We woke up to be surprised to find oil markets (still at 6:40am EDT) are looking thru any concerns that Saudi Arabia halted tanker shipments thru the Bab el Mandeb (southern Red Sea) in response to a successful Houthi attack on a Very Large Crude Carriers (VLCCs) that has a capacity of 2 million barrels of oil. Saudi Arabia said the VLCC had “minimal damage” but it was a success as the tanker was forced to return to port and it forced Saudi Arabia to halt tanker traffic thru the Bab el Mandeb. There was another VLCC attacked but no reported damages. Rather oil markets are pricing in only a marginal supply cost for some tankers to avoid the Red Sea and possibly also a marginal reduction in oil demand. We had expected a bigger price reaction and last night (10:30pm EDT) posted our blog “Major Global Oil Supply Chain Hit, Saudi Arabia Stops Oil Shipments Thru Red Sea Following Houthi Attack On A SuperTanker”. We expect this will be a hit to the supply chain by risk and insurance forcing tankers to avoid the Bab el Mandeb, but we expected a bigger price reaction and a widening of the Brent WTI diff ie. some geopolitical risk premium and not just added tanker time. Brent WTI diffs have widened, but the Brent price move and Brent WTI diff this morning look to only be pricing in some marginal tanker costs to avoid the Red Sea and possibly some marginal oil demand reduction at Saudi Arabia’s 1.035 mmb/d oil refineries at Yanbu on the Red Sea. Its seems to only be a marginal tanker transportation cost response to oil without any geopolitical risk element, and the markets don’t seem to see any increased opportunity for US oil exports to Europe as Europe also imported 1.599 mmb/d of oil in 2017 from Iran, Iraq and Kuwait.
There is big news in oil markets tonight with Saudi Arabia announcing at 5:20pm EDT that it was temporarily halting all oil tanker shipments thru the Red Sea. This was in response to the Houthis attack on two Very Large Crude Carriers (VLCCs) that each has capacity of 2 million barrels of oil. Saudi Arabia said one of the ships sustained “minimal damage”, but did not disclose the nature of the attack ie. mine, boat, missile, rocket or drone. This is going to make all insurers and other shippers pay attention and we have to believe other shippers/insurers will follow suit. There is no indication of how long the stoppage will last, but we have to believe the Saudis will want to see a substantial reduction in the risk, which means they will inevitably accelerate attacks/bombing to force the Houthis out of the port of Hodeidah. And we expect that for those that can’t self insure, the insurers will likely need even more comfort ie. take longer. This is a significant hit to the global oil supply chain. The EIA estimated that there was 4.8 mmb/d of oil and petroleum products thru the Red Sea/Bab el Mandeb from the combined northerly and southerly tanker volumes. Its not just the Saudis that ship oil and petroleum products south from their Yanbu export terminal thru the Bab el Mandeb. We are surprised that oil has only increased slightly since the new broke four hours ago and, in particular, we would have expected a much wider Brent WTI spread than has shown up until 9:20pm EDT. We look for Brent to go much higher tomorrow and the Brent WTI spread to widen.
Its tough for anyone to make a natural gas supply/demand forecast without know how cold it will be this winter. Henry Hub (HH) gas prices have fallen back to ~$2.80 in July despite gas storage being 725 bcf lower YoY and the summer gas storage injection season being almost 50% finished. HH prices and natural gas tone are being held back by US gas supply being up ~8 bcf/d YoY in 2018. We are now seeing increasing expectations for an El Nino winter, which typically means a warmer winter. This means markets are going to focus soon on winter weather and will worry that the combination of a warm winter and continued high US gas supply will lead to very low gas storage withdraws this winter. There can be a huge swing in winter residential and commercial natural gas demand between a very warm winter and a cold winter or even a normal winter. But we just came through a very warm winter and not a normal or cold winter. If the EIA’s call is right on US gas exports, industrial demand and electric power demand (ie. before considering changes in residential and commercial demand), storage at Apr 1/19 should only be ~270 bcf higher YoY even if its as warm as just finished very warm winter. Residential and commercial demand forecasts will be wrong depending on the weather and will be changed depending on how El Nino develops. The purpose of this blog is to illustrate the math on where storage should be on Apr 1/19 if its as warm as the just finished very warm winter. Its been a great Q2/18 for storage despite the record US gas supply. Weather and storage have surprised to positive with a very cold April and record/near record May and June. The math is showing that if its another warm winter like last year storage at Apr 1/19 should only be ~270 bcf higher YoY. This will bring a negative to natural gas, but not a big negative and likely a relief that demand is doing a good job of absorbing or mostly absorbing the big increases in US gas supply.
Anyone who heard Canada Natural Resource Minister Carr’s comments to introduce the Generation Energy Council Report “Canada’s Energy Transition: Getting to Our Energy Future, Together” could easily see that this recommended energy vision for Canada’s future has be assuming LNG Canada as the cornerstone of Canada’s LNG future. Canadian Press reported that Carr said “Canada’s long-term goal is to become the world’s cleanest producer of liquefied natural gas, which can then displace dirtier sources of electricity around the world, particularly coal in Asia.” We don’t believe it’s a coincidence, but there is only one other occasion that we can recall any company or any country emphasizing the strength or advantage of LNG using the adjective “cleanest”. It was in Davos in Feb, when the National Post reported “In the early evening, Trudeau met with the head of Royal Dutch Shell, Ben van Beurden, who said in front of reporters his company is looking to invest in a major “green” project in Canada. “We are looking indeed … probably investing in the greenest and cleanest energy project ever built and probably looking at the largest single investment ever made in Canada,” van Beurden said without elaborating. To which Trudeau replied, “Very exciting.” Readers of our research know we have been very bullish on LNG Canada going FID in 2018 and earlier than expected so this effective implied inclusion in the Liberals energy vision doesn’t change our bullish views. We don’t believe the Carr would have highlighted LNG in this report unless the Liberals were confident LNG Canada was going FID soon, and to have this confidence, we also have to wonder if the Liberals will be providing relief on the major outstanding cost and execution issue for LNG Canada – the 45% anti dumping duties.
Its only been 11 days since the OPEC/non-OPEC June 22/23 deal to increase oil supply by ~1 mmb/d, but there have been multiple oil supply events that have made that deal far out of date. Saudi Arabia and Russia might have had a different strategy at the June 22/23 meetings if they had known there was an immediate oil supply loss coming of ~1.3 mmb/d. But since June 22/23, three events have taken off ~1.3 mmb/d of oil supply – Libya an additional 400,000 b/d to 850,000 b/d with no specific return data, Syncrude ~350,000 b/d but is now not expected back on until early Aug, and US oil production being ~100,000 b/d lower than expected actuals. Prior to the June 22/23 meetings, we didn’t think it mattered how much OPEC/non-OPEC supply increased that weekend, we saw WTI going back above $70 with normal seasonal demand and much higher depending on Venezuela and Iran. We believed normal higher seasonal oil demand can accommodate the return of OPEC/non-OPEC barrels, a reduction in demand from trade wars, and increasing non-OPEC supply. And that this would set the stage for WTI to go back over $70. We identified the wildcards for oil to go even higher were Venezuela and Iran ie. if Venezuela declines like we expect below 1 mmb/d in a matter of months and if the US is firm in trying to get its sanctions on Iran to significantly reduce its oil exports (ie. back to at least pre nuclear deal levels). Syncrude should be coming back on and if US oil supply is only ~100,000 b/d less than expected, these shouldn’t be big pushes to move WTI higher. However, unless Saudi Arabia/Russia step up to fill the additional gap, if Libya’s oil production ends up being 200,000 to 300, 000 b/d for the next month or two and not ~1 mmb/d like it was in April/May, WTI should be moving to $80 or higher.
It was a good day for oil prices today with WTI up $2.32 to $70.53 and Brent up $1.57 to $76.21 as there were a number of positives including the follow thru of Syncrude being down, surprisingly big API oil inventory withdraws, and the US State Dept senior official background (but public) conference call on the US objectives and efforts to convince allies to be tough on Iran in line with the US sanctions. As good as oil prices were today, the reality is that they could have been way more than $10 higher if the markets believed the US will be successful in convincing its allies/other countries to comply with its now clearly stated objectives to cut Iran’s oil exports to zero. Think about it, Iran exported 2.4 mmb/d of oil and 0.3 mmb/d of condensate in May. If markets believe the US can be successful, even Saudi Aramco can’t replace this much (API and crude quality differences aside) with its spare capacity. And lets not forget that we still have Venezuela declines that we believe will be faster than expected. Even if we assume the move up in oil prices today was all due to the US state dept senior official comments, at most this probably prices in a reduction in Iran’s oil exports by 500,000 b/d or perhaps a little more. We don’t believe it prices in a 1 mmb/d reduction in Iran’s oil exports (ie. back to prior sanctions levels). And certainly no where near a full stop to Iran’s oil exports. Its why we say that if the market believed the US can be successful in this stated objective, WTI would have been way higher than $10 higher today. We expect oil to go higher as markets price in the expectation for Iran oil exports to be hit by 1 or 1.5 mmb/d even with the return of 1.0 mmb/d of OPEC/non-OPEC supply.
There is no question that an OPEC deal or no deal is the driving force for oil prices over the coming days. WTI has moved up off the bottom today but is trading down ~$0.50 to $64.85 as of 8am MDT on the reports out of Vienna that the mood is changing and that there is momentum for a mid point type deal to be reached to increase OPEC/non-OPEC oil supply in H2/18. Prior to yesterday, the “NO” side (Iran, Iraq and Venezuela) had markets fearing no deal. But the momentum shifted yesterday with the softening of the Iran stance that countries should be able to produce to quota and then Iraq trying to mediate to find a mid point. This morning, that opening evolved into an expectation that there will be a supply increase and that the number for OPEC debate is 1 mmb/d ie. some sort of mid point. There doesn’t seem to be the momentum for 1.5 mm b/d or a return to Oct 2016 levels, or chatter, as of yet, to a potential Sept review with an underlying expectation of a further oil supply increase. But as we look to the coming months, we believe the fundamentals are going to push WTI back above $70 and pointing higher no matter how much OPEC increases oil supply this weekend. The normal seasonal demand increase in oil should accommodate a return of OPEC barrels. Plus there is the likelihood that effective supply adds will be less than an announced deal if the supply increases are shared in proportion to the original cuts. And then we have the wildcards of Venezuela and Iran which could push WTI well above $70. Continue reading “WTI Should Be Going Back Above $70 No Matter How Much OPEC Increases Oil Supply This Weekend”
It was bad timing for Pembina’s analyst day to start at 8:30am EDT on May 29 given it was just before the Morneau Trans Mountain statement. Mgmt was well aware of this and started off by saying “Yes, we might have an evacuation if Trans Mountain or Kinder Morgan announces whatever they’re going to do”. It meant that Pembina’s comments were completely overshadowed as investors and sell side analysts were forced to deal with the implications of that Morneau announcement. Its too bad because mgmt. made some key comments (not on the slides) on LNG and Jordan Cove. We listened to the webcast and believe mgmt. is signaling FID on Jordan Cove is coming in 2018. Pembina sees a perfect timing for Jordan Cove LNG right now (they were too early before) to take advantage of a LNG supply gap opening up in 2023, are working with pipeline companies about the natural gas supply to Jordan Cove, are in active discussions with Chinese offtakers, and also state a “final investment decision expected following receipt of regulatory and environmental approvals”. We get a similar impression as we did with Shell’s comments six months ago – it just sounds like Pembina is pointing to or signaling a FID on Jordan Cove LNG in 2018, or as soon as they get the final approvals. Continue reading “Morneau/Trans Mountain Overshadowed Pembina Pointing To FID on Jordan Cove LNG In 2018 Or Following Final Approvals”
Its really hard to not believe a LNG Canada FID is coming in 2018 and coming a lot sooner than most expect as we continue to see events and comments pointing to a FID in 2018. This week’s event looks to be the most significant to date – reports that JGC and Fluor have apparently won the key contract for LNG Canada, the $14 billion design and build contract. This is much more significant than the April 9 Horizon North announcement of its conditional award to build temporary work accomodations for 1,175 beds in NE BC for an undisclosed customer. If true, this means that LNG Canada has picked its project construction team. We don’t see why this would be announced now if the FID wasn’t coming until late 2018. It is consistent with our long stated views that a LNG Canada FID was coming in 2018 and likely this summer either in the Shell Q2 reporting in late July or in mid Sept. Readers know that LNG markets and LNG Canada FID have been one of our key game changing themes for the Cdn oil and gas sector since our Sept 20, 2017 blogs on LNG markets, Shell’s bullish views, and how China’s fight against pollution was a game changer for LNG markets. The signs all point to LNG Canada FID soon, which should make for an interesting Shell Q1/18 earnings call on Thurs Apr 25. Continue reading “LNG Canada FID Is Looking Soon, Nikkei Asian Review Reports The Major $14b Orders To Design And Build Have Been Awarded”
The investor and Cdn oil and gas sector focus today is all on “what?” Kinder Morgan Canada (“KML”) is saying on the Trans Mountain expansion. The “what?” being KML is setting a May 31 deadline to get clarity on being able to complete construction without an ongoing battle and delays and changes from BC that effectively frustrate the execution of the federally approved project. However, it also means the “why now?” is being overlooked. KML highlighted that the timing of May 31 was driven by the seasonal restriction on construction activities for its pipeline through BC and its terminal expansion on the BC coast. KML said “what calls for that decision, that announcement at this time is we can’t move the seasons in Canada. there are certain seasons when you can do certain things”. The “why now?” is a good reminder of why we believe we are likely to see a game changer this summer for the Cdn oil and gas sector – a LNG Canada FID. LNG will also have seasonal construction considerations, and this is why we have consistently said that any FID in 2018 for LNG Canada would be in the summer and not year end. KML’s “why now?” comments reinforce this seasonal aspect of decision making for LNG Canada. Continue reading “The “Why Now?” For KML’s May 31 Deadline Reminds Why LNG Canada’s FID Is Likely In The Summer And Not In Nov Or Dec”