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?”
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.
We think the market overreacted to the today’s Federal Court of Approval ruling against the 590,000 b/d Trans Mountain expansion and forgot that Trans Mountain was #3 in the order of new oil pipeline projects behind Enbridge Line 3 and TransCanada Keystone XL. There is no other way to spin it except it was bad news for the project. Industry is fortunate the Liberals have bought Trans Mountain otherwise the expansion project would likely have been shelved post today’s ruling. Rather Liberal Finance Minister Morneau put out a very determined public resolve today that the Liberals will ensure the Trans Mountain expansion gets done. But even if so, today’s ruling means that the in service timing will be delayed to some yet to be determined later date. Prior to today, the Liberals had not said the targeted in service date post their formal acquisition of Trans Mountain. Our view has been that, prior to today, in service was Jan 2022 at the earliest, perhaps more like mid-2022 and had dropped to #3 in the order of oil pipeline takeaway projects behind Enbridge’s 375,000 Line 3 replacement and TransCanada’s 830,000 b/d Keystone XL. Line 3 and Keystone will add 1.205 mmb/d of capacity, equal to 30% of western Canada’s 2017 oil production of 3.975 mmb/d. Trans Mountain has dropped to #3 in the order of key takeaway oil pipelines, but Morneau is making a strong statement to industry and investors that the expansion will get done. So its going to have an even later in service date, but as #3 it will add another leg up to what Line 3 and Keystone XL will do for western Canada oil.
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.