Lasting Change To Oil & Gas #1 – AMLO’s Refinery Push Should Take >300,000 b/d Heavy/Medium Crude Out Of Gulf Coast By 2021

This is Blog #1 in our series of blogs over the 45 days on overlooked “Lasting Changes To Oil & Gas”.  The brutal Q4 to date for oil and gas investors has led to a flight of capital and meant there are overlooked lasting change items (both positive and negative) that are reshaping the 2019 to 2025 outlook for oil and natural gas.  Declining Venezuela and Mexico oil production and exports to the US has directly led to increasing Cdn oil exports to the US.  Blog #1 in this series is how the election of Andrés Manuel López Obrador as President of Mexico and his priority on fixing/upgrading Mexican refinery operations is an added plus for Cdn heavy/medium oil.  AMLO’s first big announcement, the Plan Nacional de Refinacion, says Mexico’s refineries “will process 1 million 863 thousand barrels of crude oil per day by 2022”.  This compares to the 640,000 b/d processed by Mexican refineries in Q3/18.  Even if AMLO only gets at least half way to the target, this should reduce Mexico heavy/medium crude exports into the US Gulf Coast (USGC) refineries by at least ~300,000 b/d by 2021/2022.  This will create added demand opportunity for Cdn heavy/medium oil to fill.  This is a key AMLO priority for his first 6-year term.  It isn’t likely to happen as quickly as AMLO’s target, but even reaching half of his target should create a big opportunity for Cdn heavy/medium oil in the USGC.

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India’s Natural Gas Consumption Would Be Up ~1.3 Bcf/d Per Year If Its To Reach Its Target Of 15% Of Its Energy Mix By 2030

India has mostly been a non-factor to date in the correction of LNG markets in 2017 because of a lack of domestic natural gas infrastructure, but that should change in 2019 and 2020.  Yesterday, we saw two good reminders on how India is just now starting to build out the domestic natural gas infrastructure to support India Prime Minister Modi’s target to get natural gas to 15% of its energy mix in 2030.   Modi’s made a major speech highlighting the build out of its compressed natural gas (CNG) distribution centres for vehicles and local natural gas distribution pipelines.  Bloomberg estimated that LNG regasification capacity additions of ~4.9 bf/d in 2019/2020, which is 1.3x current India LNG regasification capacity.  If Modi is to hit the natural gas target to reach 15% of energy mix in 2030, this would add ~1.3 bcf/d of natural gas consumption per year.  India may not be a China in terms of its LNG impact, but ~1.3 bcf/d of increased demand per year is equivalent to approx 2 Cheniere LNG phases, or ~75% of LNG Canada’s Phase 1 of 1.7 bcf/d.  Its one more reason why the outlook for LNG demand looks good in the early 2020s.

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Our Suggestion To Premier Notley: Act Now, Don’t Let The Liberals Accelerate The Phase Out Of Jacketed CPC-1232 Tank Cars

We aren’t on Premier Notley’s special envoy consultation list to come up with solutions to narrow the heavy oil differentials, but, if we were, we would tell them that the first priority should be to not make the situation worse.   And we would be strongly pushing that they act now to make sure the Liberals do not move on their announced desire to accelerate the phase out of the jacketed CPC-1232 tank cars. The jacketed CPC-1232 tank car is likely the majority of crude by rail tank cars in Canada and any elimination or earlier phase out of the existing CPC-1232 tank cars would directly reduce Cdn crude by rail capacity and volumes.  This would lead to an increasing in heavy oil differentials.  We don’t think it is an easy task, but it will be a lot easier for her to stop the Liberals from moving on this issue as opposed to trying to get it overturned after it has been implemented.  Our concern is that if Alberta does not act now, they run the risk of a similar situation as Bill C69, where something gets passed that is a big negative to the oil sector.  No one should forget that its not just Alberta that has elections in 2019, the next we shouldn’t forget that the Canada federal election has to be held by Oct 21, 2019.

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Did Saudi’s Threat Today To Use Oil As A Weapon Also Include A Broadening Of What Would Cause It To Do So?

Oil is up tonight (WTI ~$0,90 and Brent ~$1.10) following Saudi’s not so veiled threat this morning to potentially use oil as a weapon.  We are also writing ahead of the 60 Minutes playing of its full interview with Trump.  However, that was recorded yesterday (before today’s Saudi warning) so we don’t expect the interview to have any major shifts in emphasis from the publicly disclosed portion yesterday for potential “severe punishment” if Saudi Arabia is at guilty in the Khashoggi mystery.  Unless the US, Canada and others retreat on the Khashoggi mystery, we expect that oil is likely higher with the Saudi threat.  Global oil supply is tight with the Iran/Venezuela oil declines and any Saudi retreating of its current 10.7 mmb/d  will cause oil to go higher.  Perhaps most importantly, we see added risk as today’s Saudi statement seemed to point to a change in the Saudi policy on oil exports.  Today, Saudi Arabia includes in others attempt to undermine it threatening sanctions, but also “using political pressures, or repeating false accusations”.  This appears to be a broadening of the risk of impacting oil exports from the recent Saudi Press Agency report “that said “Khalid Al-Falih, reaffirmed that the petroleum policy of the Kingdom of Saudi Arabia emphasizes that the Kingdom’s petroleum supplies to countries around the world are not to be impacted by political considerations.  He reiterated that this is a firm and longstanding policy that is not influenced by political circumstances”.   We believe this broadening of the Saudi position should put more of a risk premium in oil than what is being seen so far tonight, that is unless there is a retreat in criticism of Saudi Arabia.  Today’s statement suggests a broadening of what would cause Saudi to cut off oil exports.

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Have OPEC/Non-OPEC Now Covered Almost 2 Mmb/d Of Iran Cuts And Venezuela Declines?

Its been a good month for oil prices that has been driven by the indications that US sanctions will hit Iran’s exports more than expected.  It is why we posted our Sept 28 blog “Both China And India May Be Giving In And Reducing Iran Oil Imports, A Big Plus To Oil Prices”.  WTI ~$75 and Brent ~$85 are strong oil prices.  We continue to be bullish on oil prices and expect continued strength, but this week’s multiple positive oil supply items point to a holding of oil prices near current levels.  There were several positive global oil supply indications (from Saudi Arabia, Russia, Angola, Libya, Nigeria, and US) that point to OPEC/non-OPEC now covering ~1.926 mmb/d of potential Iran cuts and Venezuela declines.  This is a big increase from a week ago.  Adding ~1.926 mmb/d is a big supply add, but may fall short of Iran and Venezuela reductions being more like ~2.14 mmb/d.  However, absent a supply interruption, the larger than expected supply adds are likely enough to keep a lid on oil prices given that global oil demand will start to seasonally decline as we get to year end.  The IEA forecasts Q1/19 oil demand to be 1 mmb/d lower than Q4/18.    The other reminder is that oil markets are increasingly set up for an oil price spike in Q2/19 or Q3/19 as the normal seasonal increases in global oil demand kicks in in Q2/19 and Q3/19.  The IEA forecasts Q3/19 oil demand to be up 2.1 mmb/d vs its Q4/19 forecast. Continue reading “Have OPEC/Non-OPEC Now Covered Almost 2 Mmb/d Of Iran Cuts And Venezuela Declines?”

Both China And India May Be Giving In And Reducing Iran Oil Imports, A Big Plus To Oil Prices

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.

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Trudeau’s Not So Subtle Hint That LNG Canada FID Is Likely Coming Next Week

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.

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Enbridge’s “Other” Projects Could Add 325,000 b/d Egress On Top Of Its Line 3 Replacement Add Of 375,000 b/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.

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Hurricanes: Key Links For Hurricane Impact On Gulf Coast Oil and Gas Infrastructure And Production

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”

Brent-WTI Diff Should Widen Earlier As Shanghai Port Leads With A 15-Mth Earlier Adoption Of IMO 2020 Lower Sulphur Limits

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.

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