US crude oil stocks posted an increase of 1.3 MMBbl from last week. Gasoline inventories increased 0.5 MMBbl and distillate inventories decreased 2.3 MMBbl. Yesterday afternoon, API reported a crude oil build of 2.5 MMBbl alongside gasoline and distillate builds of 1.7 MMBbl and 1.1 MMBbl, respectively. Analysts were expecting a crude oil build of 2.18 MMBbl. The most important number to keep an eye on, total petroleum inventories, posted a decrease of 3.4 MMBbl. For a summary of the crude oil and petroleum product stock movements, see the table below.
US crude oil production remained unchanged last week, per the EIA. Crude oil imports were up 63 MBbl/d last week, to an average of 7.1 MMBbl/d. Refinery inputs averaged 16.6 MMBbl/d (170 MBbl/d more than last week), leading to a utilization rate of 90.7%. The less than anticipated crude oil build and decline in total petroleum stocks are supporting prices. Prices are also supported by the OPEC-led supply cuts and US sanctions on Venezuelan crude, while the global economic growth concerns and lower demand expectations are pressuring prices. Prompt-month WTI was trading up $0.40/Bbl, at $54.06/Bbl, at the time of writing.
Prices traded in the $53/Bbl to $55/Bbl range last week. It has been a volatile week for prices, as WTI prices reached their two-month highs late last week due to OPEC-led supply cuts and Venezuelan crude sanctions by the US government, only to give up their gains the beginning of this week due to rising supply levels in the US and the continuing concerns about global economic and demand growth.
The OPEC-led supply cuts and Saudi Arabia’s willingness to reduce the supply levels have given some hope to the market in terms of a possible tighter crude market. The bullish sentiment, supported by the cuts, increased due to OPEC production data showing significant reduction in supply levels and Saudi Energy Minister Khalid al-Falih’s comments that the Kingdom will reduce production further in February than it originally had planned. In addition to positive news from OPEC and Saudi Arabia, prices are also getting support from the officially announced US sanctions on Venezuelan crude, which could take out as much as 0.5 MMBbl/d from the market.
Although the recent bullish news from OPEC and Venezuela point to a significant reduction in supply levels, the concerns about a global economic slowdown and demand for crude-related products are still holding a ceiling for prices. The global economic growth was already gloomy due to the ongoing US-China trade dispute, disappointing earnings from industrial firms in US and China, and the Chinese economy posting its weakest growth rate in nearly 30 years. The latest data from the US government showing new orders for US made goods sharply falling in November, increased the concerns about the economic growth and demand slowdown. Also pressuring prices further is the dollar gaining strength as well as the EIA, in its latest monthly report, showing US production increasing significantly. US production has not showed any signs of slowing down and could increase further as the year progresses when the pipeline takeaway capacity issue in the Permian basin is alleviated.
Prices in the near term will be volatile as the market assesses the OPEC supply cuts and waits for a resolution of the trade disputes between the US and China, which is to be decided by the March 2 deadline. If a deal can be reached between the countries to eliminate the currently proposed tariffs on Chinese goods or to prevent any additional tariffs, global economic and demand growth could tick upward, which could support higher prices. However, if a deal cannot be reached and the Chinese economy continues to suffer, along with other emerging economies, sentiment could shift to bearish again regardless of the OPEC and non-OPEC supply cuts pressuring prices further.
Prices in WTI settled the week up $3.46/Bbl as the market tested the highs from early December and closed the week above those levels. Watch for gains on higher volume and open interest to signify long-term expectation of gains beyond current levels. The next area for the rally to take prices up is the mid-November high of $57.96/Bbl. Should bearish news damage traders’ expectations, then the area around $50/Bbl should find support. Due to the dynamic environment surrounding WTI, prices are still subject to high volatility. Currently, the market is sending a breakout bias, but it can still fall subject to negative news (especially around global growth or failure of a significant deal between China and the US on tariffs) that can cause a quick and brutal blow to the recent gains.
Petroleum Stocks Chart
The State Geological Service (SGS) will shortly open a public tender for 12 blocks under a petroleum sharing agreement (PSA) covering a total area of 15,600 sq km onshore Ukraine; Balakliyska, Berestianska, Buzivska, Hrunivska, Ichnyanska, Ivanivska, Okhtyrska, Rusanivska, Sophiivska, Uhnivska, Varvynska, and Zinkivska. The tender terms are expected to be published by mid-February 2019 and interested parties will then have 90 days to submit applications. Winning bidders will be notified by November 2019, with final awards anticipated in Q3 2020. Full details at http://www.goukrainenow.com/ or http://www.geo.gov.ua/
This is the first PSA bid round to be held in the country since 2012. The PSA tender will be performed under the procedure in accordance with the Resolutions and the amended Law of Ukraine No. 1039-XIV On Production Sharing Agreements dated 14 September 1999 (PSA Law). A PSA model contract has not been released, however the bid information document reveals the following details:
Fig 1 – Dnieper-Donets blocks
- A non-refundable bid participation fee of UAH 300,000 (~US$ 10,830).
- An initial exploration period of five years. A minimum financial commitment in the five-year period is a bid requirement (minimum commitments have been stipulated dependent on each block in the range UAH 450 million (~US$ 16 million) to UAH 1 billion (~US$ 36 million)
- During the first exploration period, a minimum work programme must be completed which is to include seismic acquisition and no less than two exploration wells, with an increased commitment of minimum 500 sq km 3D seismic and three exploration wells in the case of the Varvinska, Ichnyanska and Sofiyivska blocks.
- The total PSA duration is 50 years, with an option for a negotiated extension.
- Cost recovery ceiling not exceed 70% of gross production until the contractor has recovered all costs and expenses (this implies the ceiling may be lowered after payout).
- The state’s share of profit petroleum to be at least 11%.
- Effective from 1 January 2018, a the royalty rate for the production of oil or condensate under a PSA is 2% and for natural gas is 1.25%.
- According to the PSA Law, the contractor is required to pay all taxes and charges stipulated by the Tax Code of Ukraine. The general corporate income tax rate is currently 18%.
Fig 2 – North Carpathian blocksInternational oil companies can bid directly for PSAs. In parallel, Ukraine is offering 30 onshore blocks under royalty/tax terms to Ukrainian companies, although foreign investors can participate via a local subsidiary company. The first 10 of these blocks were tendered on 6 December 2018 as Round 1, with bidding scheduled for 6 March 2019, whilst a further seven were released on 29 January for an auction to be held on 29 April 2019; the remaining 13 blocks are expected to follow in the coming months.
There has been plenty of public commentary about the loss of experienced older geoscientists and petroleum engineers simply due to aging.
The graph below, from an internal Exxon study, shows a trend from 2001–2013 their geoscience workforce sharply migrated toward older, retirement ages.
Dan Bilman’s 2014 article in the American Association of Petroleum Geologists (AAPG) Delegates Voice makes a similar point — many geoscientists in the oil & gas industry are at the latter stages of their careers. Based on his numbers, about half the population of the AAPG is 50 years of age or older.
While the Society of Petroleum Engineers (SPE) is bringing young engineers into their organization, their student membership growth is occurring outside the U.S. and Canada, and mainly in South America and the Asia Pacific region.
Growth in North America over the past five years is down for both members and students. The industry’s age demographics appear to be falling short of what the future will demand.
The “Great Crew Change” often evokes a fear that the insight into the practice of oil & gas geology, geophysics, and engineering — the retained knowledge of quirks in field geology and production engineering, ideas held in memory of undrilled “great” prospects, cautionary tales of “how it went wrong” in prospect definition methodology, or access to the wide knowledge network of older peers — will disappear when the older generation heads into permanent retirement.
When they go, the worry is that the hedge against risk these accumulated insights and skillsets the older generation represents, vanishes. Does it really matter, in today’s world of unrelenting focus on unconventional reservoir development?
The qualification of risk in oil & gas has changed from, “Will I make a well (i.e. do I have a large enough sealed trap with sufficient reservoir porosity and permeability)?” to “What kind of well will our engineers deliver to the bottom line?”
The prospect generators among us — the folks who worried about fault trend closures and the Wilcox, Frio/D sand/Muddy, and Rose Run isopachs, and looked for the Holy Grail of a large strat trap — are not in much demand these days. PE and institutional capital funds are backing unconventional reservoir plays because they are far better managed to margins, even if the per well payoffs are sometimes lower. Bankers are far more comfortable lending against engineering risk than against geology risk.
What I’m curious about is this — what, in this unconventional paradigm, is a newer generation of geoscientists confronting as project viability risk events?
Presumably, we all are aware of and account for industry risks as played out in price swing cycles. Some of us feel that there is NOTHING that replaces the terror of sitting in a logging trailer, looking at a down log to see if your target reservoir is at the structural position you picked, whether the resistivity values imply the presence of oil or gas (especially if your mud log has marginal shows), and whether the up-log porosity numbers help calculate out to good water saturation values.
You either make a well — good on ya, mate, beers all around — or you make that dreaded call back to the office or your investor group to tell them the acreage and dry hole money has yielded a loss.
What kind of bone shaking risk moments do the next crop of oil & gas professionals face in this unconventional world? How should their university education prepare them for these?
Maybe in this day and age of production-line factory drilling, the appreciation of risk gets lost in the accounting, the IRR calculations, and managing the margins.
Perhaps the worst case is being so far out of zone while geosteering that you lose your downhole motors and have to sidetrack, orthat your frac fluid does not make up properly and you won’t get enough of your expensive frac job pumped.
Either way, the asset value of a 50,000 acre Wolfcamp block is not significantly impaired by one or two unfortunate events — but if you find your target reservoir target 50 feet low to projections on a conventional well — that’s a complete project write off.
On a strategic level, there is risk in determining where and if the boundaries of an unconventional play can be expanded into an area of lightly drilled acreage that has been discounted due to minimal log control. These uncertainties can always be risked into a go-no-go acreage acquisition plan.
Whether geoscientists live in the unconventional world, the conventional world, or both, it is hard to let go of the idea that to earn your spurs in this business, you’ve learned some tough lessons about how risk really works, put your name behind a prospect, made a hard call, and risked nearly everything to get to TD.
Are exploration instincts being fostered and developed in the younger workforce in today’s companies? If so, how?
In the eyes of today’s managers, how important is it that their new geoscience and engineering hires have a seasoned understanding of risk? Do they value instinct as much as they value pivot tables?
I’d love to get your thoughts on what gut-stopping risk moments you’ve faced in today’s patch. Please forward any thoughts to me at email@example.com.
Natural gas storage inventories decreased 173 Bcf for the week ending January 25, according to the EIA’s weekly report. This draw is well below the market expectation, which was a decrease of 184 Bcf.
Working gas storage inventories now sit at 2.197 Tcf, which is 14 Bcf below last year and 328 Bcf below the five-year average.
At the time of this writing, the March 2019 contract was trading at $2.830/MMBtu, $0.024 below yesterday’s close of $2.854/MMBtu. The February 2019 contract expired at $2.950/MMBtu on Tuesday.
The first real cold spell of the season hit the lower 48, producing subzero temperatures. The upper Midwest had temperatures drop below -20 degrees Fahrenheit, but futures prices didn’t seem to react to the drastic cold; the March 2019 contract stayed well below $3/MMBtu. Even with the demand surge, the market seems comfortable with where we sit with storage inventories and production levels. Should February have below-average temperatures for a prolonged period of time, a concern for inventory levels may come back to the market. However, without a cold shot, prices will be bearish and stay below $3/MMBtu.
See the chart below for projections of the end-of-season storage inventories as of April 1, the end of the withdrawal season.
This Week in Fundamentals
The summary below is based on Bloomberg’s flow data and DI analysis for the week ending January 31, 2019.
- Dry gas production increased 0.67 Bcf/d on the week. The main contributors to the increase were the South Central/Gulf (+ 0.54 Bcf/d) and the Mountain (+0.11 Bcf/d) regions. In the South Central/Gulf region, Texas was the main driver of the production increase, gaining 0.36 Bcf/d on the week.
- Canadian net imports were up 0.71 Bcf/d on the week. The increase in net imports is mainly attributed to reduced exports from the US to Canada due to the extreme cold in the upper Midwest.
- Domestic natural gas demand increased 10.12 Bcf/d week-over-week. Res/Com demand increased 7.48 Bcf/d, with most of the demand coming from the Midwest and the East. Power and Industrial demand both increased on the week, gaining 1.76 Bcf/d and 0.88 Bcf/d, respectively.
- LNG exports increased 0.01 Bcf/d, while Mexican exports increased 0.18 Bcf/d on the week.
Total supply is up 1.38 Bcf/d, while total demand gained 10.64 Bcf/d week-over-week. With the increase in demand outpacing the increase in supply, expect the EIA to report a stronger draw next week. The ICE Financial Weekly Index report is currently expecting a draw of 250 Bcf for next week. Last year, the same week saw a draw of 119 Bcf, while the five-year average is 152 Bcf.
US crude oil stocks posted an increase of 0.9 MMBbl from last week. Gasoline and distillate inventories decreased 2.2 MMBbl and 1.1 MMBbl, respectively. Yesterday afternoon, API reported a crude oil build of 2.1 MMBbl alongside gasoline and distillate builds of 2.2 MMBbl and 0.21 MMBbl, respectively. Analysts were expecting a larger crude oil build of 7.97 MMBbl. The most important number to keep an eye on, total petroleum inventories, posted an increase of 6.7 MMBbl. For a summary of the crude oil and petroleum product stock movements, see the table below.
US crude oil production remained unchanged last week, per the EIA. Crude oil imports were down 1.1 MMBbl/d last week, to an average of 7.1 MMBbl/d. Refinery inputs averaged 16.5 MMBbl/d (586 MBbl/d less than last week), leading to a utilization rate of 90.1%. The less than anticipated crude oil build and decline in total petroleum stocks are supporting prices. Bullish sentiment is also supported by the sanctions on Venezuelan crude and Saudi Arabia pledging to reduce supply further than its quota levels. Prompt-month WTI was trading up $1.38/Bbl, at $54.69/Bbl, at the time of writing.
Prices traded in the $52/Bbl to $54/Bbl range last week. Prices are being pulled both directions as OPEC-led supply cuts and Venezuelan oil sanctions are increasing the bullish sentiment while weak fundamentals, due to supply overhang and global economic growth concerns, are keeping the pressure on prices.
The global economic slowdown concerns increased on Monday and pushed prices down as earnings from industrial firms in the US and China disappointed and were weaker than anticipated. The latest news increased the concerns that the world’s second-largest economy, China, is facing a serious slowdown in its economic growth, as last week Beijing reported that 2018 had the slowest economic growth seen in China in nearly 30 years. Also pressuring prices and limiting any significant gains are the ongoing US-China trade disputes. Projections for global economic and demand growth are already weak and could worsen if a deal between the US and China is not reached. Trade negotiations between the two countries will resume this week, with the hopes that a deal can be reached by the March 2 deadline.
Prices recovered their losses on Tuesday with bullish headlines hitting the market. The major headlines that increased bullish sentiment were the US sanctions on Venezuelan crude and Saudi Arabia announcing deeper cuts than their initial quota for the month of February. Following the political turmoil in Venezuela, the Trump administration last week told US energy companies that Venezuelan oil sanctions could be put in place if the situation worsens. On Tuesday, the US Treasury formally announced the decision to impose sanctions on Venezuelan state-owned oil firm PDVSA. The sanctions on Venezuelan crude may put as much as 0.5 MMBbl/d of crude at risk. The announcement by Saudi Energy Minister Khalid al-Falih also increased bullish sentiment. Khalid al-Falih said that the Kingdom is planning to reduce output to nearly 10.1 MMBbl/d during February from the original quota level, which was 10.3 MMBbl/d.
Sanctions on Venezuelan crude, deeper supply cuts by OPEC (led by Saudi Arabia), and temporary outages in Libya certainly have increased the bullish sentiment and will support prices. However, fundamentals still point to a supply overhang, due to plentiful supply and concerns that crude demand could stumble further amid an economic slowdown.
Prices in the near term will be volatile as the market assesses the OPEC supply cuts and waits for a resolution of the trade disputes between the US and China. If a deal can be reached between the countries to eliminate the currently proposed tariffs on Chinese goods or to prevent any additional tariffs, global economic and demand growth could tick upward, which could support higher prices. However, if a deal cannot be reached and the Chinese economy continues to suffer, along with other emerging economies, sentiment could shift to bearish again regardless of the OPEC and non-OPEC supply cuts pressuring prices further.
Prices in WTI settled the week slightly down as the market tested the highs from early December, just above $54.00/Bbl. This brief rally lacked the critical internal elements of increasing volume and open interest. The trade last week showed a consolidation phase of a market trying to discern the next directional bias rather than an accumulation of the market position. The CFTC report was not available for most of the week due to the government shutdown; therefore, the market is blind to the position structure among the sectors. With the shutdown ending, the market will get some definition as to the positioning of the traders in the coming weeks. The high end of the price range was tested last week, and prices may stay in the range from last November and December, between $49.00/Bbl and $54.55/Bbl. The market may probe higher after last week’s action, but the gains are unlikely to hold without key news regarding the tariff dilemma between the US and China.
Petroleum Stocks Chart