Energy Prospectus

Morgan Stanley Equity Research Team:

Oil markets are enjoying a number of tailwinds: healthy demand, benign inventory trends, supply that is ample but no longer accelerating, and a bout of USD weakness. Prices are
well supported for now. Into 2018 however, markets face a weakening balance and uncertainty over China's stock piling.

Demand strength remains a key highlight: For the third consecutive year, oil
demand is set to growth well above historical trend rates. Refinery crude runs
are well above last year's level, yet, products stocks are not building and refinery
margins – even before the impact of hurricane Harvey – remain stubbornly high.

Middle distillate inventories are normalising rapidly: Expressed in terms of days
of forward demand cover, middle distillate inventories have been trending down
counter-seasonally. In countries where weekly data is available, middle distillate
stocks now cover 21.7 days of demand, down from >24 days at the start of the
year, and steadily closing the gap with the five-year average of 20.7 days.

Supply is ample but no longer accelerating: Different tanker tracking services
estimate a decline in OPEC-12 exports of between 80-600 kb/d in August vs July,
whilst Libya and Nigeria saw exports dropping 100-300 kb/d month-on-month.
Also, the EIA's Petroleum Supply Monthly suggested that US production may not
be growing quite as fast as feared. There is little doubt that markets are well
supplied with crude oil but this is no longer getting worse.

Yet, a weakening balance into 2018 remains an overhang: We still expect that
the OPEC/non-OPEC agreement will come to an end at some point in the second
half of 2018. Together with robust growth from US shale, and modest net
growth from non-US/non-OPEC, we see oil market oversupplied next year by
~0.5 mb/d.

Also, uncertainty over China's stock piling is a risk: Data from China Customs
and NBS suggest implied stock builds of as much as 0.9 mb/d in 2017, sharply up
from even the strong stock builds in 2016. China's stock piling is opaque but it
appears that this has flattered crude oil inventory trends elsewhere in the world.
How long this can continue is uncertain, but if this slows, it would be a risk to oil
prices, especially considering the scale of this issue.

Our forecast remains unchanged – $46-50/bbl for WTI to mid-2018: Oil prices
have been range-bound recently, and we expect them to remain so. On the
downside, prices are supported in the mid $40s by demand growth and a
slowdown of US drilling activity. On the upside, the twin-risks for 2018
mentioned above, and increasing hedging demand cap prices at $50/bbl for now.
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MY TAKE:
Just six months ago some Wall Street analysts were forecasting that U.S. oil production would reach 12 million barrels per day by the end of 2018. EIA has been over-reporting U.S. production since March. It is clear that U.S. oil production growth has slowed and will not get to 10 million barrels per day by early 2018 and may struggle to get there at all. IMO it will take higher oil prices to keep growing oil production. Few areas outside of the Tier One leasehold in the shale plays is economic at sub-$50. Most upstream companies will be capital restrained and forced to live within cash flow.
The first step to removing "FEAR" is convincing investors that things aren't getting worse. They aren't.
All of our Sweet 16 reported positive EPS in the first half of 2017 and they have steady growth locked in.
Today we have a much better market for NGLs than we did a year ago. This fact is rarely mentioned. Natural gas supply/demand has rebalanced and we should have better gas prices.
OPEC's plan is working. They need to put limits on Libya and Nigeria and extend the agreement through 6/30/2018.

HOUSTON (Reuters) - The largest U.S. refinery was restarting production on Monday for the first time since being shut nearly two weeks ago by Hurricane Harvey, said sources familiar with plant operations.

Motiva Enterprises [MOTIV.UL] restored the 325,000 barrel per day (bpd) VPS-5 crude distillation unit at its 603,000 bpd Port Arthur, Texas, refinery to minimum production levels early in the day, the sources said.

After bringing the VPS-5 online, Motiva began restarting the 105,000-bpd Hydrocracking Unit 2, the sources said. The HCU-2 is a lucrative source of motor fuel exports for Motiva.

Motiva did not immediately reply to requests for comment about operations at the refinery, which has been shut since Aug. 30 due to flooding from Harvey.

Last Thursday, the VPS-5, HCU-2 and the 110,000 bpd coking unit were ready to resume production after being placed on circulation in which the units were at operating temperatures and circulating feedstock, the sources said.

However, Motiva had been waiting for adequate crude supply to be restored to the VPS-5 before restarting production, according to the sources.

Motiva said last week the Port Arthur refinery would resume production at 40 percent capacity by Monday. Motiva did not give a timeline for fully restoring output.

Sources have said it will take four to eight weeks to return the full refinery's production.

CDUs do the initial refining of crude oil and provide feedstock for all other units.

Hydrocrackers use hydrogen to produce motor fuels, especially diesel, from gas oil. Cokers produce motor fuel feedstocks and convert residual crude to petroleum coke, a coal substitute.
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It may take until late October before refineries are back to processing 17 million barrels per day of crude oil. For July and August, U.S. refiners processed over 17.4 million barrels per day. The need to replenish gasoline and other refined product inventories may require refiners to stay near 95% throughput capacity through year-end.

Short video on issues impacting oil prices at the link below.

http://www.epmag.com/videos/whats-affec ... 8ifQ%3D%3D