Brent Soars As Canadian Crude Crashes

Friday December 15, 2017

In the latest edition of the Numbers Report, we’ll take a look at some of the most interesting figures put out this week in the energy sector. Each week we’ll dig into some data and provide a bit of explanation on what drives the numbers.

Let’s take a look.

1. Forties outage blows open Brent-WTI spread

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- The outage at the Forties pipeline system took 450,000 bpd of supply offline for several weeks. North Sea oil fields have had to shut down because of the outage.
- The unexpected disruption led to a spike in the price of Brent relative to WTI. The differential had already widened in recent months, but quickly added more than $2 per barrel after the outage of Forties.
- At over $7.25 per barrel, the Brent-WTI spread for delivery in February 2018 is at its widest in years.
- That should narrow when the pipeline comes back online, but it will juice U.S. crude exports because American oil is now dramatically cheaper than elsewhere in the world.

2. Canadian oil prices plunge

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- The price differential between Brent and WTI widened because of the Forties outage, but pipeline issues are causing even more problems for Canadian oil.
- Western Canada Select, which tracks heavy oil from Alberta’s oil sands, is now trading at a $25-per-barrel discount relative to WTI, the steepest discount in four years.
- The outage at the Keystone pipeline last month backed up some supply.
- But production is also rising in Canada because a handful of new projects are coming online, which were planned years ago. At the same time, Canada has utterly failed to build new pipeline capacity to get oil out of Alberta.
- "We have a lot of oil in the oilsands," Conor Bill, managing director of Mount Auburn Capital Corp., told CBC News, "and the problem is there aren't a lot of ways to get that crude out of the area where it's produced."

3. U.S. exports stay high

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- U.S. crude exports surged this year, particularly after the WTI-to-Brent discount widened to $6-$7 per barrel.
- But port improvements, especially at The Louisiana Offshore Oil Port (LOOP), could add more export capacity in early 2018. LOOP is adding the capability to handle very large crude carriers (VLCCs), which will allow for higher levels of U.S. crude exports.
- There are other reasons why U.S. crude exports could rise. The outage at the Forties pipeline system in the UK will mean U.S. oil might be called upon to fill the void.
- More importantly, the outage will push up Brent prices relative to WTI, making U.S. crude more competitive.

4. Russia’s Arctic exports rising

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- Russia just launched its first LNG shipment from Yamal LNG, a $27 billion project in northern Siberia.
- But Russia’s oil exports from the Arctic are also surging. In November, Russia’s Arctic oil exports hit 385,000 bpd, a record high.
- Russia’s compliance with the OPEC deal looked good in August and September, but only because its Arctic Prirarzlomnoye field was offline for maintenance.
- With maintenance completed, production jumped by 50,000 bpd in November.
- Some of Russia’s production is done by private companies who were skeptical of the OPEC deal to begin with.
- Russia’s compliance rate will be closely watched in the months ahead.

5. NOCs less attractive than international oil companies

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- Ahead of the Saudi Aramco IPO, Bloomberg Gadfly takes a look at the performance of publicly-listed national oil companies (NOCs). By many metrics, international companies outperform their state-owned peers.
- The valuation of the NOCs peaked when oil prices did, back in 2007-2008. International companies held up in the years since, but the NOCs have lost a large portion of their market caps.
- That comes despite the fact that some NOCs – Russia’s Rosneft above all – are sitting on proved reserves that are many multiples of their rate of production. Also, NOCs tend to have significantly lower production costs.
- However, NOCs have other expenses that serve their governments, including huge payrolls. Rosneft, for instance, is expanding its reach and taking on debt to serve geopolitical aims, not financial ones. Petrobras struggles under price controls for domestic fuel.
- This raises questions about the investment case for Saudi Aramco, which no doubt will serve as an instrument of the state, arguably more so than the other NOCs.

6. Shale producers locked in 2018 hedges

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- U.S. shale producers ratcheted up their 2018 hedges in September, October and November, taking advantage of WTI prices that moved up into the mid- and upper-$50s.
- In the third quarter, a group of 53 U.S and Canadian shale companies surveyed by Bloomberg New Energy Finance added 0.4 mb/d of hedges for the fourth quarter of 2017, 1 mb/d for 1Q2018, 1 mb/d for 2Q2018, 0.8 mb/d for 3Q2018 and 0.8 mb/d for 4Q2018.
- The evidence suggests that the industry tends to lock in hedges at around $50 per barrel, a threshold around which U.S. shale starts and stops drilling.
- The rig count is rising again, there is a big backlog of drilled but uncompleted wells and permits for new drilling surged in November, up 50 percent from a year earlier. These indicators are probably not a coincidence – with hedges in their pockets, they can get to work knowing they have certainty regarding their sale price.

7. Inventories continue to post strong declines, but that could end

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- OECD commercial inventories fell by more than 40 million barrels in October, falling to 2,940, the lowest level since July 2015, according to the IEA.
- Inventories are now a little more than 100 barrels above the five-year average, down more than 200 million barrels since the beginning of 2017.
- That would suggest the surplus would be eliminated in 2018, but the IEA predicted this week that inventories would start rising again because of rising U.S. shale production, with stocks building at a rate of 200,000 bpd in the first half of 2018.
- If the IEA is correct, OPEC could struggle to balance the market next year. OPEC predicts the U.S. will add 1 mb/d of new supply in 2018, and the IEA says that non-OPEC supply will grow by 1.6 mb/d, while demand will only grow by 1.3 mb/d.

That’s it for this week’s Numbers Report. Thanks for reading, and we’ll see you next week.