Who gets trumped?

Who gets trumped?

7th July 2017

Onshore Rig Update, the Key Driver for US Oil Production

Drillers increased onshore rigs by 12 this week (includes 4 Alaska and 5 gas target rigs), bringing the total to 927. Onshore rigs now stand 510 above the same period a year ago, 412 of which are targeting oil.  However, despite the increase overall, rigs in the three major unconventional oil basins declined with the Permian down 1, and the Eagle Ford and Williston flat. These three major basins contribute around 50% of US oil production and 90% of US unconventional oil production.  

Natural Gas – Who holds the Trump Card and who will get Trumped?

While the infamous “Sheikhs vs Shale” battle for political supremacy in the oil markets has been ongoing since 2014, 2017 is emerging as the year in which LNG has become the new geopolitical battleground.

Over the past couple of months, the USA re-iterated support to supply LNG to China.  In reality this changed little on a practical level, but instead signaled an increased intent to engage in supply discussions (“talks about talks”).  What is sometimes overlooked by buyers though, is that the US Department of Energy has the right to rescind export arrangements if these are deemed no longer to be in the national interest.  While the effect on domestic gas pricing currently appears an unlikely basis on which to argue a suspension, as tensions in Asia increase it is possible that other geopolitical features could creep into the “National Interest” argument.  If this did happen it could offer Canada the opportunity to steal a march on their neighbours by offering diversity and security of supply without that same potential for national interest factors, as this is absent from Canadian export permits.

Another competitive threat to US supplies emerged this week when the Qataris signaled their intent to increase production capacity to 100 MMtpa (from a nominal capacity of 77MTPA today).  Qatari plans, based on very low cost gas from the North Field, would compete for customers with planned capacity from the US, where the focus is on cost reductions for liquefaction plant.  Whether or not the US LNG exports can continue with their current momentum depends on the success of some of these cost saving innovations, such as smaller scale trains, and a greater reliance on standardization and factory built units assembled on site.

Qatar has enjoyed a long period as number one in global LNG exports, and this latest announcement appears to signal an attempt to stay there even though Australia is likely to take that position away next year.  However, this could be a relatively brief reign with Australian politics around continued LNG exports challenged as a result of lack of domestic gas availability and high prices.

Meanwhile, Russia continues its push into China in an attempt to diversify its gas exports from Europe, and this too will affect demand for LNG, especially from Australia.  In last week’s bulletin we discussed some of the complex dynamics around the Russia-China proposed pipelines.

In a busy week for the LNG sector, there have also been developments in Japan following a long awaited report from the Japan Fair Trade Commission (“JFTC”) about LNG trading.   A summary of this report is available in English here.

In a blow to LNG sellers and lenders, the JFTC has highlighted certain features of long term LNG Sale and Purchase Agreements (SPAs) which may breach the Act on Prohibition of Private Monopolization and Maintenance of Fair Trade 1947 (the “AMA”), and which are likely to be subject to increased scrutiny.   Interestingly, the JFTC has also noted that this does not just apply to the drafting of clauses in new contracts, but that LNG sellers should also revisit their existing LNG SPAs to ensure that the arrangements do not violate the AMA.

Specifically, the JFTC has noted that any destination clause / restriction on diversion in an FOB contract is highly likely to violate the AMA:

  • A seller withholding consent to a buyer’s diversion request (without a compelling justification) under an ex-ship arrangement (where the seller is responsible for shipping)

  • Inclusion of a profit-sharing clause in an FOB contract;

  • Inclusion of an “unreasonable” profit sharing clause in a DES contract especially where the profit share is likely to prevent diversion; and

  • Inclusion of a take or pay clause in an LNG SPA where the seller has market power over the buyer and has already received a sufficient return on its initial investment and the buyer is at a disadvantage in the negotiations.

In the fight for global LNG supremacy it will be interesting to see which of the USA, Qatar, or Australia will be holding the Trump card, and who will get Trumped by other competing suppliers from Africa or potentially Canada or Russia, or even by the increasingly powerful buyers in the form of China and other emerging importers.

Crude – Stocks plunge 6.3 million barrels!

Prices posted gains after EIA weekly data indicated a significant drawdown of US crude stockpile, however by Friday prices were heading lower. Crude levels in storage fell nearly a million barrels per day; almost three times market expectation and could be a sign that cutbacks by the world’s biggest exporters are beginning to drain excess crude. Stockpiles have been holding near record highs world-wide despite OPEC production cuts. 

US crude oil supply fell 6.3 million barrels last week which comes as the rise in US rig count had paused for one week and US oil production growth shows signs of slowing. Easing supply-side strains supports crude prices, however, should crude oil prices rally, US drillers could certainly accelerate rig additions.

For the near term it appears that the market is focused on US rigs and production and far less on excess crude in storage. Look for crude to remain below WTI $50 per barrel until the market has clear evidence that demand continues to outpace crude supply.

Weekly Recaps

Oil Drilling Activity

Total US rig count (including the Gulf of Mexico) stands at 952, up 12 and rigs targeting oil up 7. The horizontal rig count increased to 804, adding 12.

The total number of active onshore rigs increased to 927.  When compared to a November 2014 figure of 1,876 active rigs, the current level remains 51% below the 2014 high.

Across the three major unconventional oil basins, the oil rig total decreased to 497 (down 1 last week), with Permian down 1, Eagle Ford and Williston flat.

Crude Oil Price

Brent, the global benchmark for oil, decreased US$0.51 to US$47.22 a barrel, reflecting a loss of 1.07% on the week.

WTI crude dropped US$0.67 to US$44.67 a barrel, down 1.48% on the week.

US Crude Oil Supply and Demand

Sources: EIA Weekly Update and GCA analysis

US crude oil refinery inputs averaged 17.1 million barrels per day, with refineries at 93.6% of their operating capacity last week. This is 251,000 barrels per day more than the previous week’s average.

US gasoline demand over past four weeks was at 9.6 million, down 1.8% from a year ago. Total commercial petroleum inventories decreased by 13.4 million barrels last week.

On the supply side, EIA data indicated that total domestic crude production increased 88,000 barrels to 9.34 million barrels a day. The Lower 48 crude production now stands at 8.9 million barrels per day, up 105,000 this week.

US crude imports averaged 7.7 million barrels per day last week, a decrease of 274,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged 7.9 million barrels per day, 1.0% below the same four-week period last year.

Crude oil inventories decreased 6.3 million barrels from the previous week and persist at historically high levels. The crude stored at Cushing (the main price point for WTI) deceased 1.5 million barrels; total storage is 59.3 million barrels (~66% utilization).

Authors

Who gets trumped?

Nick Fulford

Global Head of Gas and LNG - nick.fulford@gaffney-cline.com
Who gets trumped?

Ryan Pereira

Principal Commercial Manager, Global Gas and LNG - ryan.pereira@gaffney-cline.com
Who gets trumped?

P Kevin Galvin

Principal Advisor, Field Development Planning - kevin.galvin@gaffney-cline.com

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