It was a busy week for us traveling to Houston where we hosted an Ursa Insights event for clients and friends, shared the stage with our partner Planet Labs, and then returned to New York City for the Eagle Alpha buy-side conference.
Our message focused on ways to leverage our proprietary satellite data to gain intelligence on the physical oil market.
It was an easy point to drive home when you consider how the week began.
Two pumping stations along Saudi Arabia’s East-West Pipeline were reportedly bombed in a drone attack a few days after Saudi tankers were damaged near the Strait of Hormuz.
Saudi Aramco shut the 1,200-km pipeline as a precaution. The East-West Pipeline transports crude to the Red Sea port of Yanbu.
The inability to load crude from Yanbu would be a major disruption to European refiners relying upon this supply and cause a chain reaction.
How quickly this happens depends on the amount of crude held in storage.
Yanbu is one of the global sites where we measure crude inventory levels on a weekly basis using synthetic aperture radar (SAR).
Crude inventories in Yanbu were equal to 62% of capacity before the reported bombing.
Allyson Agosta, Ursa commercial director, addresses the Eagle Alpha audience, New York City (May 15, 2019)
Although these inventories didn’t need to be tapped (the pipeline later restarted), this serves as a good example of how SAR-derived inventory measurements can prove valuable when unexpected events occur.
Other types of use-cases we highlighted this week centered on the big picture, which looks something like this:
Demand concerns (i.e. US-China trade war) have countered the risk of further supply disruptions (e.g. Iran, Venezuela, Libya) and a slowdown in US crude production.
That explains why ICE Brent has been stuck in the low-$70s.
On the other hand, the contract’s term structure continues to strengthen, suggesting traders expect an undersupply in the second half of 2019.
ICE Brent’s front/sixth month spread widened to a backwardation of more than $3/b this week for the first time since June 2014 when the front-month contract was trading above $110/b.
Does that mean Brent has lots of room to run?
Rather than wait to see what happens, our proprietary data provides a near real-time pulse on some of the key factors that will determine the global supply-demand balance.
Ursa vice president, Nicole Toigo, speaks at Planet Live, Houston (May 14, 2019)
Here’s a list of ten factors:
-Will OECD Europe stocks keep tightening? Our data showed a decline in OECD Europe crude stocks in April, which is unusual for this time of year. Is that a bullish omen? (FYI: The International Energy Agency releases its data covering April stocks on June 14).
-Chinese crude inventories have yet to establish a trend this year. Given its size, China could quickly become a factor again, like it was in the fourth quarter of 2018 when storage builds helped drag oil prices lower.
-What impact will the ending of US waivers for buyers of Iranian crude have? We’re tracking shipping activity around Kharg Island as well as Iranian inventories and oil production.
-Will Saudi Arabia fulfill the wishes of the White House and increase exports? We shared with clients our estimate of Saudi production so far this month (derived from satellite imagery).
-A decline in Saudi crude stocks would imply that production hasn’t increased by enough to meet domestic needs and/or exports. Keep in mind the seasonality factor: power plants in Saudi Arabia burn more oil every summer.
-Libyan production has returned above 1 million barrels per day. Can this last? We’re monitoring El Sharara and other key oilfields for any signs of shutdowns.
-Recent builds in the Permian Basin have weakened the Midland/WTI differential. A big discount for Midland will revive pressure on pipelines to get built and drilling/well completions to slow.
Ursa Insights, Houston (May 13, 2019)
-What is the status of major pipelines under construction linking the Permian with the US Gulf Coast? Our pipeline monitoring reports provide regular updates.
-Additional offtake capacity might lead some operators to finish the job. A backlog of drilled, but uncompleted wells (DUCs) represents additional supply ready to hit the market.
-Public information on well completions is notoriously lagged. We’ve developed techniques using satellite imagery and machine learning to automatically detect well completions.
If you’re interested in learning more about the insights we can deliver, sign up for a free evaluation here.