Matt Smith

Matt Smith
Last Updated: April 18, 2017
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Marine & Offshore
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Oil is on the defensive again, retracing from resistance in recent days amid bearish U.S.-centric data of rampant production increases. Despite the Good Friday holiday, we get the EIA inventory report at the usual time tomorrow, but for now, hark, here are six things to consider in oil markets today:  

1) As oil prices based on the Dubai-Oman benchmark remain more expensive than U.S.-based WTI, Latin American crude continues to be pulled towards Asia. This is displacing other flows, translating into lower U.S. imports. We are over halfway through the month, and imports from Central and South America are at the slowest monthly pace on our records.

Our ClipperData show that imports this month continue to drop from Brazil and Colombia, while Ecuadorian grades, Napo and Oriente, are completely absent. Only Venezuelan grades are showing strength versus the month prior:    

Imports from South and Central America.jpg

2) The latest monthly IEA report has been interpreted as somewhat downbeat, despite the prognostication that 'the market is already very close to balance'. This is because demand growth has been adjusted lower by 200,000 bpd in Q1, and by 100,000 bpd for 2017 on the whole, to +1.3mn bpd.

While Asian fuel demand has been the backbone of oil demand growth for many a year, signs of stuttering from various parts of the region - including South Korea, Japan and India - means demand growth may not be as robust as we have come to expect.   

The second piece of the puzzle is inventories. The agency reported that OECD oil and product stocks fell by a mere 8.1 million barrels in February after January's rise. This leaves them at 3.055 billion (beeelion) barrels, some 330 million barrels above the 5-year average (aka, the normalized level that is the goal of the OPEC production cuts).

Including the IEA's estimate for March, it projects that inventories still climbed on the aggregate through the first quarter of the year, up by 38.5 million barrels:

IEA oecd inventories March 2017.jpg

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3) Yesterday's feature on NPR's Texas Standard addressed the issue of fracking sand, and how it is in a bull market. The interview can be found here, while here are some of the sand stats quoted: 

--Fracking sand is used as a proppant in hydraulic fracturing, to hold open tiny fissures for oil and gas to pass through

--A total of 54 million tons of fracking sand were used in the U.S. in 2014. Demand is projected to rise to 80 million tons this year, and to 120 million tons in 2018

--Typically the fracking sector has been dominated by silica sand from Wisconsin and Minnesota, as well as from Illinois, Iowa and Indiana. But as more fracking sand is needed in Texas, more mines are starting up 

--Nearly 20 times more sand is used per well compared to the peak of the last energy boom

--The largest wells now consume up to 25,000 tons, compared to from 1,500 tons in 2014

--It can take up to 1,000 truck loads to haul enough sand to frack a single large well  

4) While so much focus remains on the oil boom in the Permian basin, it is important to note that according to the latest EIA drilling productivity report, natural gas production in the basin is set to reach a new milestone, clambering over 8 Bcf/d. This has prompted Blackstone Group LP to takeover EagleClaw Midstream Ventures for $2 billion. As crude production rises in the basin, more 'associated gas' is produced as a biproduct. With demand for natural gas set to continue on its upward trajectory due to a number of factors - power generation, industrial demand, pipeline and LNG exports - the future is looking bright for the Permian, for both oil and gas.     

permian gas.jpg

5) While on the topic of the Permian, the chart below is part of a study of 37 U.S. E&P companies by Bloomberg, showing that 32 of the 37 companies have hedged part of their production for 2017. As for Permian-focused companies, they have hedged 64 percent of their expected oil production for this year...and at a weighted average price of $49.43/bbl to boot. As efficiencies improve in the basin, a hedged price of around $50/bbl appears an attractive option. Only 21 of 37 have hedged anticipated production for 2018.  

Permian hedging.jpg

6) Finally, this piece out on RBN Energy references ClipperData, and how we are counting cargoes and using port agents to identify the quantity, type and quality of crude that is being imported into the U.S. on an almost real-time basis.

Latin American crude exports Permian Basin ClipperData
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The New Wave of Renewable Fuels

In 2021, the makeup of renewables has also changed drastically. Technologies such as solar and wind are no longer novel, as is the idea of blending vegetable oils into road fuels or switching to electric-based vehicles. Such ideas are now entrenched and are not considered enough to shift the world into a carbon neutral future. The new wave of renewables focus on converting by-products from other carbon-intensive industries into usable fuels. Research into such technologies has been pioneered in universities and start-ups over the past two decades, but the impetus of global climate goals is now seeing an incredible amount of money being poured into them as oil & gas giants seek to rebalance their portfolios away from pure hydrocarbons with a goal of balancing their total carbon emissions in aggregate to zero.

Traditionally, the European players have led this drive. Which is unsurprising, since the EU has been the most driven in this acceleration. But even the US giants are following suit. In the past year, Chevron has poured an incredible amount of cash and effort in pioneering renewables. Its motives might be less than altruistic, shareholders across America have been particularly vocal about driving this transformation but the net results will be positive for all.

Chevron’s recent efforts have focused on biomethane, through a partnership with global waste solutions company Brightmark. The joint venture Brightmark RNG Holdings operations focused on convert cow manure to renewable natural gas, which are then converted into fuel for long-haul trucks, the very kind that criss-cross the vast highways of the US delivering goods from coast to coast. Launched in October 2020, the joint venture was extended and expanded in August, now encompassing 38 biomethane plants in seven US states, with first production set to begin later in 2021. The targeting of livestock waste is particularly crucial: methane emissions from farms is the second-largest contributor to climate change emissions globally. The technology to capture methane from manure (as well as landfills and other waste sites) has existed for years, but has only recently been commercialised to convert methane emissions from decomposition to useful products.

This is an arena that another supermajor – BP – has also made a recent significant investment in. BP signed a 15-year agreement with CleanBay Renewables to purchase the latter’s renewable natural gas (RNG) to be mixed and sold into select US state markets. Beginning with California, which has one of the strictest fuel standards in the US and provides incentives under the Low Carbon Fuel Standard to reduce carbon intensity – CleanBay’s RNG is derived not from cows, but from poultry. Chicken manure, feathers and bedding are all converted into RNG using anaerobic digesters, providing a carbon intensity that is said to be 95% less than the lifecycle greenhouse gas emissions of pure fossil fuels and non-conversion of poultry waste matter. BP also has an agreement with Gevo Inc in Iowa to purchase RNG produced from cow manure, also for sale in California.

But road fuels aren’t the only avenue for large-scale embracing of renewables. It could take to the air, literally. After all, the global commercial airline fleet currently stands at over 25,000 aircraft and is expected to grow to over 35,000 by 2030. All those planes will burn a lot of fuel. With the airline industry embracing the idea of AAF (or Alternative Aviation Fuels), developments into renewable jet fuels have been striking, from traditional bio-sources such as palm or soybean oil to advanced organic matter conversion from agricultural waste and manure. Chevron, again, has signed a landmark deal to advance the commercialisation. Together with Delta Airlines and Google, Chevron will be producing a batch of sustainable aviation fuel at its El Segundo refinery in California. Delta will then use the fuel, with Google providing a cloud-based framework to analyse the data. That data will then allow for a transparent analysis into carbon emissions from the use of sustainable aviation fuel, as benchmark for others to follow. The analysis should be able to confirm whether or not the International Air Transport Association (IATA)’s estimates that renewable jet fuel can reduce lifecycle carbon intensity by up to 80%. And to strengthen the measure, Delta has pledged to replace 10% of its jet fuel with sustainable aviation fuel by 2030.

In a parallel, but no less pioneering lane, France’s TotalEnergies has announced that it is developing a 100% renewable fuel for use in motorsports, using bioethanol sourced from residues produced by the French wine industry (among others) at its Feyzin refinery in Lyon. This, it believes, will reduce the racing sports’ carbon emissions by an immediate 65%. The fuel, named Excellium Racing 100, is set to debut at the next season of the FIA World Endurance Championship, which includes the iconic 24 Hours of Le Mans 2022 race.

But Chevron isn’t done yet. It is also falling back on the long-standing use of vegetable oils blended into US transport fuels by signing a wide-ranging agreement with commodity giant Bunge. Called a ‘farmer-to-fuelling station’ solution, Bunge’s soybean processing facilities in Louisiana and Illinois will be the source of meal and oil that will be converted by Chevron into diesel and jet fuel. With an investment of US$600 million, Chevron will assist Bunge in doubling the combined capacity of both plants by 2024, in line with anticipated increases in the US biofuels blending mandates.

Even ExxonMobil, one of the most reticent of the supermajors to embrace renewables wholesale, is getting in on the action. Its Imperial Oil subsidiary in Canada has announced plans to commercialise renewable diesel at a new facility near Edmonton using plant-based feedstock and hydrogen. The venture does only target the Canadian market – where political will to drive renewable adoption is far higher than in the US – but similar moves have already been adopted by other refiners for the US market, including major investments by Phillips 66 and Valero.

Ultimately, these recent moves are driven out of necessity. This is the way the industry is moving and anyone stubborn enough to ignore it will be left behind. Combined with other major investments driven by European supermajors over the past five years, this wider and wider adoption of renewable can only be better for the planet and, eventually, individual bottom lines. The renewables ball is rolling fast and is only gaining momentum.

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Market Outlook:

  • Crude price trading range: Brent – US$71-73/b, WTI – US$68-70/b
  • Global crude benchmarks have stayed steady, even as OPEC+ sticks to its plans to ease supply quotas against the uncertainty of rising Covid-19 cases worldwide
  • However, the success of vaccination drives has kindled hope that the effect of lockdowns – if any – will be mild, with pockets of demand resurgence in Europe; in China, where there has been a zero-tolerance drive to stamp out Covid outbreaks, fuel consumption is strengthening again, possibly tightening fuel balances in Q4
  • Meanwhile, much of the US Gulf of Mexico crude production remains hampered by the effects of Hurricane Ida, providing a counter-balance on the supply side

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