Tough Regulator Comments Make It Seem Like The Keystone Oil Pipeline Shut Down Isn’t Days, Or A Couple Weeks, But Much Longer

One of the big Cdn oil market stories this morning will be that the restart of the Keystone oil pipeline isn’t likely to be a matter of days, but more a matter of weeks.   We identified the wildcard to the timing for a restart to be the regulator, and the quoted comments from all three commissioners in the South Dakota Public Utilities Commission (PUC) overseeing the restart clearly suggest the PUC will be looking at this incident with a tough eye.  This was our fear and the reason why we wrote our Nov 20 blog “Cdn Heavy Oil Differentials Likely To Be Hit Harder Than The $1.55/b So Far From The Keystone Oil Spill[LINK].   We worried that the regulator is likely to take more time on this restart, especially given the Keystone name and last year’s Standing Rock protests that delayed the Dakota Access Pipeline.  As of Tues 7am MDT, Cdn heavy oil differentials widened by another $1.00, from $14.20/b to $16.75/b.   The three commission comments reinforce that fear and that a restart isn’t days or a couple weeks, but will be much longer and it lead to Cdn heavy oil diffs being hit harder than the $2.55/b to date. Continue reading “Tough Regulator Comments Make It Seem Like The Keystone Oil Pipeline Shut Down Isn’t Days, Or A Couple Weeks, But Much Longer”

Cdn Heavy Oil Differentials Likely To Be Hit Harder Than The $1.55/b So Far From The Keystone Oil Spill

We believe there is the risk for Cdn heavy oil differentials to be hit harder than the $1.55/b so far since the Keystone pipeline was shut down on Nov 16.  As of 4pm MDT, TransCanada (TRP) has not disclosed the findings for the cause of the Keystone pipeline leak, the expected time to clean up the spill, repair the pipeline and then restart the pipeline.  TRP has not inferred any bigger problem or bigger issue.  Primarily based on the straightforward TRP limited updates and aerial pictures, the market is believing the cleanup and pipeline repair can be accomplished in a matter of days not weeks.   We share that view.  However, we think a pipeline restart is likely to take longer than expected.  Its not just the clean up and repair for regulators to sign off, regulators will need to be confident in the cause of the leak and that it isn’t likely to happen elsewhere.  We think the regulator is likely to take more time on this restart, especially given the Keystone name and last year’s Standing Rock protests that delayed the Dakota Access Pipeline.   Our worries are that a restart that takes 2 weeks or more will lead to Cdn heavy oil diffs being hit harder than the $1.55/b to date. Continue reading “Cdn Heavy Oil Differentials Likely To Be Hit Harder Than The $1.55/b So Far From The Keystone Oil Spill”

Timely To Remember IEA’s Nov Oil Demand Forecasts Almost Always Turn Out To Be Lower Than Actuals

The narrative on Tues (WTI down 2.6% to $55.35/b) was all about oil demand growth not being as strong as expected.   We thought oil prices overreacted to the IEA lowering its 2018 oil demand forecast by 0.19 mmb/d to 98.9 mmb/d, or an increase of 1.3 mmb/d YoY from 2017.  A lower 2018 oil demand forecast is never positive, but, by itself, it shouldn’t have driven oil down very much given the IEA’s track record of being conservative on oil demand forecasts and that its Nov forecasts almost always end up being much lower than actual demand.  However, we did expect oil to be down (just not as much) moreso because the market seemed surprised (it shouldn’t have been) by the IEA forecast that oil supply to exceed demand by 0.6 mmb/d in Q1/18. This trend of excess Q1 supply should have been expected by everyone as oil demand is always seasonally lower in Q1 versus the just completed Q4 every year. This week’s market reaction to oil is a good reminder that oil demand is always seasonally lower in Q1 every year and that the IEA’s Nov demand forecasts almost always turn out lower than actual demand.  We have to believe that OPEC understands the math of lower Q1 seasonal demand and that is why the OPEC narrative over the past two months has moved to the expectation for the cuts to be extended past March 31, 2018. Continue reading “Timely To Remember IEA’s Nov Oil Demand Forecasts Almost Always Turn Out To Be Lower Than Actuals”

Peak Oil Demand Is Coming, But >4 Mmb/d Of New Oil Supply Will Be Needed Every Year To Replace Declines To Get There

We buy into the narrative of peak oil demand, believe it is inevitable, its visible and will happen before 2030.  Peak oil demand will be from the cumulative impact of a number of factors including EVs, battery/storage, LNG for power, LNG for transportation, increased energy efficiency, etc.  But the peak oil demand narrative forgets the most basic fundamentals of oil – industry has to add new oil supply every year to replace declines just to keep production flat.  Even after today’s big oil rally, long dated strips are still under $52 from 2020 thru 2025.  We don’t believe long dated 2020 thru 2025 strips are predictive of future prices or indicative of the marginal supply costs to add 4 to 5 million b/d every year in 2020 to 2025 or to add >3 million b/d every year once peak oil demand is reached and is in plateau.  We believe these marginal supply costs are significantly higher and >$60.  We believe oil can quickly move to a base of >$60 with this supply challenge and there will be longevity to this call as markets appreciate this challenge and that the marginal supply cost to add this much new oil production every year is well over $60.  Peak oil demand won’t take away from the challenge to add significant new oil production every year. Continue reading “Peak Oil Demand Is Coming, But >4 Mmb/d Of New Oil Supply Will Be Needed Every Year To Replace Declines To Get There”

Saudi Lifts Its Conflict With Iran To Another Level, Its Missiles To The Houthis “Could Rise To Be Considered As An Act of War”

Brent oil is only up $0.15 to $62.22 as of 10pm MDT and we expect this will go higher once markets turn their focus to Saudi Arabia’s statement this afternoon on Iran/Yemen and away from Saudi Arabia’s arresting of the 50th richest man in the world (Prince Al-Waleed) and dozens of others yesterday.  Also yesterday, the Houthis were able to get a long range missile to reach Saudi Arabia capital of Riyadh and the fallout from that missile is escalating the Saudi Arabia/Iran conflict to another level.   Saudi Arabia says the missiles were Iran manufactured, Iran’s actions were a “blatant act of military aggression by the Iranian regime, and could rise to be considered as an act of war”, reserving their right to “respond to Iran”, and are also closing Yemen’s ports.  This is an elevation from Saudi Arabia and Iran fighting thru surrogates by Saudi Arabia raising the potential of direct action.  Plus the closing of Yemen’s ports will raise the risk for tankers thru the 4.8 million b/d Bab el Mandeb.   We have to believe oil prices will start to show some geopolitical risk premium to Saudi Arabia seeming to take its Iran conflict to another level.  Geopolitical risk has clearly increased in the Middle East today. Continue reading “Saudi Lifts Its Conflict With Iran To Another Level, Its Missiles To The Houthis “Could Rise To Be Considered As An Act of War””

WTI Should Quickly Move Towards $60 If Chevron’s 28-Mth Payout For Permian Pads Are Indicative Of Industry Performance

We believe oil prices are likely to move quickly to higher base prices of $55 and $60 if the indications from Q3 reporting are indeed pointing to less than expected production growth from the Permian.  In Chevron’s Q3 last week, it highlighted that, with their low or zero royalties, their Permian pads have >30% full cycle IRRs and payout in 28 months.  No one seemed to pay attention to 28-month payout and it wasn’t raised in this week’s Permian Q3 conference calls. The emerging narrative is “value over volume”, which looks like clear signaling for lower Permian production growth.  There is a more disciplined capex spending narrative, but the reality is that this discipline is to a great part forced on them by the huge drop in equity issues for US E&P in 2017 vs 2016.   Apart from a big rush of equity causing a problem, the reason why we believe oil is going to move more quickly to base prices of $55 and $60 is in great part linked to lower than expected Permian growth, whether it be viewed from the narrative of the new-found discipline or the reality that the payout period of the wells is probably more like 2 years and not 1 year. Continue reading “WTI Should Quickly Move Towards $60 If Chevron’s 28-Mth Payout For Permian Pads Are Indicative Of Industry Performance”

Is Kurdistan President Saying The Fight For Independence Isn’t Today, But Sometime In The Future?

We were surprised that WTI closed up today, +$0.12 to $51.99. WTI is up ~$2.50 in the past week primarily driven by the escalation of the Kurdistan/Iraq/Turkey issue in the last week as Iraqi troops took back Kirkuk region oil fields from Kurdish control, and the fear that the fighting could escalate resulting in some disruptions on Kurdistan oil production.  Kurdistan President Barzani’s statement (posted on Rudaw news ~10am mountain LINK) is a must read and we thought it would have led to some of this Kurdistan premium being given back today.  Barzani’s statement should reassure markets that the risk of civil war is effectively zero and, more importantly, it sounds like Kurdistan realizes that the time to press for full independence is not now, but sometime in the future.  Barzani is clearly signaling the Kurds have to fix their internal issues and have unity on the Kurdish side before they can move on the independence mandate/goal.  Plus the fact that there is an agreement between Kurdistan and Iraq to move back to previously agreed to lines should provide comfort that Iraq will sign off on Kurdistan oil exports as requested by Turkey.  These two events should reduce the Kurdistan geopolitical risk premium in oil. Continue reading “Is Kurdistan President Saying The Fight For Independence Isn’t Today, But Sometime In The Future?”

China’s Plan To Increase Natural Gas To 10% Of Its Energy Mix Is A Global Game Changer Including For BC LNG

The news flow from China this summer on its increasing fight and urgency to fight pollution supports China’s plan to increase natural gas to 10% of its energy mix in 2020 and 15% of its energy mix in 2030.  This is a game changer to global natural gas markets and, by itself, can bring LNG to under supply 2 to 3 years earlier than expected.  China’s natural gas consumption increased by ~15% per year from 2005 thru 2016 and ~1.5 bcf/d per year vs China’s 8.5% growth rate in energy in total.   Yet natural gas only got to 5.9% of China’s energy mix.  If China is to hit 10% by 2020, it will need to increase natural gas consumption by 4 to 5 bcf/d per year.  Assuming China continues to grow its domestic natural gas production by 0.6 bcf/d per year (its growth rate for last five years), China will need to import an additional ~3.5 to ~4.5 bcf/d per year.  This is “per year”!  And if so, we believe BC LNG will be back and there is a higher probability than ever before for a Shell FID on its BC LNG project in 2018. Continue reading “China’s Plan To Increase Natural Gas To 10% Of Its Energy Mix Is A Global Game Changer Including For BC LNG”

Shell: “Every LNG Cargo That Could Technically Be Produced In This World Has Been Produced And Has Found A Well Paying Customer”

We will be presenting a very bullish outlook for natural gas later today in our webcast for Stream’s 2018 Energy Outlook.  The key to our call is that a massive natural gas demand surge has started and will lead to world LNG markets being corrected closer to 2020 than the current conventional wisdom of closer to 2025.  One of the reasons we see this happening quickly is we share Shell’s view that global LNG markets, as of mid 2017, are not in an oversupply situation and there is data support (Japan LNG spot prices, NW Europe storage) for this view.  Two weeks ago, Shell said “Actually, over the last 18 months, every LNG cargo that could technically be produced in this world has been produced and has found a well paying customer”.   Therefore, we have a different starting point than conventional wisdom that says LNG markets are oversupplied in 2017.  And if you combine a different starting point with a different view on a massive surge in natural gas demand, then you end up with a much different view of when LNG markets will move to undersupply.   We will be posting a blog post today’s webcast on why we see a massive surge in natural gas demand. Continue reading “Shell: “Every LNG Cargo That Could Technically Be Produced In This World Has Been Produced And Has Found A Well Paying Customer””

Oil Markets Must Believe The Saudi Aramco Yanbu Refinery Fire Was Caused By Hot Weather And Not A Houthi Missile

We were surprised there wasn’t any Sunday and Monday oil market discussion on the Saturday night fire at Saudi Aramco’s SAMREF (Saudi Aramco Mobil Yanbu Refining Company. JV with Exxon Mobil) 400,000 b/d refinery at Yanbu on Saudi Arabia’s Red Sea coast.  Rather, news from St. Petersburg from OPEC/non-OPEC monitoring committee and Saudi Arabia dominated oil markets and led to WTI being up $0.66 to close at $46.43/b on Monday and trading higher this morning. The lack of attention to the refinery fire was also helped by Saudi authorities stating that the Yanbu refinery fire did not affect operations.  But the key reason is oil markets must believe the Saudi explanation that the fire “happened due to hot weather” and not the Houthis version that it was the result of a successful long range H-2 Burkan missile hitting the refinery.  If markets believed the Houthis, WTI would have been much higher than $46.43/b on Monday.  Continue reading “Oil Markets Must Believe The Saudi Aramco Yanbu Refinery Fire Was Caused By Hot Weather And Not A Houthi Missile”