10th May 2019
Oil Drilling Activity
Onshore US drilling activity was down 2 with a total active count of 964 rigs; those targeting oil down 2, with the total at 805. Across the three major unconventional oil basins, the oil rig count decreased by 3, with Permian down 2, Williston down 1 and Eagle Ford flat.
Total US domestic crude output decreased by 100,000 barrels per day; below the record level of 12.3 million barrels per day reached last week. US crude inventories showed a significant decrease of 4 million barrels, compared to an expected decrease of 2.2 million barrels.
Between global warming, electric vehicles, and a worldwide crackdown on carbon, the future looks treacherous for Big Oil; however, most of the Majors are announcing sizeable carbon mitigation investment plans in response.
Carbon Management – Time is running out to future-proof your business
The interest from boardrooms in Sustainability and Environment, Social and Governance (ESG) has greatly intensified over the last couple of years. I was therefore delighted to moderate a panel this week that discussed the trends shaping these aspects in the Oilfield Service (OFS) industry. My intention was to find out if Corporate Sustainability/ESG is viewed as a buzzword or fad, a marketing tool, a common-practice necessity, or is it a strategy employed by some to deliver greater financial performance?
We heard from sustainability leaders within oil and gas industry service companies of some great examples of new products and services, and the emergence of these issues as part of a cultural shift in how to do business – eliminating waste, increasing efficiency and reducing cost. It was shown that it is an imperative that #standardization is achieved with reporting of related ESG information for it to be truly an effective tool that ensures transparency and increases client understanding and shareholder confidence.
We also heard that carbon and climate related risks are distinctive and need to be managed differently to other ESG considerations. Whilst some oil and gas companies are starting to take this into account in their procurement decisions, it will be the oilfield services companies of the future that will lead through delivery of responsible supply chains and low carbon footprint offers.
The need to quickly understand carbon and climate related risks intensified this week with the announcement from Moody’s credit rating agency that they are developing a new system to score companies on carbon transition risk. This is of course a natural consequence following the release of the 2017 Financial Stability Board – Task Force on Climate-related Financial Disclosures (FSB-TCFD). Its recommendation to achieve a more complete, consistent, and comparable set of information for market participants, along with increased transparency and appropriate pricing of climate-related risks and opportunities within a 5-year time frame (i.e., by 2022) – is now just 3 years away.
The indications are that this could therefore be a tipping point to implement Carbon Management and ensure your business remains future-proof.
Natural Gas – Tariffs
Developments this week have reminded us that Global Gas and LNG have now graduated to the premier division in terms of international trade, after years of steady, quiet trades between selective nations that never really hit the headlines.
The breakup of the US-China talks without agreement on key areas of trade appears to have thrust us back to the days leading up to the imposition of the 10% import tariff last October, with the potential for LNG to move into the 25% realm in coming weeks, or even days. How much this will impact global flows remains to be seen, but what we do know is that in recent weeks Europe has increasingly been the destination of choice for both Gulf Coast exports, and China bound cargoes from Yamal, most of which have been dropped off at European terminals.
In another move driven by the threat of tariffs, the EU has pledged to double its imports of US LNG, which of course are also linked to moves to address a perceived reliance on Russian gas imports for the continent.
Whatever the decision in tariffs, Europe currently represents the most profitable destination for US gas, and so for the time being commercial advantage, political expedience, and trade negotiations all seem to align for US LNG trades. The interesting part will be to see what happens if and when that is no longer the case.
Crude Oil – Clouded global growth expectations
Oil prices eased, reversing gains, as an escalating trade battle between the United States and China counteracted upward pressure from a surprise decline in US crude inventories. Heightened tensions between the world's two biggest economies have clouded the outlook for global growth, which influences oil demand expectations.
Several crude supply risks developed in early 2019 that contributed to a tighter crude market balance.
April 22, 2019, the United States issued a statement indicating that it would not reissue waivers, which allowed eight countries to continue importing crude oil and condensate from Iran, after they expired on May 2. Declines in Iranian production contribute to overall OPEC production declines.
There was a temporary price stimulus created by out of spec Urals Export blend hurting Central European supply for a few days in late April; fortunately this was quickly resolved and a $3 Brent price bump was removed by April 26.
Venezuela's crude oil production declines drive total OPEC production lower. Recurring power outages in Venezuela may damage oil infrastructure, limiting Venezuela's ability to produce, move, and upgrade crude oil for export. Instability in Venezuela may also limit crude oil exports. Recent events in Venezuela highlight the potential for instability and the inherent uncertainty.
In Libya, any escalation in conflict could result in damage to oil export infrastructure or a security environment where oil fields are shut-in. Either situation could lead to lower crude oil exports, reducing global supply.
Petroleum production declines in Iran and Venezuela are expected to be partially offset by production increases by other OPEC members in the short term plus renewed growth in US production into 2020.
On balance, the May update by the EIA forecasts average oil prices 11% higher in 2019 than their April forecast and broadly in line with investment bank estimates polled in April.
Veteran industry watchers (cynics) might say that when all the analysts agree the forward price curve, then it is likely we all are wrong!
Crude Oil Price
Brent, the global benchmark for oil, was unchanged at $70.59 a barrel.
WTI crude fell $0.06 to $61.71 a barrel, down 0.10% on the week.
Total US rig count (including the Gulf of Mexico) stands at 988, down 2 this week. The horizontal rig count stands at 872, down 1 this week. US rig activity continues to show constraint for 44 of the last 47 weeks and is 55 rigs below (-5.3%) last year’s total. Crude prices and desire for better capital discipline are driving 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 4 million barrels from the previous week. The crude stored at Cushing (the main price point for WTI) increased 0.8 million barrels; total stored is 46 million barrels (~51% utilization).
US crude oil refinery inputs averaged 16.4 million barrels per day, with refineries at 88.9% of their operating capacity last week. This is 41,000 barrels per day less than the previous week’s average.
US gasoline demand over the past four weeks was at 9.5 million barrels, up 0.3% from a year ago. Total commercial petroleum inventories decreased by 1.7 million barrels last week.
US crude net imports averaged 4.371 million barrels per day last week, down by 432,000 barrels per day from the previous week. Over the past four weeks, crude oil net imports averaged 4.308 million barrels per day, 28.7% less than the same four-week period last year.
US crude imports averaged 6.7 million barrels per day last week, down by 721,000 barrels per day from the previous week. Over the past four weeks, crude oil imports averaged 6.8 million barrels per day, 15.6% less than the same four-week period last year.
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