US Production declines set to continue into 2017 — US light tight oil (LTO) production response is lagging rig counts by 6-7 months, based upon legacy well decline rates and rig productivity. Our Base Case expects LTO rig counts to take another drop in 1q16 and remain low through most of 2016. Initial signs of market re-balancing in 2h16 should allow a modest price recovery and some rig additions in late-2016. LTO output needs to decline by 1 mbpd to balance global oil market, in addition to other non-OPEC production declines. The December 2015 Short-term Energy Outlook (STEO) by EIA had forecast Brent prices at $56/bbl in 2q16, with resultant rebound in US production, but this is not realistic and does not balance the market. Download presentation on US Crude Exports here.
US Condensate Production & Exports Jan16
Declining USG (PADD3) condensate production to limit export availability — Severe rig count reductions in the Eagle Ford play and accelerating well decline rates are sending Eagle Ford crude and condensate output much lower for 2016-17. Although the repeal of the US crude export ban is further eroding the economics of condensate splitters on the USG, approximately 350 kbpd of new splitters are already completed, are under construction or have committed take-or-pay off-take agreements. A combination of lower condensate production, rising splitter intake and Canadian diluent requirements should limit condensate cargo export availability through the forecast period.
US Crude Export Destinations Jan16
European refiners play larger role in US crude & condensate exports — With Canadian imports remaining stable, Europe becomes the primary destination for incremental US crude and condensate exports. Although North Sea production should decline by 300 kbpd during 2015-20, European refiners have limited ability to take larger volumes of 45° API crude and 55+° API condensate, when we examine each country’s crude slate. US producers will need to find additional outlets in Latin America, as well as higher Asian exports, as the rising light-ends imbalance pressures prices and opens arbs.
Crude Seaborne Trade Oct15
Crude seaborne trade to remain flat for the next three years — Crude destocking in 2017-18, non-crude liquids bypassing the refining system and higher domestic crude runs should limit crude seaborne trade though 2018. Refinery bypass includes NGLs transferring directly into LPG supply, biofuels, GTLs, direct crude burn and refinery gains. The crude tanker orderbook, at 18% of the fleet, is not so “moderate” under this demand regime.
Rising Crude Runs in Producing Countries & Crude Exports Oct15
Where exports come from… Severe drop in refinery utilisations among eight key oil producers and exporters provided an additional 500-700 kbpd of crude exports during 1h16. These eight producers account for more than half of global crude exports. Recovery in utilisations should remove this extra crude from the market in 2016, and the Latin American impact alone could approach 200 billion tonne-miles, or 2% of tanker demand. Refinery utilisations do not recover fully, however, due to the destruction of the Baiji refinery in Iraq, as ISIS forces retreated, and from continued operating upsets in Venezuela.
Floating Storage Oct15
Gradual release of 6.4 mdwt of Iranian floating storage vessels over 18 months adds 1.5% to dirty tanker operating fleet growth, just as supply peaks in late-2016 and early-2017. Even with slippage, yards should deliver almost 60 VLCCs during 2h16 and 1h17, which is enough to move 2.4 mbpd of crude between the AG and Asia. Owners may be slow to scrap in 2016, but demolition should accelerate in 2017, bringing growth back to 2% by late-2017.
Dirty Tanker Supply Outlook Oct15
Ecstatic over lofty tanker earnings brought on by OPEC policy largesse — and convinced that this is the start of a broad, cyclical recovery — owners once again ordered too many crude tankers in 2015. Their justification was a simplistic hypothesis about inter-basin crude flows, but shifts in global production, refining and imports suggested that the sector was a 1% growth business, at best. Given the orderbook size, the results were predictable. Download 28-page summary section of 128-page presentation here.
European Demand Jun15
Written in June 2015, when media enthusiasm over rising oil demand was hitting a crescendo, suggesting that demand would resolve the global oil supply imbalance. Although demand for price-elastic oil products, such as gasoline, continued to remain strong — especially in key markets of China, India and the US — a tepid macroeconomic environment had limited demand growth for other product grades. The media overreached when it suggested that European oil demand jumped 4% yoy in 1q15 on lower prices. In fact, bitterly-cold weather and changing bunker regulations drove the majority of Europe demand growth in 1q15, supporting crude runs. Normal weather patterns during the winter of 2015-16 led to negative yoy comparisons for Europe, pressuring distillate balances and pricing. Download report here.
Jones Act & Panama Canal Feb15
Presentation at Crude-by-Water Conference in Houston on 04 February 2015. A discussion on whether the new set of Panama Canal locks opening in 2q16 could accommodate the movement of USG crude to USWC refiners facing production declines in Alaska North Slope crude (ANS) and domestic Californian heavy crude. The higher operating and capital costs of Jones Act Alaska fleet would make the required earnings and freight costs too high to overcome typical differentials between ANS and light USG marker grades. Download presentation here.
Citgo Refinery Sales Oct14
Market commentary in October 2014 suggested that the sale of PDVSA’s three Citgo refineries would unleash significant volumes of Venezuelan crude from the Citgo crude slates for Chinese export, and thus boost VLCC demand by as much as 4%. This is unlikely. Actual Citgo Venezuelan imports are modest, but necessary for the plants. Instead, rising tight oil production and Canadian crude imports should send Latin American volumes eastward, but the shift in Saudi pricing posture after we published this report should change the extent. If successful in pricing US tight oil and Canadian oil sands out of the market, then PADD3 seaborne imports will not fall as much and the refiners’ crude wall would be less acute. Download report here.