Last Updated: August 25, 2017
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Crude, which has fallen into a pattern of limited movements caught in a tug-of-war between evenly matched forces adding and subtracting supply, could be jolted by a hurricane in the US Gulf of Mexico, which was threatening major oil and gas production, refining, import andexport facilities Friday. As the market tracked the hurricane’s path towards Texas and waited to assess the short- and long-term impact of any damage and disruptions, crude was inching up, but gasoline futures had jumped, suggesting bigger worries over products supply. Meanwhile, a growing schism between Brent and WTI is paving the way for rising US crude exports — could that restore the traditional price relationships or is Brent's backwardation a precocious sign of the global oil market rebalancing?

Hurricane Harvey was barreling across the US Gulf of Mexico and towards the coast of Texas Thursday night local time, threatening major offshore oil and gas production and refining in the region, as well as imports and exports of crude and refined products.

Harvey was expected to make a landfall as a Category 3 hurricane Friday night or early Saturday local time and the US National Hurricane Center had warned of “life-threatening inundation from rising water moving inland from the coastline.”

The Gulf of Mexico offshore area pumps about 1.66 million b/d or 17% of the total US oil output. Some 8.44 million b/d or 46% of the country’s refining capacity is located in the Texas and Louisiana Gulf Coast districts.

Terminals in the region process around 3.9 million b/d of crude imports (46% of US total) and about 700,000 b/d of product imports (31%) an well as handling around 2.7 million b/d of finished petroleum product exports (82%).

Producers and refiners were scrambling to evacuate or shut down their facilities as a precautionary measure through Thursday night, while some continued to assess the situation, caught off-guard by the sudden strengthening of a storm that had disintegrated into a tropical depression as it crossed the Yucatan Peninsula earlier in the week.

The last major tropical cyclone to hit Texas was Hurricane Ike, close on the heels of Hurricane Gustav, both in September 2008. Those resulted in 1.3 million b/d of oil production and just over 7 Bcf/day of gas production in the US Gulf being shutin as a precautionary measure. About 85% of oil production and 71% of gas production had been restored in the 12 weeks after Gustav hit. Refining capacity outage peaked at 4 million b/d, but was fully restored in less than six weeks after Gustav.

Hurricanes Katrina and Rita in August and September 2005 respectively were far more destructive and caused longer outages. They shuttered up to 1.5 million b/d of oil and up to 8.8 Bcf/day of gas production. Restoration of supplies occurred gradually from November 2005 through March 2006. Twelve weeks after Katrina struck, a little over 5 Bcf/day of gas and over 1 million b/d of oil production was still shut in.

Beyond the knee-jerk rise in crude and product prices early Friday to factor in the likelihood of oil-related supply disruptions in general, Hurricane Harvey will need to be watched closely over the next 48 hours for a more detailed assessment of the precise nature and likely duration of its impact.

If the hurricane dissipates without causing any major damage to infrastructure and production and refining facilities, any capacity shut in as a precaution should be restarted fairly swiftly, enabling the crude market to return to “normal” within days. In the event of major damage to facilities, the impact could play out differently in the crude and refined products markets, depending on which infrastructure has suffered more.

A major, drawn-out oil production outage would support crude prices, but would also be mitigated by the presence of increased spare capacity available among the 22 OPEC and non-OPEC producers that have restrained supply under their agreements since January, as well as the cushion of brimming oil inventories globally.

If refineries in Texas are damaged and are forced to halt operations for a prolonged period, it would prop up refined product prices, while also pressuring crude down because of reduced demand for the feedstock, driving a rally in product cracks, or the premium of refined products over crude.

Any major disruptions in the imports and exports of crude and products will need to be analysed carefully, for they could well cancel each other out in terms of the balance between crude and refined product supply available in the country.

The market appeared more concerned about products than crude supply through the trading sessions in Asia and Europe Friday. The front-month September NYMEX RBOB gasoline contract changed hands at $1.7295/gal at 1300 GMT Friday, up 4% from Thursday’s settle, while WTI and Brent were up only 0.5% and 1% over the same period. The EIA Wednesday reported a 107,000 b/d rise in US gasoline demand to around 9.63 million b/d in the week to August 18, and a draw of 1.22 million barrels in gasoline stockpiles, supporting sentiment for the fuel amid the ongoing US summer driving demand season.

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Average U.S. construction costs for solar and wind generation continue to fall

According to 2018 data from the U.S. Energy Information Administration (EIA) for newly constructed utility-scale electric generators in the United States, annual capacity-weighted average construction costs for solar photovoltaic systems and onshore wind turbines have continued to decrease. Natural gas generator costs also decreased slightly in 2018.

From 2013 to 2018, costs for solar fell 50%, costs for wind fell 27%, and costs for natural gas fell 13%. Together, these three generation technologies accounted for more than 98% of total capacity added to the electricity grid in the United States in 2018. Investment in U.S. electric-generating capacity in 2018 increased by 9.3% from 2017, driven by natural gas capacity additions.

Solar
The average construction cost for solar photovoltaic generators is higher than wind and natural gas generators on a dollar-per-kilowatt basis, although the gap is narrowing as the cost of solar falls rapidly. From 2017 to 2018, the average construction cost of solar in the United States fell 21% to $1,848 per kilowatt (kW). The decrease was driven by falling costs for crystalline silicon fixed-tilt panels, which were at their lowest average construction cost of $1,767 per kW in 2018.

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average construction costs for solar photovoltaic electricity generators

Source: U.S. Energy Information Administration, Electric Generator Construction Costs and Annual Electric Generator Inventory

Wind
Total U.S. wind capacity additions increased 18% from 2017 to 2018 as the average construction cost for wind turbines dropped 16% to $1,382 per kW. All wind farm size classes had lower average construction costs in 2018. The largest decreases were at wind farms with 1 megawatt (MW) to 25 MW of capacity; construction costs at these farms decreased by 22.6% to $1,790 per kW.

average construction costs for wind farms

Source: U.S. Energy Information Administration, Electric Generator Construction Costs and Annual Electric Generator Inventory

Natural gas
Compared with other generation technologies, natural gas technologies received the highest U.S. investment in 2018, accounting for 46% of total capacity additions for all energy sources. Growth in natural gas electric-generating capacity was led by significant additions in new capacity from combined-cycle facilities, which almost doubled the previous year’s additions for that technology. Combined-cycle technology construction costs dropped by 4% in 2018 to $858 per kW.

average construction costs for natural gas-fired electricity generators

Source: U.S. Energy Information Administration, Electric Generator Construction Costs and Annual Electric Generator Inventory

September, 17 2020
Fossil fuels account for the largest share of U.S. energy production and consumption

Fossil fuels, or energy sources formed in the Earth’s crust from decayed organic material, including petroleum, natural gas, and coal, continue to account for the largest share of energy production and consumption in the United States. In 2019, 80% of domestic energy production was from fossil fuels, and 80% of domestic energy consumption originated from fossil fuels.

The U.S. Energy Information Administration (EIA) publishes the U.S. total energy flow diagram to visualize U.S. energy from primary energy supply (production and imports) to disposition (consumption, exports, and net stock additions). In this diagram, losses that take place when primary energy sources are converted into electricity are allocated proportionally to the end-use sectors. The result is a visualization that associates the primary energy consumed to generate electricity with the end-use sectors of the retail electricity sales customers, even though the amount of electric energy end users directly consumed was significantly less.

U.S. primary energy production by source

Source: U.S. Energy Information Administration, Monthly Energy Review

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U.S. primary energy overview and net imports share of consumption

Source: U.S. Energy Information Administration, Monthly Energy Review

In 2019, U.S. energy production exceeded energy consumption for the first time since 1957, and U.S. energy exports exceeded energy imports for the first time since 1952. U.S. energy net imports as a share of consumption peaked in 2005 at 30%. Although energy net imports fell below zero in 2019, many regions of the United States still import significant amounts of energy.

Most U.S. energy trade is from petroleum (crude oil and petroleum products), which accounted for 69% of energy exports and 86% of energy imports in 2019. Much of the imported crude oil is processed by U.S. refineries and is then exported as petroleum products. Petroleum products accounted for 42% of total U.S. energy exports in 2019.

U.S. primary energy consumption by source

Source: U.S. Energy Information Administration, Monthly Energy Review

The share of U.S. total energy consumption that originated from fossil fuels has fallen from its peak of 94% in 1966 to 80% in 2019. The total amount of fossil fuels consumed in the United States has also fallen from its peak of 86 quads in 2007. Since then, coal consumption has decreased by 11 quads. In 2019, renewable energy consumption in the United States surpassed coal consumption for the first time. The decrease in coal consumption, along with a 3-quad decrease in petroleum consumption, more than offset an 8-quad increase in natural gas consumption.

EIA previously published articles explaining the energy flows of petroleum, natural gas, coal, and electricity. More information about total energy consumption, production, trade, and emissions is available in EIA’s Monthly Energy Review.

Principal contributor: Bill Sanchez

September, 15 2020
Nord Stream 2: Democratic Ideals or Business Reality

It was an innocuous set of words published in a newspaper in Germany on Sunday. “I hope the Russian do not force us to change our position on Nord Stream 2”, the German Foreign Minister Heiko Maas was quoted as saying. A day after that, Angela Merkel also issued a single sentence: “The German Chancellor agrees with the Foreign Minister’s comments from the weekend.” Simple words with a bold message. And potentially devastating consequences.

The incident that hardened the hearts of Germany , which had become increasingly isolated over the issue of the Nord Stream 2 natural gas pipeline that connects Russia to Germany through the Baltic Sea, was the hospitalisation of Russian opposition leader Alexei Navalny. Airlifted to Berlin following a medically-induced coma, German doctors concluded that Navalny, who is no stranger to intimidation tactics by the Putin government, was the victim of the Novichok nerve agent. If that name sounds familiar, that’s because it made headlines in 2018 over the attempted assassination of former Russian spy Sergei Skripal and his daughter Yulia in Salisbury, UK. A lethal nerve agent developed in the 1970s in Soviet Russia, Novichok is among the deadliest poisons ever developed and is banned under the Organisation for the Prohibition of Chemical Weapons. The Kremlin, predictably, denies involvement in the alleged poisoning, dismissing the German allegations as untrue.

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Throughout all this drama, Angela Merkel has stood firm. She, and her centre-right party CDU, have supported Nord Stream somewhat unenthusiastically with the primary concerns being the business element. It will unravel Germany’s plans to become a natural gas hub, as it tries to drive an EU movement towards cleaner energy. Many of Germany’s largest companies,  include petrochemicals giant BASF and its energy arm Wintershall are also heavily invested in Nord Stream and the raw gas it will bring. It would also be a reputational risk to pull the plug on a project that is almost complete and set to be launched by the year’s end, and still leaves the critical question on how Germany will be able to address its energy deficit.

The business argument has overridden political concerns so far. But now a moral imperative has arisen through the attempted murder of Alexei Navalny, with his subsequent medical treatment in Berlin. This resonates in Germany particularly, since the country understands the historical consequences of authoritarian governments and the dangers it bring. The shifting of the political landscape, especially the rise of the Green Party has triggered a ferocious debate with high-ranking politicians from both the left and right calling for the project to be scrapped. Some are even arguing that Nord Stream 2 gas supply is no longer necessary, as the country’s energy requirements are now fundamentally shifting in a post-Covid 19 world.

If, and that is a very big if, the Nord Stream 2 is scrapped, that is at least US$9.4 billion down the drain and plenty more in collateral damage from peripheral activities. It will rock the boat when the usual Merkel instinct is to steady it. But the furore over an attempted assassination by one of the world’s deadliest methods no less, might be a stand that Germany is willing to take. After all, it knows first-hand the effects of an iron fist. Berlin has so far stood alone in advancing Nord Stream 2, even after the chorus of critics surrounding it grow louder and louder. If it were to kill the project, Germany could find plenty of supporters for that move and would be more than happy to offer themselves up as a role to scupper this ship. The options are varied, but one question remains that will influence the whole issue: how is Angela Merkel willing to go to take a stand over democratic ideals or business reality?

Market Outlook:

  • Crude price trading range: Brent – US$39-41/b, WTI – US$36-38/b
  • A second global acceleration in Covid-19 cases is hampering hopes that the worldwide economy will be able to return to normality by the year’s end, delaying the time it will take for crude demand to return to its pre-crisis level
  • With the summer driving season in the northern hemisphere coming to a close, US crude stockpiles are rising, driving down prices even though the US EIA raised its forecasts for 2020 to US$38.99 for WTI and US$41.90 for Brent
  • The downturn in prices was also driven by Saudi Arabia cutting its crude pricing for October sales by a larger-than-expected amount, especially for Asian shipments

END OF ARTICLE

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