Masters Of War

Come you masters of war You that build all the guns You that build the death planes You that build all the bombs You that hide behind walls You that hide behind desks I just want you to know I can see through your masks. You that never done nothin' But build to destroy You play with my world Like it's your little toy You put a gun in my hand And you hide from my eyes And you turn and run farther When the fast bullets fly. Like Judas of old You lie and deceive A world war can be won You want me to believe But I see through your eyes And I see through your brain Like I see through the water That runs down my drain. You fasten all the triggers For the others to fire Then you set back and watch When the death count gets higher You hide in your mansion' As young people's blood Flows out of their bodies And is buried in the mud. You've thrown the worst fear That can ever be hurled Fear to bring children Into the world For threatening my baby Unborn and unnamed You ain't worth the blood That runs in your veins. How much do I know To talk out of turn You might say that I'm young You might say I'm unlearned But there's one thing I know Though I'm younger than you That even Jesus would never Forgive what you do. Let me ask you one question Is your money that good Will it buy you forgiveness Do you think that it could I think you will find When your death takes its toll All the money you made Will never buy back your soul. And I hope that you die And your death'll come soon I will follow your casket In the pale afternoon And I'll watch while you're lowered Down to your deathbed And I'll stand over your grave 'Til I'm sure that you're dead.------- Bob Dylan 1963

Sunday, February 26, 2017

the coming LNG export wave; oil refining at a two year low, refinery utilization at a 4 year low, oil exports at all time high

oil again traded in a narrow price range this week, ending about 1.0% higher at $53.99, although such a week over week comparison really shouldn't be made, because this week's prices were for April delivery, while last week's price quotes were for March oil...after closing last week at $53.40 a barrel, March oil traded 22 cents higher on the Presidents’ Day holiday for settlement on Tuesday as traders again played rising U.S. drilling activity against OPEC production cuts....prices then rose to near three-week highs on Tuesday after OPEC Secretary General Mohammad Barkindo told an oil conference that compliance with the output cuts was above 90 percent and that oil supplies would fall, with the expiring March contract closing out at $54.06 and the new front month April contract up 1% to $54.37...prices for April oil then fell about 1.5% on Wednesday on expectations of another surge in U.S. inventories, which were to be reported after the market closed at 4:30 PM, with that April contract closing at $53.59 a barrel...however, oil prices bounced back to close at $54.45 a barrel on Thursday after API estimates of supply indicated a small draw, with distillates seeing the largest draw since October 2014...oil prices then fell back on Friday, after EIA data showed an increase in both crude production and inventories, and yet another record high for the later, and ended the session 46 cents lower at $53.99 a barrel....

on the other hand, natural gas prices took another tumble this week, with the contract for March falling from a quote of $2.834 per mmBTU on Monday to $2.564 per mmBTU on Tuesday, as the post holiday markets opened to record warmth across a broad swath of the country...that price for March natural gas then recovered a bit in light trading, to $2.592 per mmBTU on Wednesday and to $2.617 per mmBTU on Thursday, when trading in the March natural gas contract expired...prices for the April natural gas contract then rose 3.8 cents to close at $2.787 on Friday, as increasing power loads and modestly higher peak power forecasts helped support prices...

as we pointed out last week, natural gas drilling activity has typically slowed at these price levels, only picking up when price quotes approach $4 per mmBTU, such that drillers can usual contract to sell their initial high output at prices above those levels...so while indications are that contract prices will stay below those break even levels in the near term, the specter that natural gas exports will eventually put pressure on supplies and raise prices to stimulate more drilling is still a threat we'll have to deal with...that was brought to the fore by two reports that were released this week, both of which forecast higher future demand for US LNG (liquefied natural gas) exports...

the first report, released Monday, was Royal Dutch Shell’s Outlook, an annual report which had previously been released by British Gas (BG), who Shell bought out early last year...they expect global natural gas demand to average an annual increase of 2% a year between 2015 and 2030, with LNG demand expected to rise at twice that rate, at 4 to 5% per year...in the year just ended, LNG import demand grew by 17 million tons to 265 million tons...the bar graph below from Shell shows where most of the growth in LNG imports came from last year:

February 25 2017 LNG import growth

the above graphic comes from page 9 of the the slide booklet of the 2017 Shell LNG Outlook and it shows the counties that increased their LNG imports last year, and by how much...in addition, those countries who were not LNG importers in 2015 are indicated in red, so all of their 2016 imports thus represent increased demand...note the US is the 3rd from the left, as even we increased LNG imports a bit last year...according to Shell, future demand for LNG will come from 2 groups of countries; those where LNG will be needed to replace declining domestic production, which includes countries such as India, Thailand, Malaysia, Indonesia, Kuwait, the Emirates, and Egypt, and those where LNG will supplement existing pipeline or domestic supplies, such as China, southern Europe and eastern Europe...

the second report that projected rising LNG demand was from the Wednesday release of the EIA's daily "today in energy" series, and was titled Liquefied natural gas exports expected to drive growth in U.S. natural gas trade...projecting from the Annual Energy Outlook 2017 base reference case, they expect us to become a net exporter of natural gas on an average annual basis by 2018...this will occur as our imports of natural gas from Canada fall and as our LNG exports increase, as they expect four more LNG export facilities that are currently under construction to be completed by 2021...the lead graphic from that report, which we'll include below, shows how this plays out over the next 20 years...

February 23 22017 natural gas trade projections

the above graphic, which we've copied from Wednesday's release Today in Energy, shows our imports of natural natural gas in trillions of cubic feet as a negative below the zero line, and our exports of natural gas in  trillions of cubic feet as a positive above the zero line, with historical data represented for the years from 1980 to 2016, and projections shown for the years from 2017 to 2040...below the zero line, our natural gas pipeline imports from Canada are shown in pink, and our LNG imports are represented by light blue...above the line, our natural gas pipeline exports to Mexico are represented by the burnt orange shading, our pipeline exports to Canada are represented by the rose shaded section, and our projected LNG exports from existing and under construction port facilities are represented by the navy blue shaded part of the graph...while we've had weeks in 2017 where our exports may have exceeded our imports, and will likely have such weeks again in 2017, this projection is on an annual basis, and according the EIA, we were a small natural gas net importer in 2016 and will again be an importer in 2017....clearly, our current LNG exports are still so small they barely show up in 2016 on a graph of this scale...

right now, only one U.S. export facility is currently in operation, Sabine Pass, on the Gulf of Mexico border between Texas and Louisiana, where just 4.5 million tons per annum is operational, and 27 million tons per annum is still under construction... however, the Federal Energy Regulatory Commission has approved natural gas export terminals with a capacity of 17 billion cubic feet (bcf) per day, which would represent the offshoring of about 19% of current U.S. natural gas production...furthermore, if all terminals for which applications are pending or expected are included, the quantity of our LNG exports goes up to 42 billion cubic feet (bcf) per day, or about 47 percent of our current natural gas production...right now, roughly 40% of our natural gas production comes from the old legacy gas fields in the south, primarily in Texas and Louisiana, while the other 60% of our output comes from 7 shale basins, with the Marcellus and the Utica account for roughly half of that...should all these export terminals be pushed through, however, almost all of the new gas will have to come from the pure natural gas shale plays, the Marcellus, the Utica, and the Haynesville, which means there will be a massive expansion of drilling and fracking to meet these natural gas export requirements...

Australia is a bit ahead of us in exporting LNG, and their experience should give us a sense of what our coming LNG exports will do to U.S. natural gas prices...contracts for natural gas exports are written well in advance of delivery, and as a result Australians living in the country's eastern region ended up paying more than twice as much for natural gas last winter than did Japanese customers taking delivery of liquefied natural gas (LNG) from the same fields...the same could easily happen here...presently, US gas futures prices are generally below $3 per mmBTU, while current LNG prices in Japan are over $7 per mmBTU...even worse, just a couple weeks ago Spain was paying more than $10 per mmBTU for LNG...if an US gas exporter contracts to deliver LNG to Japan or Spain at those prices, they'll get the gas from US shale production before US customers who dont have a contract do...if that should occur during a cold snap in mid winter, a shortage of natural gas could develop domestically, sending our prices skyrocketing...and in such a case, some of us who cant afford the higher priced natural gas simply wont get it....we know this happens, because just three years ago an LP gas shortage developed in the US for exactly the same reason, and as US LP gas prices spiked while our LP gas exports soared, a North Dakota Standing Rock Sioux woman was found dead, froze to death in her mobile home, with an empty propane tank...we can expect the same to happen here once natural gas prices rise to levels beyond which those on fixed income can afford it...

The Latest Oil Stats from the EIA

this week's oil data for the week ending February 17th from the US Energy Information Administration showed that our imports of crude oil fell to the lowest level since October and our refining of that crude oil fell for the 6th week in a row to the lowest rate in two years, leaving us with a small surplus of crude to add to our stored oil supplies, which thus were at another an all time high...our imports of crude oil fell by an average of 1,205,000 barrels per day to an average of 7,286,000 barrels per day during the week, while at the same time our exports of crude oil rose by 185,000 barrels per day to an average of 1,211,000 barrels per day, which meant that our effective imports netted out to 6,075,000 barrels per day for the week, 1,390,000 barrels per day less than last week...at the same time, our crude oil production rose by 24,000 barrels per day to an average of 9.001,000 barrels per day, which means that our daily supply of oil, from net imports and from wells, totaled an average of 15,076,000 barrels per day during the week...

meanwhile, refineries reportedly used 15,271,000 barrels of crude per day during the week, 187,000 barrels per day less than during the prior week, while at the same time, 81,000 barrels of oil per day were being added to oil storage facilities in the US...thus, this week's EIA oil figures seem to indicate that we used or stored 276,000 more barrels of oil per day than were accounted for by our net oil imports and oil well production…therefore, in order to make the weekly U.S. Petroleum Balance Sheet balance out, the EIA inserted a phantom 276,000 barrel per day number onto line 13 of the petroleum balance sheet, which the footnote tells us represents "unaccounted for crude oil"...that "unaccounted for crude oil" is further described in the glossary of the EIA's weekly Petroleum Status Report as "the arithmetic difference between the calculated supply and the calculated disposition of crude oil.", which means they got that balance sheet number by backing into it, using the same arithmetic we just illustrated.....

the weekly Petroleum Status Report also tells us that the 4 week average of our oil imports fell to an average of 8.36 million barrels per day, still 7.5% higher than the same four-week period last year...at the same time our crude oil exports at 1,211,000 barrels per day was another new record for oil exports, beating the record set last week, and as a result our crude oil exports are now averaging 3 times what we were exporting last February...meanwhile, this week's 24,000 barrel per day oil production increase included a 17,000 barrel per day increase in oil production in the lower 48 states and a 7,000 barrel per day increase in output from Alaska...topping 9 million barrels per day for the first time since last April, our crude oil production for the week ending February 17th was just 1.1% lower than the 9,102,000 barrels of crude that we produced during the week ending February 19th of last year, while it remained 6.3% below our June 5th 2015 record oil production of 9,610,000 barrels per day...

the 15,271,000 barrels of crude per day that were refined this week was down by 10.7% from the 17,107,000 barrels per day being refined during the first week of this year, and 2.4% less than the 15,685,000 barrels being refined during the same week last year....US refineries were operating at 84.3% of their capacity in the week ending February 17th, their lowest operating rate in nearly 4 years, down from 85.4% of capacity the prior week and down from the 87.3% capacity utilization rate during the week ending February 19th year ago...since we're at an interim nadir for refinery throughput and capacity utilization this week, we'll include a graph of what that looks like compared to historical trends below...

February 23 2017 refinery throughput for Feb 17

the above graph comes from an emailed package of graphs from John Kemp, who is a senior energy analyst and columnist with Reuters (see my footnote below)...this graph shows US refinery throughput in thousands of barrels by "day of the year" for the past ten years, with the past ten year range of our refinery throughput on any given date shown in the light blue shaded area, and the median of our refinery throughput, or the middle of the daily range, traced by the blue dashes over each day of the year...the graph also shows the number of barrels of oil refined for each week in 2016 traced weekly by a yellow line, with our year to date oil refining for 2017 represented in red...there is an obvious seasonality to oil refining, with demand highest in the summer and again around the holidays, but we can still see that for most all of 2016 and the first five weeks of 2017, oil refining was either at seasonal record highs or near the top of the average range...however, with domestic inventories of gasoline, distillates and most other refined products also at record levels in recent weeks, storage space for refined products has been stretched to its limits, profit margins for refineries fell to the lowest in a year, and thus refiners have cut back on the amount of oil they processed...

however, even though they refined less oil this week, gasoline production from those refineries still rose by 479,000 barrels per day to 9,429,000 barrels per day during the week ending February 17th, which was still 5.4% less than the 10,009,000 barrels per day of gasoline that were produced during the week ending February 19th a year ago...meanwhile, refineries' production of distillate fuels (diesel fuel and heat oil) also rose, increasing by 136,000 barrels per day to 4,467,000 barrels per day, which was up fractionally from the 4,438,000 barrels per day of distillates that were being produced during the week ending February 19th last year, during a mild El Nino winter... 

however, even with the increase in our gasoline production, the EIA reported that our gasoline inventories fell by 2,628,000 barrels to 256,435,000 barrels as of February 17th, in the second drop in our gasoline supplies in the past 8 weeks...that happened as our domestic consumption of gasoline rose by 230,000 barrels per day to a still below normal 8,663,000 barrels per day, while our gasoline exports rose by 293,000 barrels per day to 848,000 barrels per day and our gasoline imports fell by 238,000 barrels per day to 367,000 barrels per day...however, even with this week's inventory draw down, our gasoline supplies are up by nearly 29.3 million barrels since Christmas, remain statistically on a par with the 256,457,000 barrels of gasoline that we had stored on February 19th of last year, and are still 6.8% above the 240,014,000 barrels of gasoline we had stored on February 20th of 2015... 

similarly, even with the increase in our distillates production, our supplies of distillate fuels fell by 4,924,000 barrels to 165,133,000 barrels by February 17th, as the amount of distillates supplied to US markets, a proxy for our consumption, rose by 439,000 barrels per day to 4,292,000 barrels per day, and as our imports of distillates fell by 87,000 barrels per day to 129,000 barrels per day and as our exports of distillates were up 15,000 barrels per day to 1,007,000 barrels per day....even so, our distillate inventories are still 2.7% higher than the distillate inventories of 160,715,000 barrels of February 19th last year, and 33.4% above the distillate inventories of 124,698,000 barrels of February 20th, 2015…  

finally, with the major curtailment in our refining, we again had surplus crude remaining, and hence our inventories of crude oil rose for the 7th week in a row, increasing by 564,000 barrels to 494,762,000 barrels by February 17th, which was yet another record for our crude supplies...thus we ended the week with 8.2% more crude oil in storage than the 479,012,000 barrels we ended 2016 with, 8.9% more crude oil in storage than the then record 476,325,000 barrels we had stored on February 19th of 2016, 29.7% more crude than the 399,943,000 barrels of oil we had in storage on February 20th of 2015 and 56.7% more crude than the 331,024,000 barrels of oil we had in storage on February 21st of 2014...   

This Week's Rig Count

US drilling activity increased for the 16th time in 17 weeks during the week ending February 24th, but the 5 week string of double digit rig count increases has finally ended....Baker Hughes reported that the total count of active rotary rigs running in the US increased by just 3 rigs to 754 rigs in the week ending on this Friday, which was 251 more rigs than the 502 rigs that were deployed as of the February 26th report in 2016, but still far from the recent high of 1929 drilling rigs that were in use on November 21st of 2014...

the number of rigs drilling for oil rose by 5 rigs to 602 rigs this week, which was up from the 400 oil directed rigs that were in use a year ago, but down from the recent high of 1609 rigs that were drilling for oil on October 10, 2014...meanwhile, the count of drilling rigs targeting natural gas formations fell by 2 rigs to 151 rigs this week, which was still up from the 102 natural gas rigs that were drilling a year ago, but down from the recent natural gas rig high of 1,606 rigs that were deployed on August 29th, 2008...there also remained a single rig that was classified as miscellaneous, which is marked as a 1 rig increase from a year ago, when there were no such miscellaneous rigs at work...   

the drilling platform that had been working offshore from Alaska was shut down this week, coincidentally the same week that we learned that an offshore gas pipeline under the Cook Inlet sprung a leak...that left the total US offshore count for the week at 17 rigs, all in the Gulf of Mexico, down from 27 offshore rigs a year ago, when again they were all in the Gulf of Mexico...at the same time, a rig was set up on an inland lake in southern Louisiana, where there are now 4 of them, up from two inland water rigs a year ago...

.the number of horizontal drilling rigs working in the US increased by 10 rigs to 624 rigs this week, which is now up by 227 rigs from the 397 horizontal rigs that were in use in the US on February 26th last year, but still down from the record of 1372 horizontal rigs that were deployed on November 21st of 2014...on the other hand, 3 directional rigs were shut down during the week, cutting the directional rig count back to 69, which was still up from the 47 directional rigs that were deployed during the same week last year...in addition, a net of 4 vertical rigs were stacked this week, reducing the vertical rig count to 61, which was still up from the 58 vertical rigs that were deployed during the same week a year ago...

as usual, the details on this week's changes in drilling activity by state and by shale basin are included in our screenshot below of that part of the rig count summary from Baker Hughes that shows those changes...the first table below shows weekly and year over year rig count changes for the major producing states, and the second table shows weekly and year over year rig count changes for the major US geological oil and gas basins...in both tables, the first column shows the active rig count as of February 24th, the second column shows the change in the number of working rigs between last week's count (February 17th) and this week's (February 24th) count, the third column shows last week's February 17th active rig count, the 4th column shows the change between the number of rigs running this Friday and the equivalent Friday a year ago, and the 5th column shows the number of rigs that were drilling at the end of that reporting week a year ago, which in this week’s case was for the 26th of February, 2016...        

February 24 2017 rig count summary

again, this week's drilling changes were mostly about Texas, where they added 8 rigs, including 3 in the Permian in west Texas and another 3 in the Eagle Ford of south Texas...2 more rigs were also added in the Cana Woodford, site of the hot SCOOP and STACK plays...two rigs were shut down in Alaska, including the one offshore, and a net of two were pulled from Louisiana; otherwise, not much changed...note that outside of the major producing states shown above, Indiana also had their only active rig shut down this week; that left them unchanged from a year ago, though, when the state also had no drilling activity...

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as i noted, one of the graphs that i included above was from an emailed package of graphs from John Kemp, a senior energy analyst and columnist with Reuters...i had used two of his graphs taken from his twitter account the prior week and in so doing, noted a twitter message from him which said: SIGN UP to receive a free daily digest of best in energy news + my research notes by emailing john.kemp@tr.com
so i requested to be included on his daily digest mailing list and he responded: With pleasure.  If you know anyone else who might like to receive the daily digest and my research notes, please encourage them to contact me and I will add their emails to the circulation as well.  The mailing list is open to anyone interested in energy. Very best wishes.  John. 
i am now receiving a daily mailing of links & graphics, copies of his columns as published, and what appears a weekly pdf of graphs... so if anyone is interested in receiving the same, please write to John Kemp as noted above...alternatively you can also follow him on twitter, @ https://twitter.com/JKempEnergy where he seems to post much of what he otherwise mails...since i dont use twitter, his emails work best for me...

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note: there's more here..

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