There was significant news this week that are pointing to oil going higher, especially with this morning’s reports that Sinopec has cut its Iran oil loadings by half for Nov and Tues that India’s two biggest refiners haven’t asked for any loadings from Iran for Nov deliveries. Iran deliveries by mid Nov could still be achieved if Iran loadings are done within the two weeks for China or four weeks for India. But the clock is ticking quickly, especially for China. This week’s news is significant as it points to both China and India(Iran’s two biggest oil markets) giving in and cutting Iran oil imports to a significant degree. If so, it points to US sanctions cutting Iran oil exports to ~1.7 mmb/d and certainly above our expected range of 1.0 to 1.5 mmb/d. A cut of ~1.7 mmb/d would also be well above market expectations. This is why WTI and Brent oil prices are strong this week and expected to be stronger unless we see an abrupt change. Especially since the expectation has been that China wouldn’t be cutting Iran oil imports, rather they would maintain but also agree to not increase Iran oil imports. We should note that the impact of increased oil sanctions should ease a bit around year end as oil demand is seasonally lower every winter than in the fall and summer. The IEA forecasts Q1/19 oil demand will be 1 mmb/d lower than Q4/18. The other warning is that we still see the setup for an oil price spike in Q2/19 or Q3/19 once oil demand seasonally increases as long as Iran and Venezuela sanctions remain in place.
For those remaining few who aren’t yet believing the LNG Canada FID is coming next week, we would direct you to Prime Minister Trudeau’s tweet yesterday. It included a photo of Trudeau meeting with Shell CEO van Buerden in New York and the caption “Today, I had another excellent discussion with @Shell’s CEO, Ben van Buerden, on how we can work together to advance energy project that are good for the our economy and our environment – and how to do so responsibly”. Anyone who knows politicians knows that they like to hint and be in early on any big news and his tweet has to be a not so subtle hint that the LNG Canada FID is coming soon. Its probably the final indicator pointing to the LNG Canada FID next week. This week, it seemed like everyone (investors, sellside and media) seems to be writing and calling for the LNG Canada FID on Tues Oct 5. This would be a significant positive event for the Cdn natural gas outlook because it provides the potential for a structural fix to western Canada natural gas. The biggest impact will be in a few years as production ramps up and first LNG becomes near. While there will be an immediate impact, it will allow capital providers to believe a structural fix is coming to western Canada natural gas over the mid term. After all, the two potential phases of LNG Canada will provide visibility to ~3.4 bcf/d of demand, which is material relative to western Canada gas production of ~18 bcf/d.
It sounds like many were surprised by our positive view on Cdn oil outlook that we outlined in our SAF 2019 Energy Market Outlook webcast today. [The webcast is found at:[LINK]] Our outlook was titled “Near Term Canadian Oil Outlook Looks Significantly Better Than Expected”. We recognize the tone to Cdn oil has been negative post the recent Trans Mountain expansion court ruling and the big hit to Cdn light and heavy oil differentials in Sept. The market expects Enbridge’s Line 3 to add 375,000 b/d in late 2019, but then nothing until Keystone XL around 2022/2023 and hopefully Trans Mountain expansion at 2023 or later. And Line 3, by itself, is only expected to provide temporary pipeline relief for projected western Canada oil growth However with the delays in Keystone XL and Trans Mountain expansion, we believe there is an excellent opportunity for action on Enbridge’s suite of “low cost” “highly executable” projects that could add 450,000 b/d capacity to its mainline to PADD II (Midwest). We call these Enbridge’s “Other” projects, which for some reason have been ignored despite being highlighted going back to the Enbridge Dec 2017 investor day. We believe that there is at least 325,000 b/d of likely capacity additions around 2020 – drag reducing agents, unutilized Bakken Expansion Program capacity and Line 13 reversal. It is important to remember that Enbridge sees each of these projects as adding effective capacity on its mainline. These Enbridge”Other” projects are why we believe Canada’s added oil egress could be 700,000 b/d around 2020, and almost double the current market view of only 375,000 b/d. And by adding these “Other” projects, there should be enough pipeline capacity to support western Canada oil growth to 2025. This is why we see these as a potential game changer and why we had such a positive Cdn oil outlook in our webcast today.
With oil up strongly this morning (WTI is up $1.47 to $71.27 at 7am MDT) driven in part by Tropical Storm Gordon, we thought it was timely to remind of the key information sources for hurricane impact on US Gulf Coast oil and gas infrastructure and production. Tropical Storm Gordon is moving thru the eastern Gulf of Mexico and forecast to make landfall early Wed morning at a mix of Tropical Storm strength at New Orleans and Hurricane wind strength east of New Orleans. [Hurricane strength starts at 74 mph]. We should note that, over the past 48 hours, Gordon’s path has shifted a little to the east of the major oil refineries. But it is important to remember that the oil supply chain issues are not just from wind strength, but more often are caused by flooding and power shortages. Continue reading “Hurricanes: Key Links For Hurricane Impact On Gulf Coast Oil and Gas Infrastructure And Production”
There was big news on Friday with the Bloomberg terminal story “Shanghai Port to Start Tighter Marine-Fuel Sulfur Cap on Oct. 1”. Shanghai has surprised by being an early adopter of the lower sulphur 0.5% limits 15 months ahead of the IMO 2020 formal start date of Jan 1, 2020. With China’s continued push on pollution, we have to believe other Chinese ports will follow Shanghai’s lead as early adopters. Shanghai is #1 for the most port container volume in the world, and Chinese ports, in total, represent approx. 1/3 of total global container volume. The IMO 2020 lower sulphur limits are leading to heavy oil being hit in 2019 ahead of the Jan 1, 2020 start date. But we expect that if others in China follow Shanghai’s earlier adoption, it will bring forward (earlier) the negative IMO 2020 impact to widen heavy oil differentials. And an earlier widening of the heavy oil differential should lead to Brent winning more than WTI as the Permian oil takeaway constraints as not expected to be fixed until H2/19.