’s efforts to free up shale gas in the Barnett were showing commercial success.  The other was a realization that there were substantial, low cost natural gas resources off the coast of East Africa.  2016 marked the arrival of that shale gas on the global LNG market, but gas has yet to flow from East Africa.

Last year, Gaffney, Cline & Associates was invited to work with the US Department of Energy, the US Energy Association and Power Africa to put that right.  This week, GCA was a part of a major launch event based on a handbook that GCA helped to prepare, Understanding Gas and LNG Options for Africa, in Maputo, Mozambique.  The event was opened by H. Dean Pittman, US Ambassador to Mozambique and was attended by a number of senior African stakeholders from Mozambique, Tanzania, Ghana, Nigeria, South Africa and Senegal.  It will be followed by other similar events during 2017.

The forum was designed to share best practice, and focused on how to create a financeable platform for the gas value chain, with an emphasis on gas and LNG-to-power, seen as the major domestic demand opportunity.  In these days of a slack international LNG market, the opportunity to harness the enormous demand for power could be the key to unlock resource development.  With the planned gasification of many African economies, both gas producing nations and those who will import gas, a home grown solution to underpin upstream and infrastructure investments appears more appealing than ever.

Moves to coordinate regional energy requirements, and to link power markets, such as the Southern African Power Pool (SAPP) with gas flow and transmission were seen as critical to the creation of a sustainable demand solution.  Further cooperation around the West African Gas Pipeline, new developments in Ghana and similar initiatives to link the development of Senegalese and Mauritanian resources with regional power and LNG export plans were also highlighted.

As well as releasing new gas resources, opportunities to tackle the problem of gas flaring in Nigeria, which has also been the focus of significant GCA activity in April, are likely to develop more momentum, alongside the deregulation of the Nigerian power sector.  Perhaps African gas demand, and the related power generation opportunities, will soon start to unlock the wider LNG export opportunity for Africa and make its way onto the world stage.  GCA would certainly be pleased to play a part in that process, given its long association with its African clients in many parts of the continent.

Weekly Recaps

Oil Drilling Activity

Total US rig count (including the Gulf of Mexico) stands at 870, up 13 last week, with rigs targeting oil up 9. The horizontal rig count increased to 730, up 12 last week.

The total number of active onshore rigs increased to 849.  When compared to a November 2014 figure of 1,876 active rigs, the current level remains 55% below the 2014 high.

Across the three major unconventional oil basins, the oil rig total increased to 462 (up 7 last week), with Permian up 2, Eagle Ford up 5 and Williston flat.

Crude Oil Price

Brent, the global benchmark for oil, declined $1.35 to US$51.68 a barrel, reflecting a loss of 2.55% on the week.

WTI crude dropped $1.29 to US$49.40 a barrel, down 2.54% on the week. 

US Crude Oil Supply and Demand

Sources: EIA Weekly Update and GCA analysis

US crude oil refinery inputs averaged 17.3 million barrels per day, with refineries at 94.1% of their operating capacity last week. This is 347,000 barrels per day more than the previous week’s average.

US gasoline demand over past four weeks was at 9.2 million, down 1.8% from a year ago. Total commercial petroleum inventories increased by 6.6 million barrels last week.

On the supply side, EIA data indicated that total domestic crude production increased 13,000 barrels to 9.265 million barrels a day. The Lower 48 crude production now stands at 8.742 million barrels per day, up 20,000 this week.

US crude imports averaged about 8.9 million barrels per day last week, a increase of 1.1 million barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 8.1 million barrels per day, 4.9% above the same four-week period last year.

Crude oil inventories decreased 3.6 million barrels from the previous week and persist at historically high levels. The crude stored at Cushing (the main price point for WTI) was down 1.2 million barrels; total storage is 67.4 million barrels (~75% utilization).

Authors

We have a Problem!

Nick Fulford

Global Head of Gas and LNG - nick.fulford@gaffney-cline.com
We have a Problem!

P Kevin Galvin

Principal Advisor, Field Development Planning - kevin.galvin@gaffney-cline.com
We have a Problem!

Bob George

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

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