In November 2016, high production and seasonally low internal demand contributed to record crude oil exports from Iraq and near-record exports from Saudi Arabia (according to the Joint Organizations Data Initiative (JODI), with published data dating to January 2002). In that same month price spreads in the market supported high levels of U.S. crude imports from those countries. However, market developments, including the November 2016 agreement among certain members of the Organization of the Petroleum Exporting Countries (OPEC) to reduce production and the recent widening of the spread between Dubai/Oman crude and U.S.-produced Mars crude, suggest U.S. imports from Saudi Arabia and Iraq are now becoming less attractive to U.S. refiners.
According to the latest JODI data, Saudi crude oil exports reached 8.3 million barrels per day (b/d) in November 2016, the highest level since May 2003, before declining to 8.0 million b/d in December. Saudi exports generally increase from August to November as seasonal declines in domestic consumption increase availability of oil for export. In Iraq, exports reached a record high of almost 4.1 million b/d in November and remained at that level in December (Figure 1). According to JODI data, Saudi and Iraqi production levels were relatively high prior to the pledged production cuts beginning January 2017, with December 2016 volumes up 321,000 b/d and 700,000 b/d, respectively, from their year-ago levels, creating an opportunity to increase exports.
Given transit times, cargoes exported from Saudi Arabia and Iraq in November and December 2016 would be expected arrive in the United States between December 2016 and February 2017. Imports from Saudi Arabia into the United States increased for five consecutive weeks, rising from 1.0 million b/d for the week ending January 6 to 1.3 million b/d for the week ending February 10. Similarly, U.S. imports from Iraq grew for five consecutive weeks, increasing from 373,000 b/d for the week ending December 9, 2016 to 723,000 b/d for the week ending January 13, 2017 (Figure 3).
The price difference between Dubai/Oman medium sour grade oil, which serves as a benchmark price for similar grades produced through the Middle East, and Mars, a U.S. medium sour crude oil with similar properties, was at its lowest level for several years in 2016 (Figure 4). Under such pricing conditions, medium and heavy crude oils from Saudi Arabia and Iraq were attractive to U.S. refiners because they produced a profitable slate of finished products when processed in complex refineries.
After OPEC announced crude oil production cuts in late November 2016, the relative price of Dubai/Oman crude oil rose because supply reductions pledged by Middle East producers disproportionately affected medium sour crudes. In January 2017, the premium of Dubai/Oman over Mars reached its highest level in over a year, which is likely to encourage U.S. refiners to process more domestic medium sour barrels while reducing imports of comparable grades from the Middle East.
U.S. average regular gasoline price falls, diesel price rises
The U.S. average regular gasoline retail price fell less than one cent from the previous week to $2.30 per gallon on February 20, up 57 cents from the same time last year. The Midwest price fell two cents to $2.19 per gallon, while the Gulf Coast price fell one cent to $2.07 per gallon. The West Coast and Rocky Mountain prices each increased two cents to $2.75 per gallon and $2.25 per gallon, respectively. The East Coast price increased less than one cent, remaining at $2.29 per gallon.
The U.S. average diesel fuel price increased less than one cent, remaining at $2.57 per gallon on February 20, 59 cents higher than a year ago. The Rocky Mountain price increased three cents to $2.55 per gallon, while the West Coast, Midwest, and Gulf Coast prices each increased one cent to $2.88 per gallon, $2.50 per gallon, and $2.43 per gallon, respectively. The East Coast price rose less than one cent, remaining at $2.63 per gallon.
Propane inventories fall
U.S. propane stocks decreased by 3.3 million barrels last week to 49.8 million barrels as of February 17, 2017, 16.9 million barrels (25.3%) lower than a year ago. Gulf Coast, Midwest, and East Coast inventories decreased by 1.8 million barrels, 1.0 million barrels, and 0.6 million barrels, respectively, while Rocky Mountain/West Coast inventories were unchanged. Propylene non-fuel-use inventories represented 5.8% of total propane inventories.
Residential heating oil price increases, propane price decreases
As of February 20, 2017, residential heating oil prices averaged nearly $2.65 per gallon, less than one cent per gallon more than last week’s price but 55 cents per gallon higher than last year’s price at this time. The average wholesale heating oil price is just under $1.72 per gallon, two cents per gallon less than last week but nearly 62 cents per gallon higher than a year ago. Residential propane prices averaged just below $2.45 per gallon, nearly one cent per gallon less than last week’s price but 42 cents per gallon higher than a year ago. Wholesale propane prices averaged $0.82 per gallon, four cents per gallon lower than last week but nearly 35 cents per gallon higher than last year’s price.
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The UK has just designated the Persian Gulf as a level 3 risk for its ships – the highest level possible threat for British vessel traffic – as the confrontation between Iran with the US and its allies escalated. The strategically-important bit of water - and in particular the narrow Strait of Hormuz – is boiling over, and it seems as if full-blown military confrontation is inevitable.
The risk assessment comes as the British warship HMS Montrose had to escort the BP oil tanker British Heritage out of the Persian Gulf into the Indian Ocean from being blocked by Iranian vessels. The risk is particularly acute as Iran is spoiling for a fight after the Royal Marines seized the Iranian crude supertanker Grace-1 in Gibraltar on suspicions that it was violating sanctions by sending crude to war-torn Syria. Tensions over the Gibraltar seizure kept the British Heritage tanker in ‘safe’ Saudi Arabian waters for almost a week after making a U-turn from the Basrah oil terminal in Iraq on fears of Iranian reprisals, until the HMW Montrose came to its rescue. Iran’s Revolutionary Guard Corps have warned of further ‘reciprocation’ even as it denied the British Heritage incident ever occurred.
This is just the latest in a series of events around Iran that is rattling the oil world. Since the waivers on exports of Iranian crude by the USA expired in early May, there were four sabotage attacks on oil tankers in the region and two additional attacks in June, all near the major bunkering hub of Fujairah. Increased US military presence resulted in Iran downing an American drone, which almost led to a full-blown conflict were it not for a last-minute U-turn by President Donald Trump. Reports suggest that Iran’s Revolutionary Guard Corps have moved military equipment to its southern coast surrounding the narrow Strait of Hormuz, which is 39km at its narrowest. Up to a third of all seaborne petroleum trade passes through this chokepoint and while Iran would most likely overrun by US-led forces eventually if war breaks out, it could cause a major amount of damage in a little amount of time.
The risk has already driven up oil prices. While a risk premium has already been applied to current oil prices, some analysts are suggesting that further major spikes in crude oil prices could be incoming if Iran manages to close the Strait of Hormuz for an extended period of time. While international crude oil stocks will buffer any short-term impediment, if the Strait is closed for more than two weeks, crude oil prices could jump above US$100/b. If the Strait is closed for an extended period of time – and if the world has run down on its spare crude capacity – then prices could jump as high as US$325/b, according to a study conducted by the King Abdullah Petroleum Studies and Research Centre in Riyadh. This hasn’t happened yet, but the impact is already being felt beyond crude prices: insurance premiums for ships sailing to and fro the Persian Gulf rose tenfold in June, while the insurance-advice group Joint War Committee has designated the waters as a ‘Listed Area’, the highest risk classification on the scale. VLCC rates for trips in the Persian Gulf have also slipped, with traders cagey about sending ships into the potential conflict zone.
This will continue, as there is no end-game in sight for the Iranian issue. With the USA vague on what its eventual goals are and Iran in an aggressive mood at perceived injustice, the situation could explode in war or stay on steady heat for a longer while. Either way, this will have a major impact on the global crude markets. The boiling point has not been reached yet, but the waters of the Strait of Hormuz are certainly simmering.
The Strait of Hormuz:
Headline crude prices for the week beginning 8 July 2019 – Brent: US$64/b; WTI: US$57/b
Headlines of the week
Utility-scale battery storage units (units of one megawatt (MW) or greater power capacity) are a newer electric power resource, and their use has been growing in recent years. Operating utility-scale battery storage power capacity has more than quadrupled from the end of 2014 (214 MW) through March 2019 (899 MW). Assuming currently planned additions are completed and no current operating capacity is retired, utility-scale battery storage power capacity could exceed 2,500 MW by 2023.
EIA's Annual Electric Generator Report (Form EIA-860) collects data on the status of existing utility-scale battery storage units in the United States, along with proposed utility-scale battery storage projects scheduled for initial commercial operation within the next five years. The monthly version of this survey, the Preliminary Monthly Electric Generator Inventory (Form EIA-860M), collects the updated status of any projects scheduled to come online within the next 12 months.
Growth in utility-scale battery installations is the result of supportive state-level energy storage policies and the Federal Energy Regulatory Commission’s Order 841 that directs power system operators to allow utility-scale battery systems to engage in their wholesale energy, capacity, and ancillary services markets. In addition, pairing utility-scale battery storage with intermittent renewable resources, such as wind and solar, has become increasingly competitive compared with traditional generation options.
The two largest operating utility-scale battery storage sites in the United States as of March 2019 provide 40 MW of power capacity each: the Golden Valley Electric Association’s battery energy storage system in Alaska and the Vista Energy storage system in California. In the United States, 16 operating battery storage sites have an installed power capacity of 20 MW or greater. Of the 899 MW of installed operating battery storage reported by states as of March 2019, California, Illinois, and Texas account for a little less than half of that storage capacity.
In the first quarter of 2019, 60 MW of utility-scale battery storage power capacity came online, and an additional 108 MW of installed capacity will likely become operational by the end of the year. Of these planned 2019 installations, the largest is the Top Gun Energy Storage facility in California with 30 MW of installed capacity.
As of March 2019, the total utility-scale battery storage power capacity planned to come online through 2023 is 1,623 MW. If these planned facilities come online as scheduled, total U.S. utility-scale battery storage power capacity would nearly triple by the end of 2023. Additional capacity beyond what has already been reported may also be added as future operational dates approach.
Of all planned battery storage projects reported on Form EIA-860M, the largest two sites account for 725 MW and are planned to start commercial operation in 2021. The largest of these planned sites is the Manatee Solar Energy Center in Parrish, Florida. With a capacity of 409 MW, this project will be the largest solar-powered battery system in the world and will store energy from a nearby Florida Power and Light solar plant in Manatee County.
The second-largest planned utility-scale battery storage facility is the Helix Ravenswood facility located in Queens, New York. The site is planned to be developed in three stages and will have a total capacity of 316 MW.