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highest daily price changes in Brent and WTI crude oil

Source: U.S. Energy Information Administration, based on data from Refinitiv

On Saturday, September 14, 2019, an attack damaged the Saudi Aramco Abqaiq oil processing facility and the Khurais oil field in eastern Saudi Arabia. The Abqaiq oil processing facility is the world’s largest crude oil processing and stabilization plant, with a capacity of 7 million barrels per day (b/d) or about 7% of global crude oil production capacity. On Monday, September 16, the first full day of trading after the attack, Brent and West Texas Intermediate (WTI) crude oil prices experienced the largest single-day price increase in the past decade.

On Tuesday, September 17, Saudi Aramco reported that Abqaiq was producing 2 million b/d, and they expected its entire output capacity to be fully restored by the end of September. In addition, Saudi Aramco stated that crude oil exports to customers will continue by drawing on existing inventories and offering additional crude oil production from other fields. Tanker loading estimates from third-party data sources indicate that loadings at two Saudi Arabian export facilities were restored to the pre-attack levels. Likely driven by news of the expected return of the lost production capacity, both Brent and WTI crude oil prices fell on Tuesday, September 17.

Crude oil prices are the biggest factor for the retail price of gasoline, the most widely consumed transportation fuel in the United States. Each dollar per barrel of sustained price change in crude oil translates to an average change of about 2.4 cents per gallon in petroleum product prices. On Monday, September 16, U.S. average regular retail gasoline prices averaged $2.55 per gallon, according to the U.S. Energy Information Administration’s (EIA) Gasoline and Diesel Fuel Update.

EIA estimates that Saudi Arabia was producing 9.9 million b/d of crude oil in August. Estimates from the Joint Organizations Data Initiative (JODI) indicate the country exported 6.9 million b/d during July, the latest month for which data are available. Estimates from a third-party tanker tracking data service, ClipperData, indicate Saudi Arabian crude oil exports in August remained at 6.7 million b/d. Saudi Arabia’s crude oil production and export levels are each 0.5 million b/d lower than their respective 2018 annual averages.

Although U.S. imports of crude oil from Saudi Arabia have declined during the past three years—and recently hit a four-week average record low of 380,000 b/d in the week ending September 6—the United States still imports about 7 million b/d of crude oil. As a result, a tighter global crude oil market and increased global crude oil prices will ultimately increase the price of crude oil and transportation fuels in the United States.

Saudi Arabia monthly crude oil production and exports

Source: U.S. Energy Information Administration, Short-Term Energy Outlook, September 2019 and Weekly Petroleum Status Report; Joint Organizations Data Initiative (JODI)

Global inventories of crude oil are the most readily available alternative source of supply during a supply outage. JODI data indicate that Saudi Arabia held nearly 180 million barrels of crude oil in inventory at the end of July 2019. Saudi Arabia can use these inventories to maintain a similar level of crude oil exports as before the attack, assuming the production outage doesn’t last long, which Saudi Aramco indicated in its update on September 17.

As of September 1, commercial inventories of crude oil and other liquids for Organization for Economic Cooperation and Development (OECD) members were estimated at 2.9 billion barrels, enough to cover 61 days of its members’ liquid fuels consumption. On a days-of-supply basis, OECD commercial inventories are 2% lower than the previous five-year (2014–18) average.

OECD commercial crude oil and other liquids inventories

Source: U.S. Energy Information Administration, Short-Term Energy Outlook, September 2019

The United States has two types of crude oil inventories: those that private firms hold for commercial purposes, and those the federal government holds in the Strategic Petroleum Reserve (SPR) for use during periods of major supply interruption. Weekly EIA data for September 13 indicate total U.S. commercial inventories were equivalent to 24 days of current U.S. refinery crude oil inputs. The SPR holds additional volumes equivalent to slightly more than 37 additional days of current refinery inputs for a total of about 62 days.

The supply coverage provided by oil inventories can also be measured by days of net crude oil imports (imports minus exports). By this metric, as of June 2019, the United States could meet its net import needs by drawing down the SPR for 162 days. The Energy Policy and Conservation Act states the President may make the decision to withdraw crude oil from the SPR should they find that there is a severe petroleum supply disruption. The United States has used the SPR in this capacity three times since its creation: in 1991, at the beginning of Operation Desert Storm; in 2005, following Hurricane Katrina; and in 2011, to help offset crude oil supply disruptions in Libya.

More analysis—particularly of spare capacity available to produce more crude oil—is available in the latest This Week in Petroleum. EIA is closely monitoring the developments related to the oil supply disruption in Saudi Arabia and the effects that they have on oil markets. EIA’s findings will be reflected in the October Short-Term Energy Outlook (STEO), scheduled for release on October 8.

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January, 20 2020
Your Weekly Update: 13 - 17 January 2020

Market Watch   

Headline crude prices for the week beginning 13 January 2020 – Brent: US$64/b; WTI: US$59/b

  • Tensions in the Persian Gulf have abated, but not disappeared, as both the US and Iran stepped back from going to war; the buck, so far, has stopped with Tehran’s retaliation to the US assassination of its top general with a barrage of missile strikes at US bases in Iraq
  • The underlying situation is still fragile, with the Iranian population swinging from supporting the government to protesting its accidental downing of a commercial Ukraine Airlines plane; with the risk of war easing, crude prices have fallen back to their pre-crisis levels
  • However, American and foreign oil companies have pulled their staff from crude fields in northern Iraq and Kurdistan, including Chevron, as the oil industry in Iraq monitors the risk – and consequences – of military action
  • In precaution, oil tankers have begun boosting their rates once again to haul crude through the Persian Gulf, with quoted rates now at their highest level since the 2019 attacks on ships passing through the narrow straight
  • Although political tensions remain fresh, Saudi Arabia said that OPEC and the OPEC+ club were instead focused on using their window of production cuts to reduce excess oil stockpiles to levels ‘within the contours of 2010-2014’
  • In the US, not only is shale output staying strong, but production in the US Gulf of Mexico also made history, exceeding 2 mmb/d for the first time ever in 2019, beating the previous high recorded in 2018
  • Worries about the health of global oil demand persist… although the US and China signed a Phase 1 trade deal, the agreement is more about halting escalation of the trade war than repairing inflicted damage; a slowdown in Chinese economic growth could lead to oil demand growth halving in 2020 in China according to CNPC
  • The US active rig count fell for a second consecutive week, losing 15 rigs – 11 oil and 4 gas – for the 17th weekly decline of the past 20 weeks; losses in the Permian were once again high, shedding a total of 6 rigs
  • Crude oil prices should remain rangebound with Brent at US$63-65/b and WTI at US$57-59/b, as the market retreats back to its ever-present worries about demand while geopolitical risk premiums scale back


Headlines of the week

Upstream

  • Guyana’s success is now extending to its neighbours, with Total and Apache announcing a ‘significant’ oil discovery at their Maka Central-1 well in Suriname’s Block 58, which lies adjacent to the prolific Stabroek Block
  • BP has agreed to sell its operating interest in the UK North Sea’s Andrew assets – including the Andrew platform as well as the Andrew, Arundel, Cyrus, Farragon, and Kinnoull fields – along with its 27.5% non-operating interest in the Shearwater field to Premier Oil for some US$625 million
  • Liberia will kick start its next offshore licensing round in April 2020, offering nine blocks in the Harper basin, one of the few offshore regions in West Africa that remains unexplored and undrilled
  • Equinor has extended the life of its Statfjord assets beyond 2030, with plans to commission up to 100 new wells over the next decade, deferring decommissioning with a goal of maintaining current output levels beyond 2025
  • After Murphy Oil, Petrofac and ExxonMobil, Repsol is the latest major considering an upstream exit from Malaysia, covering assets that include six development blocks and the major Kinabalu oilfield in Sabah
  • Senegal’s government has approved Woodside’s offshore Sangomar Field Development, which will involve the drilling of 23 subsea wells and a FPSO with the capacity to process up to 100,000 b/d of crude
  • Equinor has announced plans to reduce greenhouse gas emissions from its offshore fields and onshore plants in Norway by 40% by 2030, 70% by 2040 and to near zero by 2050 from 2019 levels

Midstream/Downstream

  • Shell is reportedly seeking buyers for its 144 kb/d Anacortes refinery in Washington state, which would be its third North American sale in two years after divesting its Martinez refinery in California and Sarnia refinery in Ontario
  • Shell has announced plans to increase its share of the Mexican fuel market to 15%, which would require considerable growth in its network of 200 fuel stations in 12 states that currently represent 1% of the market
  • Occidental Petroleum plans to reduce its holdings in Western Midstream Partners – acquired as part of its controversial takeover of Anadarko – to less than 50%, potentially removing up to US$7.8 billion of debt

Natural Gas/LNG

  • Sempra Energy and Saudi Aramco have signed an agreement that will see the Saudi giant play a bigger part in the planned 22 million tpa Port Arthurt LNG project, following an existing agreement to purchase 5 mtpa signed in May 2019
  • Kuwait Petroleum Corp has agreed to purchase 3 million tpa of LNG from Qatar Petroleum for 15 years beginning 2022, with Kuwait remaining one of the few countries in the Middle East that remain neutral to the Saudi-Qatar standoff
  • ExxonMobil has signed an agreement with midstream company Outrigger Energy II to build a 250 mmscf/d cryogenic gas processing, gathering and pipeline system in the Bakken’s Williston Basin in North Dakota
  • The Larak gas field in Sarawak has achieved first gas, operated by SapuraOMV Upstream as part of the SK408 PSC that includes the Gorek and Bakong fields, with output planned to be processed into LNG at Petronas’ Bintulu complex
  • Russia’s TurkStream natural gas pipeline – connecting Russia, Turkey, Bulgaria and eventually Serbia and Hungary - has officially begun operations, delivering up to 13 bcm of Russian gas that can be rerouted from the Ukraine route
January, 17 2020
EIA forecasts slower growth in natural gas-fired generation while renewable energy rises

annual U.S. electric power sector generation by energy source

Source: U.S. Energy Information Administration, Short-Term Energy Outlook, January 2020

In its latest Short-Term Energy Outlook (STEO), released on January 14, the U.S. Energy Information Administration (EIA) forecasts that generation from natural gas-fired power plants in the electric power sector will grow by 1.3% in 2020. This growth rate would be the slowest growth rate in natural gas generation since 2017. EIA forecasts that generation from nonhydropower renewable energy sources, such as solar and wind, will grow by 15% in 2020—the fastest rate in four years. Forecast generation from coal-fired power plants declines by 13% in 2020.

During the past decade, the electric power sector has been retiring coal-fired generation plants while adding more natural gas generating capacity. In 2019, EIA estimates that 12.7 gigawatts (GW) of coal-fired capacity in the United States was retired, equivalent to 5% of the total existing coal-fired capacity at the beginning of the year. An additional 5.8 GW of U.S. coal capacity is scheduled to retire in 2020, contributing to a forecast 13% decline in coal-fired generation this year. In contrast, EIA estimates that the electric power sector has added or plans to add 11.4 GW of capacity at natural gas combined-cycle power plants in 2019 and 2020.

Generating capacity fueled by renewable energy sources, especially solar and wind, has increased steadily in recent years. EIA expects the U.S. electric power sector will add 19.3 GW of new utility-scale solar capacity in 2019 and 2020, a 65% increase from 2018 capacity levels. EIA expects a 32% increase of new wind capacity—or nearly 30 GW—to be installed in 2019 and 2020. Much of this new renewables capacity comes online at the end of the year, which affects generation trends in the following year.

Forecast generation mix varies in each of the 11 STEO electricity supply regions. A large proportion of the retired coal-fired capacity is located in the mid-Atlantic area, where PJM manages the dispatch of electricity. EIA forecasts that coal generation in the mid-Atlantic will decline by 37 billion kilowatthours (kWh) in 2020. Some of this decline is offset by more generation from mid-Atlantic natural gas-fired power plants; EIA expects generation from these plants to grow by 23 billion kWh.

forecast annual change in electric power sector generation by fuel

Source: U.S. Energy Information Administration, Short-Term Energy Outlook, January 2020

In the Midwest, where the Midcontinent ISO (MISO) manages electricity, EIA expects coal generation to fall in 2020 by 33 billion kWh. This decline is offset by an increase in natural gas electricity generation (12 billion kWh) and by nonhydropower renewable energy sources (13 billion kWh). The regional increase in renewables is primarily a result of new wind generating capacity.

The electric power sector in the area of Texas managed by the Electric Reliability Council of Texas (ERCOT) is planning to see large increases in generating capacity from both wind and solar. EIA expects this new capacity will increase generation from nonhydropower renewable energy sources by 24 billion kWh this year. EIA expects the increased ERCOT renewable generation will lead to a regional decline of natural gas-fired generation and coal generation of 14 billion kWh for each fuel source in 2020.

EIA expects these trends to continue into 2021. EIA forecasts U.S. generation from nonhydropower renewable energy sources will grow by 17% next year as the electric power sector continues expanding solar and wind capacity. This increase in renewables, along with forecast increases in natural gas fuel costs, contributes to EIA’s forecast of a 2.3% decline in natural gas-fired generation in 2021. U.S. coal generation in 2021 is forecast to fall by 3.2%.

January, 17 2020