Analys

Cutting supply of “black crude” will feel like more

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6 år sedan

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19 december, 2018

The point is that all crudes are not created equal. US supply of ultralight crudes and NGLs is drowning the world with light end products. As a result the gasoline refinery crack has crashed to zero. At the same time however the world is getting starved for medium to heavy molecules leading to abnormally strong refinery mid. dist. margins.

When OPEC+ now is cutting supply of at least 1.2 m bl/d of crude they are primarily cutting supply of medium sour crude or “black crude”. In exchange the market is left to consume more light to ultralight US shale oil crude and NGLs.

Bjarne Schieldrop, Chief analyst commodities at SEB

Bjarne Schieldrop, Chief analyst commodities, SEB

US shale oil typically contains about 60% medium to heavy molecules. But if we also factor in the added supply of US liquids which is NGLs etc. which contains 0% such molecules then the total comes down to only 40%. I.e. average new liquids supply in the US only contains a 40% cut on average of medium to heavy molecules.

“Black crude” (medium sour) in comparison contains close to 80% medium to heavy molecules. I.e. twice as much as the new US liquids supply. So when OPEC+ now cuts 1.2 m bl/d of “black crude” it reduces supply of medium to heavy molecules by 0.93 m bl. To make up for this the US has to lift total liquids supply by 2.3 m bl/d.

You can always break apart longer hydrocarbon molecules to medium length molecules (mid-dist. and lighter). Yes, it is an expensive process but the equipment for splitting longer hydrocarbons is still widespread in the global refining system today. All from splitting VGO (Vacuum Gas Oil) to either Gasoline (by Fluid Catalytic Crackers (FCCs) or to middle distillates (by Hydrocrackers) to breaking apart vacuum residue in Cokers to mid and light products. But merging shorter molecules and converting them to middle distillates is way more difficult and expensive and is in general not done. The exception of this is Shell’s Perl, Gas To Liquids (GTL) plant in Qatar where natural gas is converted to diesel. But that is more one of a kind.

From end 2016 to end 2018 the US has increased its hydrocarbon liquids supply by 4.2 m bl/d consisting of 2.9 m bl/d of crude and 1.3 m bl/d non-crude (typically NGL’s). The later typically contains no medium to heavy molecules while the prior contains 59% such molecules or less. In total the 4.2 m bl/d of new liquids supply in the US has added 1.7 m bl/d of medium to heavy molecules or 0.4 m bl/d per m bl/d of additional US liquids. “Black crude” however typically contains close to 78% medium to heavy molecules.

The huge change in the oil market due to the arrival of booming US shale oil is many faceted and complex. The new molecule composition in US liquids supply growth is one of many. Of this aspect we have probably only seen the start. Most new refineries are in general geared towards Middle East medium sour crude or “black crude” and the new ultralight liquids supply from the US does not match these all that well. The new Chinese INE crude contract is typically defined as medium sour crude if we look at the crude streams going into the physical delivery of this contract. That is to match the Chinese refineries.

Again, when OPEC+ now is cutting 1.2 m bl/d of black crude it is more than meets the eye. The feel of this cut will be deeper than its headline number of 1.2 m bl/d and it may not lead to all that much of a blessing for US ultralight liquids supply as producers there hope for once the cut starts to bite.

Today at 16:30 CET we’ll have the US EIA oil inventory data. They are likely to be quite bearish. Given the US EIA’s drilling productivity report this Monday we are likely going to see that the EIA lifts US crude production by 100 to 200 k bl/d versus last week. The API yesterday indicated stock changes of US crude: +3.5 m bl, Gasoline: +1.8 and Distillates: -3.4 m bl. In total a rise and also bearish for crude if that is the outcome.

Positive note: Dimondback is cutting activity in the Permian basin in 2019 in response to lower crude prices and higher costs.

Ch1: US ultralight crude versus Brent crude and Oman crude. The difference is much larger if one also includes US supply growth in NGLs

Table 1: Ultralight US shale oil contains much less medium to heavy molecules

Ch2: Mid-dist and heavy ends; much more fun than gasoline lately versus what is usually the case. Probably just the beginning.

Ch3: Crude prices falling like a rock

Ch4: US EIA drilling productivity report on Monday. Only bearish reading as of yet: higher drilling, higher DUCs, higher production, higher productivity and a marginal, annualized production rate of 1.6 m bl/d per year. Lower crude oil prices have not yet started to impact activity in December and January. But news above from Dimondback shows that prices are starting to hurt.

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Stronger inventory build than consensus, diesel demand notable

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Yesterday’s US DOE report revealed an increase of 4.6 million barrels in US crude oil inventories for the week ending February 14. This build was slightly higher than the API’s forecast of +3.3 million barrels and compared with a consensus estimate of +3.5 million barrels. As of this week, total US crude inventories stand at 432.5 million barrels – ish 3% below the five-year average for this time of year.

Ole R. Hvalbye, Analyst Commodities, SEB

In addition, gasoline inventories saw a slight decrease of 0.2 million barrels, now about 1% below the five-year average. Diesel inventories decreased by 2.1 million barrels, marking a 12% drop from the five-year average for this period.

Refinery utilization averaged 84.9% of operable capacity, a slight decrease from the previous week. Refinery inputs averaged 15.4 million barrels per day, down by 15 thousand barrels per day from the prior week. Gasoline production decreased to an average of 9.2 million barrels per day, while diesel production increased to 4.7 million barrels per day.

Total products supplied (implied demand) over the last four-week period averaged 20.4 million barrels per day, reflecting a 3.7% increase compared to the same period in 2024. Specifically, motor gasoline demand averaged 8.4 million barrels per day, up by 0.4% year-on-year, and diesel demand averaged 4.3 million barrels per day, showing a strong 14.2% increase compared to last year. Jet fuel demand also rose by 4.3% compared to the same period in 2024.

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Analys

Higher on confidence OPEC+ won’t lift production. Taking little notice of Trump sledgehammer to global free trade

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4 dagar sedan

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19 februari, 2025

Redaktionen

Ticking higher on confidence that OPEC+ won’t lift production in April. Brent crude gained 0.8% yesterday with a close of USD 75.84/b. This morning it is gaining another 0.7% to USD 76.3/b. Signals the latest days that OPEC+ is considering a delay to its planned production increase in April and the following months is probably the most important reason. But we would be surprised if that wasn’t fully anticipated and discounted in the oil price already. News this morning that there are ”green shots” to be seen in the Chinese property market is macro-positive, but industrial metals are not moving. It is naturally to be concerned about the global economic outlook as Donald Trump takes a sledgehammer smashing away at the existing global ”free-trade structure” with signals of 25% tariffs on car imports to the US. The oil price takes little notice of this today though.

Bjarne Schieldrop, Chief analyst commodities, SEB

Kazakhstan CPC crude flows possibly down 30% for months due to damaged CPC pumping station. The Brent price has been in steady decline since mid-January but seems to have found some support around the USD 74/b mark, the low point from Thursday last week. Technically it is inching above the 50dma today with 200dma above at USD 77.64/b. Oil flowing from Kazakhstan on the CPC line may be reduced by 30% until the Krapotkinskaya oil pumping station is repaired. That may take several months says Russia’s Novak. This probably helps to add support to Brent crude today.

The Brent crude 1mth contract with 50dma, 100dma, 200dma and RSI. Nothing on the horizon at the moment which makes us expect any imminent break above USD 80/b

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Brent looks to US production costs. Taking little notice of Trump-tariffs and Ukraine peace-dealing

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6 dagar sedan

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17 februari, 2025

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Brent crude hardly moved last week taking little notice of neither tariffs nor Ukraine peace-dealing. Brent crude traded up 0.1% last week to USD 74.74/b trading in a range of USD 74.06 – 77.29/b. Fluctuations through the week may have been driven by varying signals from the Putin-Trump peace negotiations over Ukraine. This morning Brent is up 0.4% to USD 75/b. Gain is possibly due to news that a Caspian pipeline pumping station has been hit by a drone with reduced CPC (Kazaksthan) oil flows as a result.

Brent front-month contract rock solid around the USD 75/b mark. The Brent crude price level of around USD 75/b hardly moved an inch week on week. Fear that Trump-tariffs will hurt global economic growth and oil demand growth. No impact. Possibility that a peace deal over Ukraine will lead to increased exports of oil from Russia. No impact. On the latter. Russian oil production at 9 mb/band versus a more normal 10 mb/d and comparably lower exports is NOT due to sanctions by the EU and the US. Russia is part of OPEC+, and its production is aligned with Saudi Arabia at 9 mb/d and the agreement Russia has made with Saudi Arabia and OPEC+ under the Declaration of Cooperation (DoC). Though exports of Russian crude and products has been hampered a little by the new Biden-sanctions on 10 January, but that effect is probably fading by the day as oil flows have a tendency to seep through the sanction barriers over time. A sharp decline in time-spreads is probably a sign of that.

Longer-dated prices zoom in on US cost break-evens with 5yr WTI at USD 63/b and Brent at USD 68-b. Argus reported on Friday that a Kansas City Fed survey last month indicated an average of USD 62/b for average drilling and oil production in the US to be profitable. That is down from USD 64/b last year. In comparison the 5-year (60mth) WTI contract is trading at USD 62.8/b. Right at that level. The survey response also stated that an oil price of sub-USD 70/b won’t be enough over time for the US oil industry to make sufficient profits with decline capex over time with sub-USD 70/b prices. But for now, the WTI 5yr is trading at USD 62.8/b and the Brent crude 5-yr is trading at USD 67.7/b.

Volatility comes in waves. Brent crude 30dma annualized volatility.