18th April 2019
Oil Drilling Activity
Onshore US drilling activity decreased by 10 with a total active count of 986 rigs; those targeting oil down 8, with the total at 825. Across the three major unconventional oil basins, the oil rig count decreased by 1, with Permian down 1, Williston and Eagle Ford flat.
Total US domestic crude output was at 12.1 million barrels per day, a decrease of 100,000 barrels per day. This week’s domestic crude oil production estimate incorporates a re-benchmarking that lowered estimated volumes by less than 50,000 barrels per day, which is about 0.4% of this week’s estimated production total.
US crude inventories decreased by 1.4 million barrels last week, compared to an expected rise of 1.8 million barrels, following three consecutive weeks of increases.
The number of Americans who applied for unemployment benefits in mid-April fell for the fifth week in a row to a nearly 50-year low of 192,000; the economy has a sturdy foundation on which it can continue to grow.
Carbon Management – Providing stability in a responsible energy transition
This week, the heads of the French and English central banks, Francois Villeroy de Galhau and Mark Carney, along with Frank Elderson, chair of a network of 34 central banks and supervisors, issued an open letter on the impacts of climate change on the global economy. This included damage to infrastructure and private property, negative health impacts, a decrease in productivity and destruction of wealth.
However, they go on to say that “while urgent action is desirable, an abrupt transition could also have an impact on financial stability and the economy more broadly.” Nowhere in the global economy is this truer than in oil and gas. The solution they propose is that companies “integrate the monitoring of climate-related financial risks into day-to-day supervisory work, financial stability monitoring and board risk management,” and “conduct scenario analysis to assess their strategic resilience to climate change policy.”
This is entirely aligned with the mission of Carbon Management practice, which aims to help governments, energy companies, and the financial community understand and solve energy transition issues related to oil and gas resources, assets and investments - in a systematic, replicable and impartial manner. The objective is to provide a framework and a classification system to identify which activities will be economic in the energy transition and what solutions are available over time to reduce carbon-intensity, thereby securing business models and asset valuations, and enabling sustainable investment and lending decisions to be made with confidence. Carbon Management therefore provides stability to the energy transition.
While some activists in developed countries call for investors to turn-away from oil and gas, and “leave it in the ground,” this open letter starts to identify the many unintended consequences on society that such a sudden or disorderly move would cause. Instead we have to work together to find a responsible energy transition, and Carbon Management in oil and gas is a key enabler.
Natural Gas – Where’s the dry gas?
Many of the headlines in the last few months have cited the huge amounts of associated natural gas being produced alongside tight oil, especially in the Permian basin. With State data showing record amounts of gas being flared, and Waha hub prices at record low levels, one could easily surmise that US Natural Gas prices, and the LNG global prices that are now increasingly linked to Henry Hub are destined for a “lower for longer” scenario.
Certainly, the forward strip suggests that we are stuck in a $3 or less market for the foreseeable future. However, the reality of the North American gas market remains as it has always been – someone needs to be drilling and producing non-associated dry gas, and selling it at a price that will generate a sustainable investment. With the reversal in basis that came with the massive acceleration of gas resource development in the Northeast, another fact that is sometimes overlooked, is that even with today’s Henry Hub price of about $2.56/MMBtu, prices realized for dry gas producers in the Marcellus are some 25c less (today), not including gathering costs, and other expenses.
Another trend that suggests dry gas production may be under some pressure is the reduction in well inventories, with many of the DUCs (drilled uncompleted wells) from 2017 and 2018 now moved to producing status. With drilling applications also down in the Northeast, there appear to be some indications that current natural gas prices are short of what they need to be to encourage new investment.
On the demand side, the next 12 months will see additional LNG plant completions, as well as industrial growth borne out of the sustained period of low cost energy and increased domestic production that the shale gas boom has brought to the US. In fact, the EIA is predicting a rise in US gas production this year of 7.6 bcfd, a very material addition, especially coming on the back of the 10 bcfd increase seen in 2018.
There is no doubt that the Permian volumes, especially with the benefit of new gas pipelines to capture gas currently being flared, will be a big part of the production increases. However, that marginal therm of gas to balance supply and demand will always come from a non-associated well, and it remains to be seen how much of it can be profitably produced with gas prices where they are today. Of course, these days, many more eyes are being trained on the US gas market and prevailing prices. Be in no doubt, there is no shortage of aspirational LNG exporters around the world ready to step in, if the US boom shows signs of faltering!
Crude Oil – US oil rig Y-o-Y growth hits 0.5%.... returning to 2018 level
As global supply stocks lessen, the crude market is becoming ever more sensitive to a sudden or unexpected disruption. Oil prices have significantly moved up since the start of the year, supported by ongoing OPEC-led supply cuts, escalating fighting in Libya and US sanctions on Iran and Venezuela.
International benchmark Brent crude and US West Texas Intermediate crude have risen by approximately 30% and 40%, respectively, since the start of the year. The primary reason for the run-up: the crude market is tightening. That means a global oversupply of crude is draining, bringing supply and demand into balance and putting the market at risk of flipping into shortage.
Expectations are that Washington will tighten the sanctions screw in line with its ultimate goal of reducing Iran's oil exports to zero. The oil market is currently experiencing a supply deficit and any further reduction in supplies from Libya and Iran would cause the market to overtighten and put upward pressure on crude prices.
EIA forecast that the typical US residential household will consume about 3,080 kilowatt-hours of electricity this summer (June through August), down 5% from the average summer consumption in 2018. If this forecast is realized, it would be the lowest level of electricity consumption per customer since 2014 and the second-lowest level since 2001. EIA expects summer electricity consumption will be lower than in 2017 because of milder projected temperatures.
Crude Oil Price
Brent, the global benchmark for oil, increased $0.38 to $71.88 a barrel, reflecting a gain of 0.53% on the week.
WTI crude fell $0.36 to $63.89 a barrel, down 0.56% on the week.
Total US rig count (including the Gulf of Mexico) stands at 1012, down 10 this week. The horizontal rig count stands at 886, a decrease of 3 this week. US rig activity continues to show constrained growth for 41 of the last 44 weeks and stands just 0.5% above last year’s total. Crude prices are compelling US shale operators to focus on well productivity (i.e., well completion) and operational efficiency over rig growth.
US Crude Oil Supply and Demand
Crude oil inventories decreased 1.4 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) decreased 1.6 million barrels; total stored is 46.0 million barrels (~49% utilization).
US crude oil refinery inputs averaged 16.1 million barrels per day, with refineries at 87.7% of their operating capacity last week. This is 22,000 barrels per day less than the previous week’s average.
US gasoline demand over the past four weeks was at 9.4 million barrels, down 0.2% from a year ago. Total commercial petroleum inventories increased by 2.5 million barrels last week.
US crude net imports averaged 3.591 million barrels per day last week, down by 659,000 barrels per day from the previous week. Over the past four weeks, crude oil net imports averaged 3.884 million barrels per day, 40.1% less than the same four-week period last year.
US crude imports averaged 6.0 million barrels per day last week, down by 607,000 barrels per day from the previous week. Over the past four weeks, crude oil imports averaged 6.5 million barrels per day, 20.6% less than the same four-week period last year.
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