7th June 2019
Oil Drilling Activity
Onshore US drilling activity dropped 9 with a total active count of 948 rigs; those targeting oil down 11, with the total at 789. Across the three major unconventional oil basins, the oil rig count decreased by 9, with Permian down 6, Williston down 1 and Eagle Ford down 2.
US domestic crude output increased by 100,000 barrels per day; US crude oil production hit a new record level of 12.4 million barrels per day. US crude inventories increased 6.8 million barrels last week, compared to an expected decrease of 1.7 million barrels.
The WTI crude oil price has dropped more than 20% below its April peak after closing at $51.68/Bbl, slipping below the $53.04 level needed to push oil into another bear market.
Global growth concerns have sent WTI sliding since cresting above $66/Bbl on April 23, exacerbated as a weekly rise of 6.8 MM barrels in domestic crude supplies lifted total stockpiles to their highest level in nearly two years.
Carbon Management - Addressing gas flaring in a developing country
Whilst specific regulations in many developing countries for reduction of gas flaring are not common, countries such as Indonesia, with the world’s 5th largest GHG emissions and the largest contributor of forest-based emissions, are making progress to make sizable reductions.
Last year, satellite data analyzed by the US National Oceanic and Atmospheric Administration (NOAA) showed that Indonesia had achieved an annual reduction of nearly 20%, the 4th largest reduction of flared volumes in the world, moving from the world’s 11th largest gas flaring country in 2016 to the 15th in 2017. This was truly an impressive result.
Indonesia has however had a long history of action on reducing its gas flaring. In 2003, Indonesia became a member of the World Bank Global Gas Flaring Reduction Partnership (GGFR), which has an initiative to support zero routine flaring by 2030. In 2007/8, the World Bank financed $7.7M for three onshore gas flare reduction projects in Indonesia.
In 2016, Indonesia signed the UNFCCC Paris Agreement, and has submitted its first nationally determined contribution based on a national action plan to reduce GHG emissions reduction. In the near term, the land use sector has been a focus for GHG reductions through a moratorium on clearing of primary forests and sustainable forest management. However, the government has implemented a new national energy policy, with an ambition to transform the primary energy supply mix by 2050. A basis for reduction in the energy sector includes additional gas usage (distribution lines and CNG fuel stations). In 2017, the Energy and Mineral Resources Ministry issued a decree regulating the sale of flared gas (with a ceiling price of $0.35/MMBtu) to reduce flaring activities.
Further gas flaring regulations in Indonesia look to be on their way over the next decade to meet its energy and climate policy obligations. Well-designed regulations will make further improvements, and take the country to a flaring intensity – the amount of gas flaring per barrel of oil produced – that is as good, or better than many developed countries, and below the global average of 170 scf/Bbl.
Natural Gas – Chicken and the egg
Around a hundred years ago, the world witnessed a massive shift in the way energy was generated, from the solid fuel days of biomass (wood) and coal, to the golden age of oil. What we are witnessing now is arguably the next shift, as natural gas starts to overshadow its cousin oil, and the world moves to a largely gaseous phase of energy sources (in which Hydrogen is likely to play an increasing role, too).
At each of these junctures, energy pricing has been a challenge as energy consumers are looking at a new fuel that is simply substituting for something they had before. In the early days of oil, especially in the power generation sector, coal was used as a reference price, until oil became a fungible commodity on its own, and indices such as Brent, WTI and JCC started to emerge.
So it has been with gas, with the first 50 years of the international trade in LNG being dominated by oil-indexed contracts. For gaseous trades, things have changed though. First, with the development of a natural gas wholesale market in the US and Canada, a series of indicators such as Henry Hub and AECO emerged. Then, as European markets unbundled, first NBP and then TTF became market indicators that investors, buyers and sellers alike began to have sufficient faith in, that they supported lending arrangements, and became widely adopted in longer term contracts.
In many ways, then, the arrangement reported this week between Apache and Cheniere should come as no surprise. Given how much influence Henry Hub is likely to have on the market-clearing price of LNG globally, and the waning influence of Brent and JCC, by rights moving to international indices for LNG should not make a big difference over many years of gas sales.
It seems likely that many buyers, especially those accustomed to buying HFO or Gasoil for power, may still hanker after some kind of oil relationship in their pricing. However, over the next ten years, the establishment of a global network of LNG hub prices, roughly correlated with the cost of freight between them would appear to be the future destination for gas, following the trends set on a more local level in North America and Europe, and the way oil has developed over the last century or so.
Gas and oil, being competing sources of Btus, will never depart too much from one another, but the Apache deal with Cheniere looks very much like the shape of the future for globally traded LNG.
Crude Oil - Gulf Coast imports fundamentally changed
US Gulf Coast crude oil imports averaged 1.8 million barrels per day in March 2019, the lowest level since March 1986 and significantly lower than the peak of 6.6 million barrels per day in March 2007. Preliminary weekly data indicates that Gulf Coast crude oil imports have averaged about 1.9 million barrels per day through April and May. Falling crude oil imports into the US Gulf Coast so far in 2019 are the result of both recent events and continuing longer-term trends.
Recently, sanctions on Venezuelan imports and heavy refinery maintenance have reduced imports. At the same time, imports to the Gulf Coast have also decreased because of sharp declines in imports from OPEC following an agreement among members to reduce production and because imports are being replaced by increased production of domestic crude.
Together, these trends have fundamentally changed how the Gulf Coast region is supplied with crude oil. In the past five consecutive months, the US Gulf Coast has exported more crude oil than it imported (net exports).
Wells drilled horizontally into tight oil and shale gas formations continue to account for an increasing share of crude in the US. In 2004, horizontal wells accounted for about 15% of US crude production in tight oil formations. By the end of 2018, that percentage had increased to 96%.
Crude Oil Price
Brent, the global benchmark for oil, decreased $2.86 to $61.95 a barrel, reflecting a loss of 4.41% on the week.
WTI crude fell $2.20 to $52.76 a barrel, down 4.00% on the week.
Total US rig count (including the Gulf of Mexico) stands at 975, down 9 this week. The horizontal rig count stands at 855, down 7 this week. US rig activity continues to show constrained growth for 48 of the last 51 weeks and is 85 rigs below (-8%) last year’s total. Crude prices trending lower and US shale operators continue to focus on well productivity (i.e., well completion) and operational efficiency over rig growth. Capital discipline over production growth is the driller’s present behavior.
US Crude Oil Supply and Demand
Crude oil inventories increased 6.8 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) increased 1.7 million barrels; total stored is 50.8 million barrels (~56% utilization).
US crude oil refinery inputs averaged 16.9 million barrels per day, with refineries at 91.8% of their operating capacity last week. This was 171,000 barrels per day more than the previous week’s average.
US gasoline demand over the past four weeks was at 9.4 million barrels, down 1.3% from a year ago. Total commercial petroleum inventories increased by 22.4 million barrels last week.
US crude net imports averaged 4.629 million barrels per day last week, up by 1,084,000 barrels per day from the previous week. Over the past four weeks, crude oil net imports averaged 4.115 million barrels per day, 30% less than the same four-week period last year.
US crude imports averaged 7.9 million barrels per day last week, up by 1,065,000 barrels per day from the previous week. Over the past four weeks, crude oil imports averaged 7.3 million barrels per day, 7.5% less than the same four-week period last year.
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