Phil Flynn 9-13-2018
Oil prices soared yesterday on concerns of tropical storms and a major hurricane, but sold off after a downgrade of Hurricane Florence. Still, the market must come to grips with more tropical storms as well as contradictions when it comes to supply and demand. We have a storm that may cause more demand destruction than risk to supply and oil rallied. The Energy Information Administration (EIA) reported that U.S. oil supplies fell by 5.296 million barrels, hitting the lowest level since February of 2015, below the 400 million barrels mark, yet the International Energy Agency (IEA) said global oil production hit a record 100 million barrels a day in August. It seems that increased OPEC production offset declines in Venezuela, Iran and the U.S. shale patch. The U.S. is now the world biggest oil producer and the IEA says that they are counting on "relentless growth led by record output from the U.S.A’s shale patch to raise NON-OPEC output after the EIA is reducing its forecast for U.S. shale due to bottlenecks. There are warnings from some that demand for oil is waning yet refining demand for oil is at record highs. Is your head spinning faster than the Hurricanes? That’s ok, because if you’re a long-term trader, just set it and forget it with a long-term bullish position.
The IEA is counting on shale to increase Non-OPEC production by 2 million bpd in 2018 and 1.8 million bpd in in 2019 but is that making you comfortable?
John Kemp at Reuters wrote that “U.S. oil production is running into capacity constraints, which are starting to have a material impact on the global availability of crude, causing the market to tighten and putting upward pressure on prices." He writes that the biggest problem is the lack of enough pipeline capacity to move oil from shale wells in western Texas and eastern New Mexico to refineries in the Midwest and export terminals on the Gulf Coast. He also says that production in the Permian Basin has also been constrained by shortages of labor, equipment and materials, which have pushed drilling, pressure pumping and completion costs sharply higher.
What Mr. Kemp is writing about is something the Energy Report has been warning about for some time. While today global supply versus demand is in a delicate balance, we feel that we are headed towards a deficit maybe as early as next year. While our target on oil for this year remains at $84 a barrel in 2019 you should be able to add $10 a barrel to that price.
Meanwhile back in the U.S., refiners are doing everything they can to get distillates supplies out of the hole. They smoked as crude oil refinery inputs averaged a near record 17.9 million barrels per day during this week, more than 210,000 barrels per day more than the previous, operating at 97.6% of capacity. That lead to a 6.2 million barrels increase for distillate supply but still about 3% below the five-year average for this time of year. Gasoline production increased last week, averaging 10.4 million barrels per day. Distillate fuel production increased last week, averaging 5.5 million barrels per day. The Refiners are amazing!
U.S. oil exports surged by 320k bpd to 1.8M bpd, a number that should continue to grow as the Brent Crude premium. Hurricane Gordon shut in at least 100k bpd of Gulf Of Mexico production last week and now with more storms impacting the area US output may not bounce back for a while.
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MY TAKE: One thing that is confusing in the IEA reports is that they include NGLs in "oil" supply & demand most of the time, but other times they talk about crude oil. Lots of refined products can only be made from crude oil and diesel cannot be made from the "Ultra Light" shale oil.
Oil Prices - Sept 13
Oil Prices - Sept 13
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: Oil Prices - Sept 13
The price of WTI has been flopping around in the $65 to $75 range since mid-April. The almost daily swings of over $1/bbl drive investors crazy, but we have remain fairly firm in Phase 4 to the "Rebound". On June 6 WTI dipped to $64.73 then went up to $74.15 on June 29. It has since been inside that range. A test of support at $65.01 was followed by a steady rise to $70.01 on August 30. I continue to use $65/bbl WTI in all of my forecast/valuation modes for future periods, but there is definitely upside to that price.
There is clear evidence of a tight global oil market, which IEA confirmed today. Although IEA seems to do their best to provide conflicting stats.
Here is IEA's official summary of their "Oil Market Report" dated September 13, 2018
Since the previous edition of this Report, the price of Brent crude oil fell close to $70/bbl and is now flirting with $80/bbl. Two reasons for the swing are that Venezuela’s production decline continues, and we are approaching 4 November when US sanctions against Iran’s oil exports are implemented. In Venezuela, production fell in August to 1.24 mb/d and, if the recent rate of decline continues, it could be only 1 mb/d at the end of the year. Evidence provided by tanker tracking data suggests that Iran’s exports have already fallen significantly but we must wait to see if the 500 kb/d of reductions seen so far will grow. (See Iran supply tumbles as buyers take heed of US sanctions).
If Venezuelan and Iranian exports do continue to fall (about a 99% chance that they do), markets could tighten and oil prices could rise without offsetting production increases from elsewhere.
Supply from some countries has grown since the Vienna meetings in June: last month Saudi Arabia and Iraq combined saw output increase by 160 kb/d. In Iraq’s case, exports have grown to such an extent that they are greater than Iran’s production, and there is still about 200 kb/d of shut-in capacity in the north of the country due to the ongoing dispute with the Kurdistan Regional Government. Based on our August estimates of production, OPEC countries are sitting on about 2.7 mb/d of spare production capacity, 60% of which is in Saudi Arabia. But the point about spare capacity is that, having been idle, it is not clear exactly how much, beyond what is widely thought to be “easy” to bring online, will be available to coincide with further falls in Venezuelan exports and a maximisation of Iranian sanctions.
It is not just a question of volume; refiners used to processing Venezuelan or Iranian crude will compete to find similar quality barrels to maintain optimal refinery operations. Alternative supplies of lighter crude might not be ideal for this reason. Even before we factor in any further fall in exports from Venezuela or Iran, record global refinery runs are expected to result in a crude stock draw of 0.5 mb/d in 4Q18. Any draw will be from a basis of relative tightness: in the OECD, stocks at end-July were 50 million barrels below the five-year average.
If we are looking for additional barrels from elsewhere to help compensate for further export declines from Venezuela and Iran the picture is mixed. Brazil was supposed to be one of the big production success stories of 2018, but various problems have stymied growth to the extent that output will rise by only 30 kb/d this year versus a first estimate of 260 kb/d. On the upside, the United States continues to show stellar performance with total liquids output (note that IEA includes NGLs) expected to grow by 1.7 mb/d this year and another 1.2 mb/d in 2019. However, companies are not adjusting their production plans, despite higher prices, due to infrastructure bottlenecks and this is unlikely to change in the near future. Even so, growth this year has returned to the extraordinary pace seen in 2014 during the first shale boom. Finally, Libyan production surged back in August to 950 kb/d, not far below the 1 mb/d level that was achieved for almost a year prior to the recent disturbances. However, as we have seen in the past few days with attacks on NOC headquarters, the situation is fragile.
As far as oil demand is concerned, following an increase of 1.4 mb/d in 2018, growth next year will be 1.5 mb/d. Even so, in 2018, we are seeing signs of weaker demand in some markets: gasoline demand is stagnant in the US as prices rise; European demand in the period May-July was consistently below year-ago levels; demand in Japan is sluggish notwithstanding very high temperatures and will be further impacted by the recent natural disasters. As we move into 2019, a possible risk to our forecast lies in some key emerging economies, partly due to currency depreciations versus the US dollar raising the cost of imported energy. In addition, there is a risk to growth from an escalation of trade disputes.
We are entering a very crucial period for the oil market. The situation in Venezuela could deteriorate even faster, strife could return to Libya and the 53 days to 4 November will reveal more decisions taken by countries and companies with respect to Iranian oil purchases. It remains to be seen if other producers decide to increase their production. The price range for Brent of $70-$80/bbl in place since April could be tested. Things are tightening up.
There is clear evidence of a tight global oil market, which IEA confirmed today. Although IEA seems to do their best to provide conflicting stats.
Here is IEA's official summary of their "Oil Market Report" dated September 13, 2018
Since the previous edition of this Report, the price of Brent crude oil fell close to $70/bbl and is now flirting with $80/bbl. Two reasons for the swing are that Venezuela’s production decline continues, and we are approaching 4 November when US sanctions against Iran’s oil exports are implemented. In Venezuela, production fell in August to 1.24 mb/d and, if the recent rate of decline continues, it could be only 1 mb/d at the end of the year. Evidence provided by tanker tracking data suggests that Iran’s exports have already fallen significantly but we must wait to see if the 500 kb/d of reductions seen so far will grow. (See Iran supply tumbles as buyers take heed of US sanctions).
If Venezuelan and Iranian exports do continue to fall (about a 99% chance that they do), markets could tighten and oil prices could rise without offsetting production increases from elsewhere.
Supply from some countries has grown since the Vienna meetings in June: last month Saudi Arabia and Iraq combined saw output increase by 160 kb/d. In Iraq’s case, exports have grown to such an extent that they are greater than Iran’s production, and there is still about 200 kb/d of shut-in capacity in the north of the country due to the ongoing dispute with the Kurdistan Regional Government. Based on our August estimates of production, OPEC countries are sitting on about 2.7 mb/d of spare production capacity, 60% of which is in Saudi Arabia. But the point about spare capacity is that, having been idle, it is not clear exactly how much, beyond what is widely thought to be “easy” to bring online, will be available to coincide with further falls in Venezuelan exports and a maximisation of Iranian sanctions.
It is not just a question of volume; refiners used to processing Venezuelan or Iranian crude will compete to find similar quality barrels to maintain optimal refinery operations. Alternative supplies of lighter crude might not be ideal for this reason. Even before we factor in any further fall in exports from Venezuela or Iran, record global refinery runs are expected to result in a crude stock draw of 0.5 mb/d in 4Q18. Any draw will be from a basis of relative tightness: in the OECD, stocks at end-July were 50 million barrels below the five-year average.
If we are looking for additional barrels from elsewhere to help compensate for further export declines from Venezuela and Iran the picture is mixed. Brazil was supposed to be one of the big production success stories of 2018, but various problems have stymied growth to the extent that output will rise by only 30 kb/d this year versus a first estimate of 260 kb/d. On the upside, the United States continues to show stellar performance with total liquids output (note that IEA includes NGLs) expected to grow by 1.7 mb/d this year and another 1.2 mb/d in 2019. However, companies are not adjusting their production plans, despite higher prices, due to infrastructure bottlenecks and this is unlikely to change in the near future. Even so, growth this year has returned to the extraordinary pace seen in 2014 during the first shale boom. Finally, Libyan production surged back in August to 950 kb/d, not far below the 1 mb/d level that was achieved for almost a year prior to the recent disturbances. However, as we have seen in the past few days with attacks on NOC headquarters, the situation is fragile.
As far as oil demand is concerned, following an increase of 1.4 mb/d in 2018, growth next year will be 1.5 mb/d. Even so, in 2018, we are seeing signs of weaker demand in some markets: gasoline demand is stagnant in the US as prices rise; European demand in the period May-July was consistently below year-ago levels; demand in Japan is sluggish notwithstanding very high temperatures and will be further impacted by the recent natural disasters. As we move into 2019, a possible risk to our forecast lies in some key emerging economies, partly due to currency depreciations versus the US dollar raising the cost of imported energy. In addition, there is a risk to growth from an escalation of trade disputes.
We are entering a very crucial period for the oil market. The situation in Venezuela could deteriorate even faster, strife could return to Libya and the 53 days to 4 November will reveal more decisions taken by countries and companies with respect to Iranian oil purchases. It remains to be seen if other producers decide to increase their production. The price range for Brent of $70-$80/bbl in place since April could be tested. Things are tightening up.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group