Easwaran Kanason

Co - founder of NrgEdge
Last Updated: June 8, 2017
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Business Trends
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World production of crude and liquids has been revised slightly downward from EIA’s May Short-Term Energy Outlook (STEO) for both 2017 and 2018. The Organization of the Petroleum Exporting Countries (OPEC) met on May 25, 2017, and announced an extension to production cuts that were originally set to end this month. The agreed-upon OPEC crude oil production target remains at 32.5 million barrels per day (b/d) through the end of the first quarter of 2018. EIA now forecasts OPEC members’ crude oil production to average 32.3 million b/d in 2017 and 32.8 million b/d in 2018, about 0.2 million b/d and 0.4 million b/d, respectively, lower than previously forecast. However, continuing production growth in many non-OPEC countries is expected to moderate the pace of global liquid fuels inventory draws in 2017 and lead to a small inventory build in 2018.

EIA now forecasts OPEC crude oil and other liquids production to average 39.6 million b/d from the third quarter of 2017 through the first quarter of 2018 (340,000 b/d lower than previously forecast). Non-OPEC production averages 59.6 million b/d over this period, up from 58.3 million b/d over the same period a year earlier. Considering both OPEC and non-OPEC production forecasts and the outlook for demand growth, EIA now expects an average global inventory draw of 100,000 b/d through the first quarter of 2018. The largest draws are expected in the third quarter of 2017, when global crude oil and other liquids inventories are forecast to fall by an average of 430,000 b/d 

Inventory draws of this magnitude suggest the possibility of some upward pressure on crude oil prices over the coming months. The third quarter 2017 Brent spot price forecast is $54/b in EIA’s June STEO, up from $52/b in the May STEO. However, because U.S. tight oil production is relatively responsive to changes in oil prices, and given an estimated six-month lag between a change in oil prices and realized production, higher crude oil prices in mid-2017 have the potential to raise U.S. supply in 2018.

The largest global inventory increase in the forecast occurs in the second quarter of 2018, when Brazilian and OPEC production are expected to realize quarterly increases of 570,000 b/d and 220,000 b/d, respectively. The expectation of supply growth in 2018 could contribute to oil price weakness in late 2017 and early 2018; the June STEO’s Brent spot price forecast for the first quarter of 2018 is $52/b, $3/b lower than in the previous forecast. The current forecast assumes OPEC cuts will be extended beyond March 2018, but that non-compliance, which begins to grow late in 2017, increases somewhat in the second half of 2018. Although this forecast reflects the assumption of only partial OPEC compliance with a second production-cut extension in 2018, any extension provides some support for crude oil prices, even if only temporarily, and partially offsets downward price pressure from growing inventories.

The June STEO forecasts a 2017 average spot price for Brent crude oil of $53/b, unchanged from the previous STEO, along with a $56/b price forecast for 2018, $1/b lower than expected last month. WTI prices are forecast to average $2/b less than Brent in both 2017 and 2018 (Figure 2). As always, all oil price forecasts are subject to considerable uncertainty. For example, NYMEX contract values for September 2017 delivery that traded during the five-day period ending June 1 suggest that a range of $39/b to $64/b encompasses the market expectation for WTI prices in September 2017 at the 95% confidence level; also, as shown in the figure, the range encompassing current market expectations at this confidence level widens for longer time horizons.

Figure 2. West Texas Intermediate crude oil price

U.S. crude oil production increases through the forecast, averaging 9.3 million b/d in 2017 and 10.0 million b/d in 2018. The 2018 forecast exceeds the previous record production level of 9.6 million b/d set in 1970. Growth in U.S. production of crude oil and hydrocarbon gas liquids has been the largest contributor to the 820,000 b/d of non-OPEC liquids supply growth from January through May 2017. Continued increases in drilling activity in U.S. shale basins, particularly in Texas, support production increases throughout the forecast. The largest expansion for U.S. production occurs in the fourth quarter of 2017, which averages a quarter-over-quarter rise of 330,000 b/d.

U.S. average regular gasoline price increases, diesel retail price drops

The U.S. average regular gasoline retail price rose slightly from the previous week, remaining virtually unchanged at $2.41 per gallon on May 29, up three cents from the same time last year. The Midwest and Gulf Coast prices each rose two cents to $2.32 per gallon and $2.17 per gallon, respectively, while the Rocky Mountain and East Coast prices each increased one cent to $2.43 per gallon per gallon and $2.35 per gallon, respectively. The West Coast price dropped two cents to $2.94 per gallon.

The U.S. average diesel fuel price fell one cent to $2.56 per gallon on May 29, 16 cents higher than a year ago. The West Coast, East Coast, Midwest, and Gulf Coast prices each dropped one cent to $2.84 per gallon, $2.60 per gallon, $2.51 per gallon, and $2.42 per gallon, respectively, while the Rocky Mountain price increased less than a penny, remaining at $2.66 per gallon.

Propane inventories gain

U.S. propane stocks increased by 3.3 million barrels last week to 50.4 million barrels as of June 2, 2017, 26.9 million barrels (34.8%) lower than a year ago. Gulf Coast, Midwest, Rocky Mountain/West Coast, and East Coast inventories increased by 2.3 million barrels, 0.5 million barrels, 0.3 million barrels, and 0.1 million barrels, respectively. Propylene non-fuel-use inventories represented 5.5% of total propane inventories.

Brent crude oil inventories/stocks OECD production/supply STEO (Short-Term Energy Outlook) WTI (West Texas Intermediate)
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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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