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 Permian is in desperate need of pipelines. That much is true. There is so much shale liquids sloshing underneath the Permian formation in Texas and New Mexico, that even though it has already upended global crude market and turned the USA into the world’s largest crude producer, there is still so much of it trapped inland, unable to make the 800km journey to the Gulf Coast that would take them to the big wider world.
The stakes are high. Even though the US is poised to reach some 12 mmb/d of crude oil production next year – more than half of that coming from shale oil formations – it could be producing a lot more. This has already caused the Brent-WTI spread to widen to a constant US$10/b since mid-2018 – when the Permian’s pipeline bottlenecks first became critical – from an average of US$4/b prior to that. It is even more dramatic in the Permian itself, where crude is selling at a US$10-16/b discount to Houston WTI, with trends pointing to the spread going as wide as US$20/b soon. Estimates suggest that a record 3,722 wells were drilled in the Permian this year but never opened because the oil could not be brought to market. This is part of the reason why the US active rig count hasn’t increased as much as would have been expected when crude prices were trending towards US$80/b – there’s no point in drilling if you can’t sell.
Assistance is on the way. Between now and 2020, estimates suggest that some 2.6 mmb/d of pipeline capacity across several projects will come onstream, with an additional 1 mmb/d in the planning stages. Add this to the existing 3.1 mmb/d of takeaway capacity (and 300,000 b/d of local refining) and Permian shale oil output currently dammed away by a wall of fixed capacity could double in size when freed to make it to market.
And more pipelines keep getting announced. In the last two weeks, Jupiter Energy Group announced a 90-day open season seeking binding commitments for a planned 1 mmb/d, 1050km long Jupiter Pipeline – which could connect the Permian to all three of Texas’ deepwater ports, Houston, Corpus Christi and Brownsville. Plains All American is launching its 500,000 b/d Sunrise Pipeline, connecting the Permian to Cushing, Oklahoma. Wolf Midstream has also launched an open season, seeking interest for its 120,000 b/d Red Wolf Crude Connector branch, connecting to its existing terminal and infrastructure in Colorado City.
Current estimates suggest that Permian output numbered around 3.5 mmb/d in October. At maximum capacity, that’s still about 100,000 b/d of shale oil trapped inland. As planned pipelines come online over the next two years, that trickle could turn into a flood. Consider this. Even at the current maxing out of Permian infrastructure, the US is already on the cusp on 12 mmb/d crude production. By 2021, it could go as high as 15 mmb/d – crude prices, permitting, of course.
As recently reported in the WSJ; “For years, the companies behind the U.S. oil-and-gas boom, including Noble Energy Inc. and Whiting Petroleum Corp. have promised shareholders they have thousands of prospective wells they can drill profitably even at $40 a barrel. Some have even said they can generate returns on investment of 30%. But most shale drillers haven’t made much, if any, money at those prices. From 2012 to 2017, the 30 biggest shale producers lost more than $50 billion. Last year, when oil prices averaged about $50 a barrel, the group as a whole was barely in the black, with profits of about $1.7 billion, or roughly 1.3% of revenue, according to FactSet.”
The immense growth experienced in the Permian has consequences for the entire oil supply chain, from refining balances – shale oil is more suitable for lighter ends like gasoline, but the world is heading for a gasoline glut and is more interested in cracking gasoil for the IMO’s strict marine fuels sulphur levels coming up in 2020 – to geopolitics, by diminishing OPEC’s power and particularly Saudi Arabia’s role as a swing producer. For now, the walls keeping a Permian flood in are still standing. In two years, they won’t, with new pipeline infrastructure in place. And so the oil world has two years to prepare for the coming tsunami, but only if crude prices stay on course.
Recent Announced Permian Pipeline Projects
Headline crude prices for the week beginning 3 December 2018 – Brent: US$61/b; WTI: US$52/b
Headlines of the week
The engine oil market has grown up around 10 to 12% in the last three years because of various reasons, mostly because of the rise of automobiles.
According to the Bangladesh Road Transport Authority (BRTA), the number of registered petrol and diesel-powered vehicles is 3,663,189 units.
The number of automotive vehicles has increased by 2.5 times in the last eight years.
The demand for engine oils will rise keeping pace with the increasing automotive vehicles, with an expected 3% yearly growths.
Mostly, for this reason, the annual lubricant consumption raised over 14% growth for the last four years. Now its current demand is around 160 million tonnes.
The overall lubricants demand has increased also for the growth of the power sector, which has created a special market for industrial lubricants oil.
The lubricants oil market size for industries has doubled in the last five years due to the establishment of a number of power plants across the country.
The demand for industrial oil will continue to rise at least for the next 15 years, as the quick rental power plants need a huge quantity of lube oil to run.
The industries account for 30% of the total lubricant consumption; however, it is expected to take over 35% of the overall demand in the next 10 years.
Mobil is the market leader with 27% market share; however, market insiders say that around 70% market shares belong to various brands altogether, which is still undefined.
It is already flooded with many global and local brands.