EIA: No Drawdown In Oil Inventories Until Mid-2018

Friday January 27, 2016

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. Oil inventories to rise through mid-2018

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- Global crude oil and product inventories increased at a rate of about 2 million barrels per day in the fourth quarter of 2016 as upstream production continued to rise and seasonal factors weighed on demand.
- But for the whole of 2016, inventories grew at a more modest 0.9 mb/d average.
- OPEC cuts will help, but global production is still expected to increase this year, according to the EIA. Demand will grow faster, however, leading to the inventory build to shrink to just 0.3 mb/d for 2017.
- But that is still a surplus. The EIA doesn't actually see inventories declining until the second half of 2018, a remarkably bearish projection that leaves crude oil prices below $60 per barrel for the next two years.

2. Gasoline stocks rising again

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- Even as OPEC has sparked a bull run and a bout of optimism over the past two months, signs of a glut persist.
- Gasoline inventories are rising at an unusually fast pace for this time of year, and the excess supplies are squeezing refining margins as storage levels rise. Gasoline stocks are up 17 million barrels since the start of the year.
- Gasoline stocks tend to rise in the first two months of the year as refiners churn out product ahead of what is typically maintenance season between February and April. Maintenance and retooling at the end of winter and beginning of spring allows refiners to prepare for peak summer demand.
- But the stock gains in the first three weeks of 2017, as Reuters notes, was the fastest build in over ten years, almost twice as large as the seasonal average.

3. Oil majors become cash flow neutral

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- The five supermajors saw their debt levels double over the past three years to $220 billion. Plugging the massive holes in their budget with ever-rising debt threatened their credit ratings.
- ExxonMobil (NYSE: XOM) saw debt rise to $46 billion by 3Q2016; Royal Dutch Shell (NYSE: RDS.A) has debt topping $78 billion, the largest pile of debt in the world aside from Brazil's Petrobras.
- But spending reductions and drilling efficiencies, combined with an improvement in oil prices, has allowed the oil majors to become cash flow neutral, according to analysts at Jefferies International Ltd.
- At $50 per barrel, the top five oil majors can fund their capex programs and also pay shareholder dividends without taking on more debt.
- Credit analysts had warned about creditworthiness and market analysts questioned the integrity of their dividends, but shareholder payouts appear safe now that the financials have improved.

4. BP sees oil demand slowing

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- BP expects oil demand to steadily slow over the next twenty years even as supply rises, leading to a "lower for much longer" scenario.
- That will lead to a growing market share from low-cost producers in the Middle East, Russia and the U.S., forcing high-cost producers out of the market.
- BP projects annual oil demand growth at just 0.7 percent through 2035, about half the rate of the preceding two decades.
- Transportation will no longer the main source of demand growth by 2030 as EVs and efficiency take a bite into consumption. Freight, petrochemicals and aviation will be the major sources of growth.
- "We are seeing a shift in the global energy mix," Bob Dudley, BP's CEO, said at a briefing in London. "There is a continuous de-carbonization of the fuel mix. Oil demand continues to grow over the next 20 years, but energy efficiency will moderate growth in demand."

5. Revenues from U.S. federal lands plunged

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- The U.S. government took in nearly $6 billion in revenues from energy production on federal lands in 2016, which includes coal, natural gas, oil and renewables. That is down sharply from the $14 billion that flowed to government coffers in FY2013.
- Royalties from crude oil production accounted for about 55 percent of the total between 2010 and 2016. But revenues plummeted from falling oil prices over the past three years.
- The source of revenue is also split roughly in half between onshore and offshore, with a smaller slice coming from American Indian territories.
- The total pot of revenue collected is subsequently distributed to federal, state and other funds. The states hardest hit by the oil price downturn include Alaska, Louisiana, New Mexico, North Dakota, Oklahoma and Wyoming. Those states fell into recession in 2016, according to a new report from S&P Global Ratings.

6. Brazil looms large for offshore drillers

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- In 2016, new oil discoveries were at their lowest levels in seven decades, and down 90 percent from the volume of oil discovered in 2010.
- Back in 2010, Brazil was the darling of the oil world, with Petrobras and its partners logging discoveries exceeding 20 billion barrels in that year alone - or, about six times the volume of oil that was discovered across the entire globe in 2016.
- More discoveries in offshore Brazil were recorded in 2011 and 2012. But the crash in oil prices and the high cost of production in Brazil have led to several quiet years.
- Nevertheless, the resource potential in Brazil is enormous. And after the Brazilian government liberalized its energy sector last year, opening up exploration to private companies, interest will be high for the two rounds of offshore bidding the government recently announced, scheduled for 2017.
- Shell's (NYSE: RDS.A) purchase of BG Group last year was a big play on Brazil - BG had significant assets in offshore Brazil.

7. Mexico peso hit after crisis with Trump administration

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- The Mexican peso lost 1 percent after Mexican President Enrique Pena Nieto cancelled his scheduled meeting with U.S. President Donald Trump.
- The spat took a turn for the worse when news broke that the Trump administration wants to slap a 20 percent tariff on Mexico to pay for the border wall.
- The proposal could be part of the Trump administration's support for a border-adjustment tax.
- Some in the oil and refining industries are opposed to the tax because it will cause gasoline prices to rise. One report from the Brattle Group estimates gasoline prices will increase by $0.30/gallon immediately.
- But U.S. oil producers would benefit because domestic crude oil prices would trade at a premium to international prices. Goldman Sachs estimates a 25 percent immediate increase in U.S. oil prices.
- However, the proposed tax threatens a trade war with one of the U.S. top trade partners. The political and economic fallout is unknown.

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