Source: U.S. Energy Information Administration, Short-Term Energy Outlook, July 2017
In EIA’s latest Short-Term Energy Outlook (STEO), total U.S. crude oil production is forecast to average 9.3 million barrels per day (b/d) in 2017, up 0.5 million b/d from 2016. In 2018, EIA expects crude oil production to reach an average of 9.9 million b/d, which would surpass the previous record of 9.6 million b/d set in 1970. EIA forecasts that most of the growth in U.S. crude oil production through the end of 2018 will come from tight rock formations within the Permian region in Texas and from the Federal Gulf of Mexico.
In the July STEO, the Permian region is expected to produce 2.9 million b/d of crude oil by the end of 2018, about 0.5 million b/d more than the estimated June 2017 production level, representing nearly 30% of total U.S. crude oil production in 2018. The Permian region covers 53 million acres in the Permian Basin of western Texas and southeastern New Mexico.
Within the Permian Basin are smaller sub-basins such as the Midland Basin and the Delaware Basin, which contain historically prolific non-tight formations as well as multiple prolific tight formations such as the Wolfcamp, Spraberry, and Bone Spring. With the large geographic area of the Permian region and stacked plays, operators can continue to drill through several tight oil layers and increase production even with sustained West Texas Intermediate (WTI) crude oil prices below $50 per barrel (b).
Based on data from Baker Hughes, 366 of the 915 onshore rigs in the Lower 48 states in June were operating in the Permian region. EIA forecasts that the Permian’s rig count will fall slightly to 345 at the end of 2017 and then grow to 370 by the end of 2018.
In addition to responding to changes in WTI price, increases in rig counts are also related to cash flow. In the Permian, operators have been able to maintain positive cash flow because of lower costs, higher productivity, and increased hedging activity by producers, many of whom have sold future production at prices higher than $50/b. Available cash flows could potentially contribute to the growth of rigs in this region despite relatively flat crude oil prices since December 2016.
EIA’s Drilling Productivity Report expects that productivity in the Permian, as measured by new-well oil production per rig in barrels per day, decreased for the 10th consecutive month in June. Output per rig is likely decreasing because operators are drilling more wells than they are completing.
Completing a well involves casing, cementing, perforating, and hydraulically fracturing to make it ready for producing. When operators drill a well but do not complete it, the inventory of drilled but uncompleted wells (DUCs) increases, which tends to lower output per drilling rig. Oil only flows after a well is completed.
The trend of operators drilling more wells than they are completing does not have a clear cause, but a widening of the WTI-Midland crude oil price discount to WTI-Cushing since the beginning of 2017 suggests the possibility of some minor transportation constraints. Lags in well completion may also reflect implementation of strategies that drill more wells from a single pad with completion equipment not deployed until all wells are drilled.
Source: U.S. Energy Information Administration, Drilling Productivity Report, July 2017
Average output per well shows that productivity based on initial production rates continues to increase in the Permian region. Initial production based on average output per well year to date is higher than the 2016 annual average. Many operators are continuing to experiment with completion techniques to maximize output per well, suggesting the 2017 annual average initial production rate could continue to increase.
Source: U.S. Energy Information Administration, Drilling Productivity Report, July 2017
Note: 2017 is based on year-to-date data (through April). Other years represent annual averages.
The dynamics related to drilling in the Federal Gulf of Mexico (GOM) differ from those in Lower 48 onshore regions. Because of the length of time needed to complete large offshore projects, oil production in the GOM is less sensitive to short-term oil price movements than Lower 48 onshore production. In 2016, eight projects came online in the GOM, contributing to production growth. Another seven projects are anticipated to come online by the end of 2018. Based on anticipated production at both new and existing fields, crude oil production in the GOM is expected to increase to an average of 1.7 million b/d in 2017 and 1.9 million b/d in 2018.
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Supply chains are currently in crisis. They have been for a long time now, ever since the start of the Covid-19 pandemic reshaped the way the world works. Stressed shipping networks and operational blockages – coupled with China’s insistence on a Covid-zero policy – means that cargo tanker rates are at an all-time high and that there just aren’t enough of them. McDonalds and KFCs in Asia are running out of French fries to sell, not because there aren’t enough potatoes in Idaho, but because there aren’t enough ships to deliver them to Japan or to Singapore from Los Angeles. The war in Ukraine has placed a particular emphasis on food supply chains by disrupting global wheat and sunflower oil supply chains and kicking off distressingly high levels of food price inflation across North Africa, the Middle East and Asia. It was against this backdrop that Indonesia announced a complete ban on palm oil exports. That nuclear option shocked the markets, set off a potential new supply chain crisis and has particular implications on future of crude oil pricing and biofuels in Asia.
A brief recap. Like most of Asia, Indonesia has been grappling with food price inflation as consequence of Covid-19. Like most of Asia, Indonesia has been attempting to control this through a combination of shielding its most vulnerable citizens through continued subsidies while attempting to optimise supply chains. Like most of Asia, Indonesia hasn’t been to control the market at all, because uncoordinated attempts across a wide spectrum of countries to achieve a similar level of individual protectionism is self-defeating.
Cooking oil is a major product of sensitive importance in Indonesia, and one that it is self-sufficient in as a result of its status as the world’s largest palm oil producer. So large is Indonesia in that regard that its excess palm oil production has been directed to increasingly higher biodiesel mandates, with a B40 mandate – diesel containing 40% of palm material – originally schedule for full implementation this year. But as palm oil prices started rising to all-time highs at the beginning of January, cooking oil started becoming scarcer in Indonesia. The government blamed hoarding and – wary of the Ramadan period and domestic unrest – implemented a Domestic Market Obligation on palm oil refineries, directing them to devote 20% of projected exports for domestic use. Increasingly stricter terms for the DMO continued over February and March, only for an abrupt U-turn in mid-March that removed the DMO completely. But as the war in Ukraine drove prices even further, Indonesia shocked the market by announcing an total ban on palm oil exports in late April. Chaotically, the ban was first clarified to be palm olein only (straight refining cooking oil), but then flip-flopped into a total ban of crude palm oil as well. Markets went haywire, prices jumped to historical highs and Indonesia’s trading partners reacted with alarm.
Joko Widodo has said that the ban will be indefinite until domestic cooking oil prices ‘moderate’. With the global situation as it is, ‘moderate’ is unlikely to be achieved until the end of 2022 at least, if ‘moderate’ is taken to be the previous level of palm oil prices – roughly half of current pricing. Logistically, Indonesia cannot hold out on the ban for more than two months. Only a third of Indonesia’s monthly palm oil production is consumed domestically; the rest is exported. An indefinite ban means that not only fill storage tanks up beyond capacity and estates forced to let fruit rot, but Indonesia will be missing out on crucial revenue from its crude palm oil export tax. Which is used to fund its biodiesel subsidies.
And that’s where the implications on oil come in. Indonesia’s ham-fisted attempt at protectionism has dire implications on biofuels policies in Asia. Palm oil prices within Indonesia might sink as long as surplus volumes can’t make it beyond the borders, but international palm oil prices will remain high as consuming countries pivot to producers like Malaysia, Thailand, Papua New Guinea, West Africa and Latin America. That in turn, threatens the biodiesel mandates in Thailand and Malaysia. The Thai government has already expressed concern over palm-led food price inflation and associated pressure on its (subsidised) biodiesel programme, launching efforts to mitigate the worst effects. Malaysia – which has a more direct approach to subsidised fuels – is also feeling the pinch. Thailand’s move to B10 and Malaysia’s move to B20 is now in jeopardy; in fact, Thailand has regressed its national mandate from B7 to B5. And the reason is that the differential between the bio- and the diesel portion of the biodiesel is now so disparate that subsidy regimes break down. It would be far cheaper – for the government, the tax-payers and consumers – to use straight diesel instead of biodiesel, as evidenced by Thailand’s reversal in mandates.
That, in turn, has implications on crude pricing. While OPEC+ is stubbornly sticking to its gentle approach to managing global crude supply, the stunning rebound in Asian demand has already kept the consumption side tight to match that supply. Crude prices above US$100/b are a recipe for demand destruction, and Asian economies have been preparing for this by looking at alternatives; biofuels for example. In the past four years, Indonesia has converted some of its oil refineries into biodiesel plants; in China, stricter crude import quotas are paving the way for China to clamp down on its status of a fuels exporter in favour of self-sustainability. But what happens when crude prices are high, but the prices of alternatives are higher? That is the case for palm oil now, where the gasoil-palm spread is now triple the previous average.
Part of this situation is due to market dynamics. Part of it is due to geopolitical effects. But part of it is also due to Indonesia’s knee-jerk reaction. Supply disruption at the level of a blanket ban is always seismic and kicks off a chain of unintended consequences; see the OPEC oil shocks of the 70s. Indonesia’s palm oil export ban is almost at that level. ‘Indefinite’ is a vague term and offers no consolation to markets looking for direction. Damage will be done, even if the ban lasts a month. But the longer it lasts – Indonesian general elections are due in February 2024 – the more serious the consequences could be. And the more the oil and refining industry in Asia will have to think about their preconceived notions of the future of oil in the region.
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An online shop is a type of e-commerce website where the products are typically marketed over the internet. The online sale of goods and services is a type of electronic commerce, or "e-commerce". The construction supply online shop makes it all the more convenient for customers to get what they need when they want it. The construction supply industry is on the rise, but finding the right supplier can be difficult. This is where an online store comes in handy.
Nowadays, everyone is shopping online - from groceries to clothes. And it's no different for construction supplies. With an online store, you can find all your supplies in one place and have them delivered to your doorstep. Construction supply online shops are a great way to find all the construction supplies you need. They also offer a wide variety of products from different suppliers, making it easier for customers to find what they're looking for. A construction supply online shop is essential for any construction company. They are the primary point of contact for the customers and they provide them with all the goods they need.
Most construction supply companies have an online shop where customers can purchase everything they need for their project, but some still prefer to use brick-and-mortar stores instead, so it’s important to sell both in your store.
Construction supply is an essential part of any construction site too. Construction supply shops are usually limited to the geographic area where they are located. This is because, in order for construction supplies to be delivered on time, they must be close to the construction site that ordered them. But with modern technology and internet connectivity, it has become possible for people to purchase their construction supplies online and have them shipped right to their doorstep. Online stores such as Supply House offer a wide variety of products that can help you find what you need without having to drive around town looking for it.
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