A Bearish Build

A Bearish Build

US crude oil stocks decreased by 1.5 MMBbl last week. Gasoline and distillate stocks posted withdrawals of 2.5 MMBbl and 0.2 MMBbl respectively. Yesterday afternoon, API had reported a surprise crude oil build of 1.8 MMBbl while reporting gasoline and distillate drawdowns of 4.8 MMBbl and 1.2 MMBbl. respectively. Analysts, however had expected a crude withdrawal of 2.8 MMBbl. The most important number to keep an eye on, total petroleum inventories, posted a build of 1.1 MMBbl. For a summary of the crude oil and petroleum product stock movements, see table below.

US production was estimated to be up 20 MBbl/d from last week per EIA’s estimate. Lower 48 production was reported to be up 25 MBbl/d, while Alaska posted a decline of 5 MBbl/d. Imports were up by 209 MBbl/d last week to an average of 8.3 MMBbl/d. Refinery inputs averaged 17.4 MMBbl/d (123 MBbl/d more than last week), leading to a utilization rate of 95.4%. The report is bearish due to a smaller than anticipated crude withdrawal, as well the build in total stocks. WTI prices are down $0.27/Bbl to $48.89/Bbl at the time of writing.

Crude prices have been trading in the $48-51/Bbl range. Prices briefly pierced the $50/Bbl mark on Monday with bullish news from the OPEC meeting continuing to resonate. The possibility of the US imposing crude oil related sanctions on Venezuela added to the bullish sentiment. Sanctions could target crude oil imports from Venezuela (currently 720 Mbl/d) or barring PDVSA from doing financial business with US dollars, which would effectively bar exports of refined products from their refineries in the US. The sanctions would create short term volatility in prices. See Drillinginfo’s blog regarding ‘Vendemonium’ here: https://info.drillinginfo.com/drillinginfos-take-vendemonium/.

The two-month high for prices achieved earlier this week was short lived, as a Reuters survey reported OPEC crude output had risen in July by 90 MBbl/d to 33 MMBbl/d, a 2017 high. The increase was mainly led by Libya, who remain exempt from the quotas. Iraq also contributed to the increase in output. The global demand numbers from IEA and the eagerness of Saudi Arabia to make the cuts a success will continue to bring out the bulls and set a floor for prices. However, there are still bearish factors in the form of rising OPEC and US production. Prices around the $50/Bbl level could lead to further hedging by US producers, placing a lid on prices.

Some OPEC and non-OPEC producers will be meeting on August 7-8th in Abu Dhabi to discuss how the group can increase compliance to balance global inventory levels. The anticipation of the outcome of this meeting could create some short-term volatility in prices. As stated here previously, without continued high compliance with production quotas and concurrent realization of the demand growth projected by IEA, there is little chance for the inventory normalization. Without inventory normalization, there can be no sustained price recovery. Recent price action has now expanded the range for WTI prices. The midterm low will likely be $42/Bbl (June and November 2016 low). Trade in the coming weeks will likely confirm the top of the new range ($50-$51/Bbl) and has redefined the low side of the range to $44/Bbl. As previously written, Drillinginfo has been expecting volatile trade and this will continue as the market gains confidence with regards to the pace of inventory normalization. The potential for tests of $39/Bbl has become remote and Drillinginfo expects the primary range in the mid- to high-$40/Bbl to hold the near-term trade.

Please find the updated Drillinginfo charts on the link below:
Petroleum Stock Report

Crude Stocks Down, Prices Up

Crude Stocks Down, Prices Up

US crude oil stocks decreased by 7.6 MMBbl last week. Gasoline inventories decreased by 1.6 MMBbl, while distillate stocks increased by 3.1 MMBbl. Yesterday afternoon, API had reported a crude oil and gasoline withdrawal of 8.1 MMBbl and 0.8 MMBbl respectively, alongside a distillate build of 2.1 MMBbl. Analysts had expected a more modest crude withdrawal of 2.9 MMBbl alongside gasoline and distillate builds of 1.1 MMBbl each. The most important number to keep an eye on, total petroleum inventories, decreased by 3.9 MMBbl. For a summary of the crude oil and petroleum product stock movements, see table below.

US production was estimated to be up 59 MBbl/d from last week per EIA’s estimate. Imports were down by 132 MBbl/d last week to an average of 7.6 MMBbl/d. Refinery inputs averaged 17.2 MMBbl/d (103 MBbl/d more than last week), leading to a utilization rate of 94.5%. The report is bullish due to a larger than anticipated crude withdrawal, surprise gasoline withdrawal, and the sizeable total stocks withdrawal. The increase in US production and distillate inventories can be interpreted a bearish, but the declining trend in total crude oil and petroleum inventories is decidedly bullish. WTI prices are up $1.25/Bbl to $46.29/Bbl at the time of writing.

Oil prices were up on Tuesday after the EIA revised its US oil production forecast for 2018 down to an annual average of 9.9 MMBbl/d from 10.0 MMBbl/d citing their lower price expectations for crude for the balance of 2017 and in 2018. There was also speculation that Nigeria and Libya may curb output following their invite to attend the OPEC quota monitoring committee meeting on July 24th in Moscow. Additionally, Euroilstock data showed crude oil intake increased and stocks of refined products decreased in June, adding to the bullish sentiment about the start of high demand season. On the bearish side, OPEC’s monthly report (released Wednesday) showed that OPEC production rose 393 MBbl/d in June to 32.611 MMBbl/d led by increases from Nigeria and Libya (exempt from quotas) alongside additional barrels from Saudi Arabia and Iraq. The IEA monthly report will be released tomorrow and their comments regarding the current balance will be closely watched by the market. Rising OPEC and US production continues to keep a lid on prices. As stated here previously, without continued high compliance with production quotas and the realization of the demand growth projected by IEA, there is little chance for the global market to normalize inventories and provide an environment for higher prices. Drillinginfo expects WTI prices to trade in the mid-$40/Bbl range in the short term as the market comes to grips with whether the implied deficit will continue to prompt global inventory normalization. Until global inventories start to decline continuously, longer term price advances will be limited.

Please find the updated Drillinginfo charts on the link below:
Petroleum Stocks Chart

Bearish Sentiment Continues

Bearish Sentiment Continues

US crude oil stocks increased by 0.1 MMBbl last week. Gasoline and distillate stocks posted withdrawals of 0.9 MMBbl and 0.2 MMBbl respectively. Yesterday afternoon, API had reported a crude oil build of 0.851 MMBbl, alongside gasoline and distillate builds of 1.35 MMBbl and 0.678 MMBbl respectively. Analysts had expected a crude withdrawal of 2.5 MMBbl. The most important number to keep an eye on, total petroleum inventories, increased slightly by 0.8 MMBbl. For a summary of the crude oil and petroleum product stock movements, see table below.

US production was estimated to be down 100 MBbl/d from last week per EIA’s estimate. Imports were up by 140 MBbl/d last week to an average of 8.1 MMBbl/d. Refinery inputs averaged 16.9 MMBbl/d (262 MBbl/d less than last week), leading to a utilization rate of 92.5%. The report has bullish and bearish signals. The build in crude oil, which ran contrary to analyst expectations, and the build in total petroleum inventories were clearly bearish. However, the withdrawals in primary refined products and the decline in EIA’s production estimates could be interpreted as bullish. WTI prices are up $0.28/Bbl to $44.52/Bbl at the time of writing.

WTI prices have continued to trade in the $42-45/Bbl range. The IEA’s monthly report showed the implied deficit for 2Q17 to be 670 MBbl/d (half of the implied deficit from the prior month’s report). Along with that, the commentary that “patience is required” for inventories to normalize have fanned the flames for recent bearish sentiment. The rising overall OPEC production due to growth from Libya and Nigeria (both exempt from quotas) has also exacerbated the concerns on the supply side. The growing US rig count and production estimates are also driving prices lower. Although WTI prices have been lower recently, most US producers have hedged production at higher prices earlier this year, which means US production will continue to grow this year. As stated here previously, without continued high compliance with production quotas and the realization of the demand growth projected by IEA, there is little chance for the global market to normalize inventories and provide an environment for higher prices. Drillinginfo expects WTI prices to trade in the mid-$40/Bbl range in the short term as the market comes to grips with whether the implied deficit will prompt global inventory normalization. Until global inventories start to decline, longer term price advances will be limited.

Please find the updated Drillinginfo charts on the link below:
Petroleum Stocks Chart

Weekly Petroleum Status Report – 5/24/2017

Weekly Petroleum Status Report – 5/24/2017

US crude oil stocks decreased by 4.4 MMBbl last week, alongside gasoline and distillate withdrawals of 0.8 MMBbl and 0.5 MMBbl respectively. Yesterday afternoon, API had reported a crude oil withdrawal of 1.5 MMBbl while reporting gasoline and distillate withdrawals of 3.15 MMBbl and 1.85 respectively. Analysts had expected a crude withdrawal of 2.3 MMBbl. The most important number to keep an eye on, total petroleum inventories, posted a decrease of 3.5 MMBbl. For a summary of the crude oil and petroleum product stock movements, see table below.

US production was estimated to be up 15 MBbl/d from last week per EIA’s estimate. Imports were down 296 MBbl/d last week to an average of 8.3 MMBbl/d. Refinery inputs averaged 17.3 MMBbl/d (159 MBbl/d more than last week), leading to a utilization rate of 93.5%. The petroleum stocks report is bullish, due to sizeable withdrawals in crude oil and total petroleum inventories. WTI prices are up $0.22/Bbl to $51.69/Bbl at the time of writing.

WTI prices have been trading in the $49-51/Bbl range. The recent rally seen in prices is due to the bullish API report from yesterday as well as expectations firming around a nine-month extension on OPEC cuts. Saudi Arabian energy minister Khalid al-Falih flew to Baghdad on Monday in efforts to convince Iraq to join in for the nine-month cut extension. Khalid al-Falih’s efforts seemed to have paid off as Iraqi oil minister Jabar Ali al-Luaibi on Monday said he agreed with Saudi Arabia for a nine-month cut extension. Saudi Arabia’s efforts in rallying OPEC producers to help reduce global oil inventories to their five-year average is helping the bullish sentiment ahead of the May 25th Vienna meeting. In order to normalize inventories back to levels from prior to the price crash, full compliance from OPEC members for the extended quota period in conjunction with expected demand growth (1.33 MMBbl/d per IEA) will be necessary. However, the relentlessly increasing US rig count and possible growth from Libya and Nigeria continue to keep a lid on prices. Should OPEC’s decision on Thursday drive prices higher, US production could increase even further. DrillingInfo expects WTI prices to remain in the $49-$52/Bbl range until the meeting. Longer term prices will be shaped by the outcome of the OPEC meeting tomorrow and its effects on the stubbornly high global inventories, especially during the high demand summer season.

Please find the updated Drillinginfo charts on the link below:
Petroleum Stocks Chart

Saudi Aramco’s Port Arthur Refinery and The US Refinery Fleet

Saudi Aramco’s Port Arthur Refinery and The US Refinery Fleet

Port Arthur, TX is home to the US refining fleet’s crown jewel. With an atmospheric distillation capacity of 603 MBbl/cd, this complex coking refinery is the largest refinery in the US. As of May 1st, this marvel of a complex refinery is now 100% owned by Saudi Aramco.

Saudi Aramco upped its 50% ownership in the Port Arthur refinery, which it previously held through the Motiva Enterprises JV with partner Royal Dutch Shell following the decision to disband the JV in early 2016. Along with the giant refinery, Saudi Aramco also acquired ownership of a number of distribution terminals and rights to sell Shell branded gasoline in a number of East Coast states and the eastern half of Texas. This move is an important one, even for a state owned behemoth like Saudi Aramco.

Saudi Aramco now owns approximately 300 MBbl/d more of the US domestic refining capacity. This means that Saudi Arabia now has the ability to send more of its own crude into the US refining fleet, making the volume of “sticky” imports (those crude oil imports that are difficult to replace due to contractual obligations or foreign ownership stakes in refineries) higher than it was previously. Saudi Arabia is already the second largest source of US crude imports behind Canada. According to the EIA, the US imported 1.34 MMBbl/d from Saudi Arabia in February.

Paired with the distribution terminals and rights to sell Shell branded gasoline, it is also a strategic move on the part of Saudi Aramco to capture the value add from refining and distribution in the US. Saudi Aramco also acquired the value of optionality: They can create additional demand for their own crude or decide to buy advantaged feedstock from US or Canada if they wish to take advantage of any arbitrage opportunities in the market. In effect, this refinery creates a market share luxury for them.

At this point, it is prudent to talk about the US refining fleet as a whole and what possibly lies ahead. US production has reversed its declining trajectory and is expected to post healthy growth moving forward, acting as the swing producer that OPEC (and in particular, Saudi Arabia) once was. The US currently has 18.2 MMBbl/cd of refining capacity. Assuming an average long-term refinery utilization rate of 90%, the effective capacity of the fleet is 16.4 MMBbl/cd. Canadian imports (~3.5 MMBbl/d) will continue to make their way into the US refining fleet due to the lack of Canadian refining capacity, the tooling of the US refineries (lending itself well to heavy crudes), and the need to refine heavier crudes in conjunction with the lighter grades to meet the mid and heavy distillate demand for refined products. Additionally, there is ~1.3 MMBbl/d of “sticky” crude imports that will continue to make their way into the US. This brings the effective refining capacity available to US domestic crude production to 11.6 MMBbl/cd.

Using DI ProdCast, given the Drillinginfo price forecast, US production will reach the 11.6 MMBbl/d level before the end of 2019 (Figure 1). As US production grows, the expectation will be for the domestic volumes to push out more imports and to continue to make their way into the global market. According to the EIA, in February, US crude oil exports reached an all time high level of 1.12 MMBbl/d. As US production grows, more and more volumes will have to find a home in the global refinery fleet.

United States Crude Oil Production 2017
Figure 1 – US Production vs. Effective Refining Capacity (Source: DI ProdCast)

Neither the pushing out of additional imports or higher exports from the US will be easy to achieve. US shale production is much lighter than benchmark crude oil grades and this is the portion of production that is growing. Most of this crude oil can be classified as ultra light (42-50°API) or as condensate (50+°API). These lighter crude oils do not fit as well into the complex refinery tooling of the US fleet. The US fleet is well suited to handle heavy, sour crude oils. Thus, as these lighter crude oils continue to grow in terms of volume and make their way in to the slate, they can cause inefficiencies and sub-par economics due to the product slate that they generate. Lighter crude oils usually yield more gasoline-level refined products, which are not as valuable as the distillate-level products that are the most valuable part of the mid and heavy grade barrels. Refiners will discount lighter crudes to make up for the opportunity cost of refining this type of crude and foregoing the optimal feed slate.

Producers who see steep discounts for their lighter crude oils would likely aim to take these barrels abroad, where they may be a better fit for the less complex refinery fleet of other regions. However, it is prudent to note that even these refining centers are not used to the light crude oils from US shale (global crude oil slate is heavier than the ultra light and condensate production in the US). Thus, these barrels will not be a perfect fit abroad either. Additionally, the variability of shale crude will be new to refiners abroad, who are used to the consistent quality and composition that comes with grades produced from conventional reservoirs. Shale crudes from the same basin and play can differ greatly in terms of chemical composition. This implies that the ultra light and condensate quality shale crude oil will likely be discounted by both domestic and foreign refineries.

Refinery slates, economics, and refined product demand patterns will be important to track, as these will shape the general crude oil market as well as the crude oil differentials amongst grades moving forward. Saudi Aramco, with their newly held 100% ownership of the Port Arthur, TX refinery will be in a prime position to use their refining capacity to suit their purposes. They can:

  • Import Saudi crude grades into the refinery to keep their US import market share, in effect forcing US production to find a home elsewhere in the global refining fleet.
  • Import Saudi crude grades into the refinery for processing and sell the added value refined products to US or global consumers.
  • Take advantage of proximity to discounted US and Canadian feedstock to generate optimal refinery returns while keeping the option of exploiting arbitrage opportunities for their crude oil production open.

In short, the market share luxury and optionality that comes with having an expanded integrated oil and refining operation will provide Saudi Aramco with value for years to come under any crude oil and refined product price scenario.

Photo courtesy of The Center for Land Use Interpretation