After a lesser draw than expected to crude inventories, oil is selling off on this third Wednesday in April. As strong imports from the Middle East this week should help to buoy inventories for next week's report, hark, here are five things to consider in oil markets today.
1) Much is being made of Saudi Arabia's February exports, which showed a drop to the lowest since mid-2015, according to JODI data. But we can see in our Clipperdata that this drop is superseded by a solid rebound in March exports. We see exports rebounded to over 7.2 million barrels per day, with flows bound for East Asia (think: Japan, South Korea, China) accounting for 45 percent of loadings.
This is the second-highest monthly volume heading to East Asia from Saudi on our records. The highest was in January. In the aftermath of the OPEC production cut, East Asia has been strongly favored for OPEC barrels. Total OPEC loadings bound for East Asia in March have clambered above the 10mn bpd level, the highest on our records, although April so far is looking considerably weaker as total OPEC export volumes drop.
2) It is also interesting to note that Saudi Arabia oil inventories rose in February amid the export lull. We discussed earlier in the month how JODI data showed that oil inventories dropped to 262 million barrels in January, down from a peak of 329 million barrels in October 2015.
After dropping thirteen out of the previous fourteen months - and for seven months in a row - Saudi crude inventories for February rebounded by 2.74mn bpd. This appears due to less crude leaving the country, and more finding its way to be both refined and put into storage:
3) As the Dakota Access Pipeline (DAPL) starts up, the largest refiner on the East Coast - Philadelphia Energy Solutions (PES) - is not expected to take any deliveries of Bakken crude by rail in June. Once DAPL starts up, it is more profitable for oil to be sent by pipe to the U.S. Gulf Coast than it is to send it by rail to the East Coast.
As our ClipperData illustrate below, the marginalization of Bakken barrels to the East Coast has been underway for a good while. Waterborne imports bottomed out in early 2015 - at exactly the same time that Bakken shale crude production was peaking out.
As Bakken production has dropped off since, and as oil prices have remained low (making waterborne imports a more economically viable option than crude by rail), waterborne imports have risen ever since. While Canadian and Brazilian grades are consistently delivered to the refinery, West and North African grades have accounted for nearly 60 percent of imports since the start of last year.
4) Today's key EIA inventory numbers have been driven in large part by big swings on the US Gulf Coast. While total US refinery runs rose by 241,000 bpd, an increase of 260,000 bpd was seen from Gulf Coast refiners.
This uptick in Gulf Coast refining activity, in combination with imports remaining somewhat in check, has meant oil inventories have drawn down on the Gulf Coast by 3 million barrels. Next week's report is set to be impacted by super-strong waterborne imports from the Middle East, but for now, the increase in refining activity is taking center-stage. Crude inputs are now a whopping 958,000 bpd above year-ago levels.
5) Finally, the IMF has published its April 2017 World Economic Outlook. It projects world economic growth is going to be at 3.5 percent in 2017, rising to 3.6 percent in 2018. As we know all too well, all paths lead back to energy, hence downward revisions have been made to Latin American and Middle East nations due to the impact of lower oil prices and production cuts.
While the Russian economy is seen turning a corner as oil prices rebound, Saudi Arabia's economy is projected to grow at 1.3 percent in 2018, down from an estimate of 2.3 percent in January, due to austerity measures and production cuts.
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A month ago, crude oil prices were riding a wave, comfortably trading in the mid-US$70/b range and trending towards the US$80 mark as the oil world fretted about the expiration of US waivers on Iranian crude exports. Talk among OPEC members ahead of the crucial June 25 meeting of OPEC and its OPEC+ allies in Vienna turned to winding down its own supply deal.
That narrative has now changed. With Russian Finance Minister Anton Siluanov suggesting that there was a risk that oil prices could fall as low as US$30/b and the Saudi Arabia-Russia alliance preparing for a US$40/b oil scenario, it looks more and more likely that the production deal will be extended to the end of 2019. This was already discussed in a pre-conference meeting in April where Saudi Arabia appeared to have swayed a recalcitrant Russia into provisionally extending the deal, even if Russia itself wasn’t in adherence.
That the suggestion that oil prices were heading for a drastic drop was coming from Russia is an eye-opener. The major oil producer has been dragging its feet over meeting its commitments on the current supply deal; it was seen as capitalising on Saudi Arabia and its close allies’ pullback over February and March. That Russia eventually reached adherence in May was not through intention but accident – contamination of crude at the major Druzhba pipeline which caused a high ripple effect across European refineries surrounding the Baltic. Russia also is shielded from low crude prices due its diversified economy – the Russian budget uses US$40/b oil prices as a baseline, while Saudi Arabia needs a far higher US$85/b to balance its books. It is quite evident why Saudi Arabia has already seemingly whipped OPEC into extending the production deal beyond June. Russia has been far more reserved – perhaps worried about US crude encroaching on its market share – but Energy Minister Alexander Novak and the government is now seemingly onboard.
Part of this has to do with the macroeconomic environment. With the US extending its trade fracas with China and opening up several new fronts (with Mexico, India and Turkey, even if the Mexican tariff standoff blew over), the global economy is jittery. A recession or at least, a slowdown seems likely. And when the world economy slows down, the demand for oil slows down too. With the US pumping as much oil as it can, a return to wanton production risks oil prices crashing once again as they have done twice in the last decade. All the bluster Russia can muster fades if demand collapses – which is a zero sum game that benefits no one.
Also on the menu in Vienna is the thorny issue of Iran. Besieged by American sanctions and at odds with fellow OPEC members, Iran is crucial to any decision that will be made at the bi-annual meeting. Iranian Oil Minister Bijan Zanganeh, has stated that Iran has no intention of departing the group despite ‘being treated like an enemy (by some members)’. No names were mentioned, but the targets were evident – Iran’s bitter rival Saudi Arabia, and its sidekicks the UAE and Kuwait. Saudi King Salman bin Abulaziz has recently accused Iran of being the ‘greatest threat’ to global oil supplies after suspected Iranian-backed attacks in infrastructure in the Persian Gulf. With such tensions in the air, the Iranian issue is one that cannot be avoided in Vienna and could scupper any potential deal if politics trumps economics within the group. In the meantime, global crude prices continue to fall; OPEC and OPEC+ have to capability to change this trend, but the question is: will it happen on June 25?
Expectations at the 176th OPEC Conference
Global liquid fuels
Electricity, coal, renewables, and emissions
Source: U.S. Energy Information Administration, U.S. liquefaction capacity database
On May 31, 2019, Sempra Energy, the majority owner of the Cameron liquefied natural gas (LNG) export facility, announced that the company had shipped its first cargo of LNG, becoming the fourth such facility in the United States to enter service since 2016. Upon completion of Phase 1 of the Cameron LNG project, U.S. baseload operational LNG-export capacity increased to about 4.8 billion cubic feet per day (Bcf/d).
Cameron LNG’s export facility is located in Hackberry, Louisiana, next to the company’s existing LNG-import terminal. Phase 1 of the project includes three liquefaction units—referred to as trains—that will export a projected 12 million tons per year of LNG exports, or about 1.7 Bcf/d.
Train 1 is currently producing LNG, and the first LNG shipment departed the facility aboard the ship Marvel Crane. The facility will continue to ship commissioning cargos until it receives approval from the Federal Energy Regulatory Commission to begin commercial shipments. Commissioning cargos refer to pre-commercial cargo loaded while export facility operations are still undergoing final testing and inspection. Trains 2 and 3 are expected to come online in the first and second quarters of 2020, according to Sempra Energy’s first-quarter 2019 earnings call.
Cameron LNG has regulatory approval to expand the facility through two additional phases, which involve the construction of two additional liquefaction units that would increase the facility’s LNG capacity to about 3.5 Bcf/d. These additional phases do not have final investment decisions.
Cameron LNG secured an authorization from the U.S. Department of Energy to export LNG to Free Trade Agreement (FTA) countries as well as to countries with which the United States does not have Free Trade Agreements (non-FTA countries). A considerable portion of the LNG shipments is expected to fulfill long-term contracts in Asian countries, similar to other LNG-export facilities located in the Gulf of Mexico region.
Cameron LNG will be the fourth U.S. LNG-export facility placed into service since February 2016. LNG exports rose steadily in 2016 and 2017 as liquefaction trains at the Sabine Pass LNG-export facility entered service, with additional increases through 2018 as units entered service at Cove Point LNG and Corpus Christi LNG. Monthly exports of LNG exports reached more than 4.0 Bcf/d for the first time in January 2019.
Source: U.S. Energy Information Administration, Natural Gas Monthly
Currently, two additional liquefaction facilities are being commissioned in the United States—the Elba Island LNG in Georgia and the Freeport LNG in Texas. Elba Island LNG consists of 10 modular liquefaction trains, each with a capacity of 0.03 Bcf/d. The first train at Elba Island is expected to be placed into service in mid-2019, and the remaining nine trains will be commissioned sequentially during the following months. Freeport LNG consists of three liquefaction trains with a combined baseload capacity of 2.0 Bcf/d. The first train is expected to be placed in service during the third quarter of 2019.
EIA’s database of liquefaction facilities contains a complete list and status of U.S. liquefaction facilities.