Is Saudi Arabia Signaling The Target For Rebalancing Oil Will Be Less Than The 5-Year Average Of Oil Inventories?

Oil trading today and tomorrow will be all about the chatter and speculating if OPEC and Russian will extend its cuts on Nov 30.  For the past couple months, the clear expectation has been an extension for a 9-month extension of the cuts to the end of 2018.  WTI has been very strong and has moved to high $50’s on the expectation for the extension. At 6am MST, WTI has moved off its bottom this morning and is now only down $0.39 to $57.68.  We are a little surprised it hasn’t moved a little weaker and that Saudi oil minister al-Falih’s comments aren’t getting much market attention this morning, or at least his saying ““What is a normal level of stocks? This is a technical matter and this needs talks with other parties”.   It seems that Al-Falih could be suggesting there could be some other definition for normal or the target.  In theory, this could allow them to put a lesser target in and they are further along to being rebalanced.   There is logic to using a different period.  It means that OPEC and Russia can say that rebalancing will be reached way sooner, but it is moving the goal posts closer versus the expectations of correcting to the 5-year average. Continue reading “Is Saudi Arabia Signaling The Target For Rebalancing Oil Will Be Less Than The 5-Year Average Of Oil Inventories?”

Cdn Heavy Oil Differentials Should Narrow With The Good News That PHMSA Approves Keystone Restart

There was good news this afternoon when PHMSA signed off on the restart of Keystone Pipeline at reduced pressures tomorrow (Nov 28).  Keystone was only down for 12 days, which is a faster return than we expected given the tough public comments from the South Dakota PUC.  But the good news for Keystone is that the restart decision authority was from PHMSA and not the PUC.  The PUC is still a wildcard, but its potential impact is probably down the road a month or two, or whenever they finish their forensic analysis and can determine if TransCanada violated any permit conditions.   The Keystone restart is good news for Cdn heavy oil producers as Cdn heavy oil differentials should recapture some of the recent widening that happened once Keystone was shut in.  TransCanada did not disclose the exact level of reduced volumes to restart and what volumes are reached in the rampup and when, but the fact that PHMSA signed off on the restart should bring both an immediate positive tone and impact to Cdn heavy oil.   Even at reduced volumes, this is good news for Cdn heavy oil, especially given the declining oil production of the primary competitors to Gulf of Mexico refiners (Mexico and Venezuela) in 2016 and continuing in 2017. Continue reading “Cdn Heavy Oil Differentials Should Narrow With The Good News That PHMSA Approves Keystone Restart”

Declining Venezuela/Mexico Production Should Limit The Widening Of Cdn Heavy Oil Diffs From The Keystone Pipeline Shut Down

Its been 10 days since Keystone Pipeline was shut down and its hard to see a quick restart.  We have a regulator with responsibility (Pipeline & Hazardous Materials Safety Administration) for the pipeline restart and one that wants to make sure it has its say (South Dakota Public Utilities Commission).  There is no formal indication for the cause of the leak, but it sounds like it is different than the cause of the nearby April 2016 Keystone Pipeline leak.   The only real option for displaced volumes is by rail as Enbridge’s heavy oil lines are full.  But we believe Gulf of Mexico refineries will want to lock up Cdn heavy oil barrels because of declining Venezuela and Mexico oil production.   Just like Venezuela and Mexico led to narrower than expected Cdn heavy oil differentials in 2017, it should help keep a cap on the widening Cdn heavy oil differentials to not much more than the cost of rail. Continue reading “Declining Venezuela/Mexico Production Should Limit The Widening Of Cdn Heavy Oil Diffs From The Keystone Pipeline Shut Down”

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”