Month: February 2018

Oil market angst over recent jump in EIA crude production forecasts

In addition to recent financial markets turmoil, the crude markets have been under price pressure from concerns over surging US crude production, punctuated by a sharp upgrade in forecasts from the EIA in its Short-Term Energy Outlook (STEO) this week.  In fact, the February STEO featured a 317 kbpd jump in its 2018 forecast for US crude production from its January report, which was also 668 kbpd above its October forecast (shown above).

The April 2018 WTI contract has given up more than $5/bbl this week on these concerns, which may be overstated, since re-benchmarking and methodology adjustments have driven the surge in EIA estimates.  After all, the latest weekly estimate of US crude production (for the week ending 02 Feb) jumped by 332 kbpd week-over-week, to 10,251 kbpd, after averaging 28 kbpd of weekly gains during the previous 13 weeks.  Similarly, the monthly data for November 2017, released a week ago, surged by 384 kbpd over the October estimate, also reflecting the recent changes in EIA modelling and reporting.

The EIA actually tried to inform market participants about these changes ten days ago in a presentation, following up on a November 2017 webinar.  Most oil analysts recognise this and know that the EIA will make upward adjustments their historical database accordingly.  This higher level of crude production has already flowed through the system and the price movements reflect this.  The supply/demand balance has not changed and the near-term rises in production are consistent with the recent rise in rig counts and estimated rig productivity.  Only market perception has changed.

PADD1 Clean Tanker Demand Outlook Nov17

Clean tanker demand for the US East Coast (PADD1) is resuming its previous declines, on weak fundamentals.  Slowed by weak demographics, PADD1 gasoline demand will face tepid vehicle-miles travelled and the continued growth of electric vehicles (EVs).  Meanwhile, fuel switching to natural gas for home heating is providing a structural decline in heating oil demand, offsetting rising trucking demand for diesel.  Despite all of the angst over PADD1 refining, the region’s plants account for only 20% of clean product supply, and PADD1 is essentially a large blending centre reliant on the USG (PADD3) to meet demand.  Stable pipeline flows and rising Jones Act tanker movements will cut into imports and tanker demand.  Lower inventories and a colder winter could boost demand this season.  Download the Executive Summary of the presentation here.

Crude Tanker Outlook Oct16

Crude tanker market may face lower earnings for longer than consensus — Although analysts are finally marking down their crude tanker spot earnings forecasts for 2017-18, they may be under-estimating the depth and duration of the downturn.  The current market view continues to deteriorate, but it still expects earnings to remain above break-even rates, before rebounding in 2018.  Our Base Case suggests that rates will slide below these levels in 2017-18 and remain near breakeven in 2019, before a recovery finally arrives in 2020.

The key market disconnect may be an over-estimation of tanker demand — Arguments from tanker owners and equity analysts that moderate oil consumption growth should support tanker demand growth of 3-5% are relying upon an extrapolation of previous relationships.  As we have stressed during the past several years, oil product demand is not crude tanker demand, and a simple extrapolation of previous trends may prove painful.

Crude tanker tonne-mile demand is peaking for the next several years — Although crude tanker tonne-mile demand in 2017 may rival the peak in 1h16, demand is unlikely to return to these levels until early in the next decade.  Crude trade volumes should decline after 2017, pressured by continued growth in liquids bypassing the refining system and rising domestic crude runs.  Additional growth in land-based imports and a pause in eastbound Atlantic Basin exports should dampen tonne-miles.

Download cover page and executive summary of 43-page report here.

US Crude Production Jan16

US Production declines set to continue into 2017 — US light tight oil (LTO) production response is lagging rig counts by 6-7 months, based upon legacy well decline rates and rig productivity.  Our Base Case expects LTO rig counts to take another drop in 1q16 and remain low through most of 2016.  Initial signs of market re-balancing in 2h16 should allow a modest price recovery and some rig additions in late-2016.  LTO output needs to decline by 1 mbpd to balance global oil market, in addition to other non-OPEC production declines.  The December 2015 Short-term Energy Outlook (STEO) by EIA had forecast Brent prices at $56/bbl in 2q16, with resultant rebound in US production, but this is not realistic and does not balance the market.  Download presentation on US Crude Exports here.

US Condensate Production & Exports Jan16

Declining USG (PADD3) condensate production to limit export availability — Severe rig count reductions in the Eagle Ford play and accelerating well decline rates are sending Eagle Ford crude and condensate output much lower for 2016-17.   Although the repeal of the US crude export ban is further eroding the economics of condensate splitters on the USG, approximately 350 kbpd of new splitters are already completed, are under construction or have committed take-or-pay off-take agreements.  A combination of lower condensate production, rising splitter intake and Canadian diluent requirements should limit condensate cargo export availability through the forecast period.

 

US Crude Export Destinations Jan16

European refiners play larger role in US crude & condensate exports —  With Canadian imports remaining stable, Europe becomes the primary destination for incremental US crude and condensate exports.  Although North Sea production should decline by 300 kbpd during 2015-20, European refiners have limited ability to take larger volumes of 45° API crude and 55+° API condensate, when we examine each country’s crude slate.  US producers will need to find additional outlets in Latin America, as well as higher Asian exports, as the rising light-ends imbalance pressures prices and opens arbs.

Crude Seaborne Trade Oct15

Crude seaborne trade to remain flat for the next three years — Crude destocking in 2017-18, non-crude liquids bypassing the refining system and higher domestic crude runs should limit crude seaborne trade though 2018.  Refinery bypass includes NGLs transferring directly into LPG supply, biofuels, GTLs, direct crude burn and refinery gains.  The crude tanker orderbook, at 18% of the fleet, is not so “moderate” under this demand regime.

Rising Crude Runs in Producing Countries & Crude Exports Oct15

Where exports come from…  Severe drop in refinery utilisations among eight key oil producers and exporters provided an additional 500-700 kbpd of crude exports during 1h16.  These eight producers account for more than half of global crude exports.  Recovery in utilisations should remove this extra crude from the market in 2016, and the Latin American impact alone could approach 200 billion tonne-miles, or 2% of tanker demand.  Refinery utilisations do not recover fully, however, due to the destruction of the Baiji refinery in Iraq, as ISIS forces retreated, and from continued operating upsets in Venezuela.

Floating Storage Oct15

Gradual release of 6.4 mdwt of Iranian floating storage vessels over 18 months adds 1.5% to dirty tanker operating fleet growth, just as supply peaks in late-2016 and early-2017.  Even with slippage, yards should deliver almost 60 VLCCs during 2h16 and 1h17, which is enough to move 2.4 mbpd of crude between the AG and Asia.  Owners may be slow to scrap in 2016, but demolition should accelerate in 2017, bringing growth back to 2% by late-2017.

Dirty Tanker Supply Outlook Oct15

Ecstatic over lofty tanker earnings brought on by OPEC policy largesse — and convinced that this is the start of a broad, cyclical recovery — owners once again ordered too many crude tankers in 2015. Their justification was a simplistic hypothesis about inter-basin crude flows, but shifts in global production, refining and imports suggested that the sector was a 1% growth business, at best. Given the orderbook size, the results were predictable.  Download 28-page summary section of 128-page presentation here.