Friday September 8, 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. U.S. could become net oil exporter
- According to S&P Global Platts PIRA Energy, the U.S. will become a net oil exporter by 2023, a dramatic turnaround from a peak import dependence in 2005 when the U.S. imported 12.5 million barrels of oil per day.
- The change will come in large part because of ongoing growth in U.S. shale production.
- The U.S. is expected to import an average of 4.4 mb/d this year on net. That will shift to a situation of net exports rising to 3.3 mb/d by 2031.
- S&P Global Platts says that declining import dependence will increase the odds that the U.S. begins selling off its strategic petroleum reserve to fund non-energy items.
2. Brent-WTI spread deepened on Hurricane Harvey
- The spread between Brent and WTI, two of the most important oil benchmarks, has been relatively small for years. Prior to 2014, the spread was often much larger, reflecting different conditions within the U.S. (WTI) compared to the rest of the world (Brent).
- But the spread opened up again this summer, a symptom of rapid growth in U.S. oil production at a time when OPEC is limiting supply from the Middle East.
- Hurricane Harvey blew open the spread. The outage of a fifth of U.S. refining capacity trapped crude oil within the United States. WTI briefly traded at a more than $5 per barrel discount to Brent, the largest disparity since 2015.
- However, because the U.S. removed the ban on crude oil exports at the end of 2015, there is little chance that the discount will ever reach double-digit territory. If WTI is discounted enough, refiners will snatch up U.S. crude, forcing the benchmarks to converge again.
3. Hurricane Irma targeting South Florida
- Hurricane Irma, a Category 5 monster, is taking aim at South Florida after devastating parts of the Caribbean.
- According to GasBuddy.com, there were more than 600 gasoline stations without fuel on Wednesday, as Floridians stockpiled essentials ahead of the storm.
- Florida has no oil production or refining assets to speak of, so the effects of the storm will fall largely on the availability of fuel, which all comes from out of state.
- And just about all of it comes by truck or by sea. The storm could keep both of those avenues nonfunctional for several days.
- But, according to Bloomberg, the problem is made worse because of the problems in Texas from Hurricane Harvey. After Harvey, lots of surplus fuel from Florida was sent to Texas to make up for shortages there. Now truckers will have to scramble to take fuel in the opposite direction.
- “We were long-hauling from Florida to Houston last week, and now we’re talking about going from Houston to Florida,” Andy Milton, senior vice president of supply for Mansfield Oil, told Bloomberg. “That’s just the stupidity of the world we’re in right now.”
4. Cut off North Korean oil supply?
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- With tensions higher than ever on the Korean peninsula, the U.S. is pushing a total embargo on oil to North Korea, hoping to pressure China into taking a harder line.
- China called it “unacceptable,” and one of China’s great fears is a collapse of the North Korean regime.
- Exact figures on how much oil flows from China to North Korea are unknown, but the reclusive country probably only consumes about 15,000 barrels per day, a tiny fraction of the 2.6 mb/d that South Korea consumes. Imports probably only stand at 10,000 bpd, all of which goes to North Korea’s lone refinery.
- Experts believe that even if crude oil supplies were cut off – something China probably won’t agree to – the country could make do with storage for several months.
- In any event, experts also say that possessing nuclear weapons is an existential issue for North Korea; there are few strategies that would force them to forgo the weapons program. The world will probably have to learn to live with and contain a nuclear North Korea.
5. Lithium demand soaring on rise of EVs
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- There were more than 2 million EVs on the road in 2016, a paltry figure, but double the total from a year earlier.
- That number will swell to about 25 million by 2030, according to Bloomberg New Energy Finance (BNEF), although even that could be a conservative estimate – China alone is aiming to have 35 million on its roads by 2025.
- This will ensure robust demand for lithium and other metals used to make batteries. According to BNEF and Sanford C. Bernstein & Co., the top lithium suppliers will have to produce enough lithium to supply the equivalent of 35 Tesla gigafactories by 2030, requiring investment of between $350 and $750 billion.
- There is debate about whether or not lithium supply will be able to keep up with demand, but few expect that to affect the sticker price of an EV because lithium makes up only a small portion of the cost.
6. Nissan Leaf hopes to change game, but still not top
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- Nissan Motor’s (OTCMKTS: NSANY) unveiled a new version of its all-electric Leaf, extending its range in an effort to beat out the competition.
- The new Leaf will go 150 miles on a charge, about 40 percent longer than the old version. The new price will be $31,000, roughly the same as the old one and about $5,000 cheaper than the highly-touted Tesla (NYSE: TSLA) Model 3.
- But as Bloomberg Gadfly notes, for an extra $5,000, “roughly the cost of a trim, paint job and extended warranty,” a motorist could drive 220 miles on a charge with a Tesla.
- On a per-mile basis, the Leaf costs $199 while the Model 3 only costs $159. The Renault (EPA: RNO) Zoe only costs $93 per mile of range.
- The new Leaf is an improvement, but without a major price cut or a blockbuster increase in its range, it probably won’t change the game.
7. Brent backwardation returns
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- While WTI has been hit because of rising shale production and the refinery interruptions from Hurricane Harvey, Brent has fared much better.
- Brent futures have flipped into backwardation, a situation in which front month contracts trade at a premium to futures further out. Brent futures for the first six months of 2018 are in backwardation, the first time that has occurred since 2014.
- Backwardation is a sign of bullish sentiment, reflecting near-term market tightness and an expectation that inventories will continue to decline.
- The recent move towards backwardation is a positive sign that oil traders believe oil prices will rise next year as the market moves towards rebalancing.
That’s it for this week’s Numbers Report. Thanks for reading, and we’ll see you next week.