The magic number seems to be 1 million barrels. At least, that is what has been requested by the US to Saudi Arabia and some other OPEC producers in an unofficial appeal. After President Donald Trump publicly complained on Twitter that ‘OPEC is at it again!’ when US crude prices surged to their highest levels in three years – induced in no small part by the re-imposition of sanctions on Iran – the request strikes a more conciliatory note as the oil titans of the world seek to bring some order to the market.
It is not known how the request was made, but it is known that it was made individually to a select group of oil producers – likely Saudi Arabia and its closest OPEC allies Kuwait, the UAE and Algeria, and most definitely not Iran. News of the request raised eyebrows. The US tends to shy away from involvement or engagement with OPEC, and that this happened an unprecedented situation. The USA is less worried about surging shale production in response to higher prices, but something more short-term – retail gasoline prices have jumped to their highest levels in more than three years, and with the summer driving season coming, the US fears high pump prices will trigger dissatisfaction, particularly with mid-term elections coming in November. Requesting the American shale industry to restrict output goes against US policy, so it has to go to OPEC, cap in hand, to ask for help.
Can OPEC help? Will OPEC help? The answer is very likely to be a yes. Between Saudi Arabia, Kuwait and the UAE alone, there is almost 2 mmb/d of spare capacity that could theoretically be activated quickly. Those three – along with Algeria and non-OPEC member Oman – reportedly met up prior to the US request to their position in raising output. Russia too has significant spare capacity – some 500,000 b/d – that Rosneft is said to be gearing up to utilise. It is not known whether the US request included one to Russia, but OPEC and Russia were always going to head into the June 22 meeting in Vienna with the target of raising output regardless of America. The past three weeks has been characterised by a united Saudi-Russia front aimed to marshalling support for an output increase to convince other members of the OPEC-NOPEC alliance to fall in line.
From its ‘the higher the better’ attitude seen earlier this year, OPEC has now moved to a desire to contain prices within the US$70-75/b range. To do that, it has publicly stated that it will move to replace any volumes lost from Iran and Venezuela. No numbers have officially stated, but 1 million barrels per day was always seen as a significant enough figure by analysts worldwide. And now, it seems, the US believes that is the magic number as well. OPEC meets in two weeks and I believe it is very likely that they too will agree.
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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
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