US drilling activity has top billing in S&P Global Platts editors' pick of commodities trends this week. Plus, LNG netbacks, China-US energy trade, and EU carbon prices.
1. Permian oil rig count reaches 11-year low
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What’s happening? Permian Basin oil rigs dropped by one to 128 rigs in the week ending August 19, marking an 11-year low, according to data from Enverus. Overall, the US oil and gas rig count was up one to 289 in the same week. The decline in the Permian rig count has slowed but has been dramatic: in the first week of March 428 rigs – 300 more than currently – were working in the basin. Although the Permian is the largest US oil producing basin and viewed as one of the most economic, upstream operators are being prudent amid low crude prices caused by the coronavirus pandemic, according to S&P Global Platts Analytics.
What’s next? Q2 earnings calls in early August brought some badly-needed confidence to an industry wracked by months of uncertainty from low oil demand in the wake of the coronavirus pandemic. Operators that had curtailed oil output as wells became uneconomic at prices not seen in 20 years, by early August had restored the bulk of their volumes and began, or planned, to restart some limited drilling and well completions. In short, visibility is improving and operators are starting to look forward to what they believe will be a more solid year in 2021.
2. Asian netbacks rally triggers increased US LNG activity
What’s happening? US Gulf Coast LNG netbacks from Northeast Asia are rallying, incentivizing a ramp-up in activity at liquefaction terminals. Feedgas deliveries to the six major US export terminals recently reached the highest level since early June but were still down by about 50% since a record volume in March.
What’s next? Considerable downside risk remains in the cards should early-winter Asian demand disappoint, which could see a wave of cargoes flow back to Europe mid-winter.
3. Low oil prices hamper China's efforts to meet US trade deal target
What's happening? China has stepped up purchases of US crude in recent trading cycles to try to comply with the Phase 1 trade deal struck with Washington in January. August is on track to have the largest amount of US crude delivered to China in a given month, expected to cross 30 million barrels. At least seven China-bound cargoes, carrying around 14 million barrels of crude, have been scheduled for September loading in the US Gulf Coast in recent days with China as their destination, S&P Global Platts fixtures data showed.
What next? Low oil prices may severely impede Beijing's efforts to meet the purchase target for energy products in terms of dollar value. China's crude imports from the US for the first three quarters of 2020 may reach around $3.42 billion based on the average Platts Dated Brent price of $40.87/b up to August 17 this year. If China imported 10 VLCCs (20 million barrels) of US crude per month in Q4, worth $100 million each at an oil price of $50/b, it would only amount to another $3 billion. This is far below the Phase 1 commitment, which calls for an additional $18.5 billion of US energy purchases in 2020, and $52.4 billion worth of purchases across the next two years, over 2017 levels.
4. EU carbon prices hold above Eur25/mt, but more supply coming
What’s happening? EU carbon dioxide allowance prices have held up at above Eur25.00/mt in August, after easing back from a 14-year high of over Eur30.00/mt in July. Dramatic gains since a March crash to Eur15.00/mt have taken prices back above their pre-COVID trading range, with support coming from an expected increase in the EU’s 2030 emissions target due in September, which will tighten supply after 2021.
What’s next? Recent price strength may face a test as September approaches, with monthly auction volumes set to rebound to over 86 million mt, compared with just 37.5 million mt in August. October and November will also provide similar volumes of fresh EUAs into the market, which may help to balance the more bullish impacts of upcoming regulatory reforms. Europe’s carbon market continues to be characterized by a tug-of-war between rather bearish short-term fundamentals pitted against expected future tightness as the EU beefs up the system to deliver the lion’s share of its rising climate ambition out to 2030 and beyond.
Reporting by Starr Spencer, Eric Yep, Oceana Zhou, Harry Weber and Frank Watson