A few of us traveled this week to attend the Argus Americas Crude Summit. Ursa was one of the conference sponsors.
It was great to be back in Houston to hear about the latest trends and share with folks some of the insights we’re seeing in the oil market.
Here are some takeaways:
OECD inventories are the biggest factor impacting oil prices. These stockpiles have been around the five-year average. That’s a “pretty comfortable” level of supply. Traders want to know whether the OPEC+ production cuts impact inventories.
(We recently wrote about the market’s focus on crude inventories and use of Ursa to provide answers on this very topic).
OPEC compliance: Countries with obligations to cut production under the OPEC+ pact will likely do so. The agreement will probably be extended through the second half of 2019.
Argus Americas Crude Summit
Saudi production should average 10.2 million barrels per day (bpd) in 2019. That’s well below spare capacity of 11-11.5 million bpd available immediately. Saudi production could reach 12 million bpd, but that would take 3-6 months.
US-Middle East relations: Arab governments don’t believe the US will be able to sustain a consistent Middle East policy, said H.R. McMaster, former national security advisor in the Trump administration.
Recalling President Obama’s disengagement from the Middle East, Arab leaders think that could happen again if a Democrat wins the White House in 2020, he said.
With that in mind, countries like Saudi Arabia seem to be hedging their bets, McMaster said. What was the significance of the MBS-Putin handshake at the G20 summit?
Cost of production: The drop in flat oil prices has forced US shale producers to make efficiency gains allowing the Permian to remain the biggest source of supply growth in the world.
The cost of production is approximately $35-$40 per barrel, well below current oil prices.
Maxed out: The US shale revolution has introduced vast supplies of light sweet crude, exceeding the appetite by domestic refiners configured to process sour crude (i.e. imports). This excess supply will need to be exported to find a home.
Bottlenecks shifting: Pipelines are getting built to relieve the glut of crude from the Permian Basin. That’s helping move supply more easily to the Gulf Coast. But now the concern in the market is that waterborne infrastructure won’t be adequate to deliver this supply to market.
Logistical limitations: US ports are draught-constrained limiting the ability to load supertankers. VLCCs need minimum of a 75-foot draught. VLCCs are meant to be loaded at sea via single point mooring.
A significant expansion of Gulf Coast dock capacity is underway. These projects are tied into pipelines delivering crude from producing basins. Louisiana could become a major export location.
A Cushing bottleneck seems likely to form in 2019 that won’t subside until 2020.
Some major pipeline projects began delivering crude into Cushing last year, with a few more expected to come online this year. This additional capacity combined with greater production led to an imbalance between inbound and outbound flows.
There are 25 inbound pipelines (3.99 million bpd) versus 15 outbound pipelines (3.16 million bpd), according to an industry consultant.
It won’t be until 2020 when planned outbound pipeline projects are completed that Cushing will rebalance.
(Cushing stocks built almost nonstop from the week ending October 4 to December 27, reaching the highest level since January 25, according to Ursa data. See chart above.)
Impact of MARPOL IV: The IMO 2020 rules lowering the sulfur cap for marine fuel will translate into greater demand for middle distillates, pushing prices higher.
Quote of the day: “IMO 2020 is worth somewhere between $0 to $3 billion to us,” a major US refiner said. Hence uncertainty around the issue less than a year before implementation.