After five weeks of being whiplashed by financial market fears, crude reconnected with its own fundamentals over March 12-16, only to become locked in a narrow price band, with WTI anchored at $60/barrel and Brent at $65. Predictions of ballooning non-OPEC oil supplies were counter-balanced by reiterations of confidence in strong global oil demand growth this year, depriving the market of any incentive to either go long or short.
The limbo could prove to be short-lived. As the week came to a close, Iran and the fate of its nuclear deal had moved to the top of news headlines. The sudden departure of Rex Tillerson, a moderate on Iran, and his replacement as US secretary of state by the more hawkish CIA director Mike Pompeo, could precipitate a clash between the two countries over the 2015 multilateral nuclear deal. The fate of the Iran nuclear deal is now a cliffhanger and likely to inject a fear premium in crude over the coming weeks.
Meanwhile, anxiety over the possible outbreak of trade wars, especially between the US and China, as well as the US and its partners in the precarious North American Free Trade Agreement — Canada and Mexico — could continue to rattle the financial markets. The fears come on top of lingering uncertainty over the course of US inflation rates and monetary policy. The Federal Reserve is widely expected to raise interest rates by a quarter of a percentage point at its next meeting March 20-21.
Myriad concerns rippling through the financial markets since the start of February ultimately converge to hang a question-mark over the presumed strong and synchronous global economic growth this year. They have rattled equity markets across the world and are likely to continue buffeting crude as well. A deceleration in the global economic growth would not bode well for the health of oil demand.
The oil market’s focus this week was primarily on OECD inventory data and outlook for global oil supply and demand balances. The closely-watched monthly oil market reports from OPEC and the International Energy Agency released on Wednesday and Thursday respectively were remarkably similar in tone and almost evenly split between the bullish and bearish elements on the horizon. The weekly US stocks data also pulled market sentiment in opposite directions, showing a major build in crude inventories and a plunge in gasoline and distillate stocks for the week ended March 9.
The OPEC and IEA reports lent further credence to expectations of a shale renaissance in 2018, given their projections of US crude production vaulting by 1 million b/d or more this year, way higher than the growth recorded in 2017. The market is once again paying attention to the weekly US rig count data after mostly ignoring it through the latter half of last year, once the shale growth trajectory had become clear. The rig numbers are not a good proxy for US crude production rates, but a useful input for market participants continuously trying to assess or validate their assessment of shale’s growth.
Unfortunately, the rig count is also not telling a coherent story yet. Baker Hughes reported a drop of four in the number of oil rigs operating in the US in the week ended March 9 to a total of 796, reversing six successive weeks of increases, and leaving the market guessing on what the trend might be.
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The Permian is in desperate need of pipelines. That much is true. There is so much shale liquids sloshing underneath the Permian formation in Texas and New Mexico, that even though it has already upended global crude market and turned the USA into the world’s largest crude producer, there is still so much of it trapped inland, unable to make the 800km journey to the Gulf Coast that would take them to the big wider world.
The stakes are high. Even though the US is poised to reach some 12 mmb/d of crude oil production next year – more than half of that coming from shale oil formations – it could be producing a lot more. This has already caused the Brent-WTI spread to widen to a constant US$10/b since mid-2018 – when the Permian’s pipeline bottlenecks first became critical – from an average of US$4/b prior to that. It is even more dramatic in the Permian itself, where crude is selling at a US$10-16/b discount to Houston WTI, with trends pointing to the spread going as wide as US$20/b soon. Estimates suggest that a record 3,722 wells were drilled in the Permian this year but never opened because the oil could not be brought to market. This is part of the reason why the US active rig count hasn’t increased as much as would have been expected when crude prices were trending towards US$80/b – there’s no point in drilling if you can’t sell.
Assistance is on the way. Between now and 2020, estimates suggest that some 2.6 mmb/d of pipeline capacity across several projects will come onstream, with an additional 1 mmb/d in the planning stages. Add this to the existing 3.1 mmb/d of takeaway capacity (and 300,000 b/d of local refining) and Permian shale oil output currently dammed away by a wall of fixed capacity could double in size when freed to make it to market.
And more pipelines keep getting announced. In the last two weeks, Jupiter Energy Group announced a 90-day open season seeking binding commitments for a planned 1 mmb/d, 1050km long Jupiter Pipeline – which could connect the Permian to all three of Texas’ deepwater ports, Houston, Corpus Christi and Brownsville. Plains All American is launching its 500,000 b/d Sunrise Pipeline, connecting the Permian to Cushing, Oklahoma. Wolf Midstream has also launched an open season, seeking interest for its 120,000 b/d Red Wolf Crude Connector branch, connecting to its existing terminal and infrastructure in Colorado City.
Current estimates suggest that Permian output numbered around 3.5 mmb/d in October. At maximum capacity, that’s still about 100,000 b/d of shale oil trapped inland. As planned pipelines come online over the next two years, that trickle could turn into a flood. Consider this. Even at the current maxing out of Permian infrastructure, the US is already on the cusp on 12 mmb/d crude production. By 2021, it could go as high as 15 mmb/d – crude prices, permitting, of course.
As recently reported in the WSJ; “For years, the companies behind the U.S. oil-and-gas boom, including Noble Energy Inc. and Whiting Petroleum Corp. have promised shareholders they have thousands of prospective wells they can drill profitably even at $40 a barrel. Some have even said they can generate returns on investment of 30%. But most shale drillers haven’t made much, if any, money at those prices. From 2012 to 2017, the 30 biggest shale producers lost more than $50 billion. Last year, when oil prices averaged about $50 a barrel, the group as a whole was barely in the black, with profits of about $1.7 billion, or roughly 1.3% of revenue, according to FactSet.”
The immense growth experienced in the Permian has consequences for the entire oil supply chain, from refining balances – shale oil is more suitable for lighter ends like gasoline, but the world is heading for a gasoline glut and is more interested in cracking gasoil for the IMO’s strict marine fuels sulphur levels coming up in 2020 – to geopolitics, by diminishing OPEC’s power and particularly Saudi Arabia’s role as a swing producer. For now, the walls keeping a Permian flood in are still standing. In two years, they won’t, with new pipeline infrastructure in place. And so the oil world has two years to prepare for the coming tsunami, but only if crude prices stay on course.
Recent Announced Permian Pipeline Projects
Headline crude prices for the week beginning 3 December 2018 – Brent: US$61/b; WTI: US$52/b
Headlines of the week
The engine oil market has grown up around 10 to 12% in the last three years because of various reasons, mostly because of the rise of automobiles.
According to the Bangladesh Road Transport Authority (BRTA), the number of registered petrol and diesel-powered vehicles is 3,663,189 units.
The number of automotive vehicles has increased by 2.5 times in the last eight years.
The demand for engine oils will rise keeping pace with the increasing automotive vehicles, with an expected 3% yearly growths.
Mostly, for this reason, the annual lubricant consumption raised over 14% growth for the last four years. Now its current demand is around 160 million tonnes.
The overall lubricants demand has increased also for the growth of the power sector, which has created a special market for industrial lubricants oil.
The lubricants oil market size for industries has doubled in the last five years due to the establishment of a number of power plants across the country.
The demand for industrial oil will continue to rise at least for the next 15 years, as the quick rental power plants need a huge quantity of lube oil to run.
The industries account for 30% of the total lubricant consumption; however, it is expected to take over 35% of the overall demand in the next 10 years.
Mobil is the market leader with 27% market share; however, market insiders say that around 70% market shares belong to various brands altogether, which is still undefined.
It is already flooded with many global and local brands.