Friday, November 20, 2015
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. OPEC increased output in 2015. Gains led by Iraq and Saudi Arabia
- OPEC made its now famous decision in November 2014 to leave its production target unchanged at 30 million barrels per day (mb/d). Since then, the group has consistently exceeded that target.
- In October, OPEC produced an average of 31.76 mb/d, well in excess of the stated quota.
- The production gains made since last year have almost entirely come from Saudi Arabia and Iraq, each adding around 500,000 barrels per day.
2. OPEC fighting for Europe market share
- News reports have documented the battle for market share in Europe between Russia and Saudi Arabia. Saudi Arabia’s increased exports to Europe are pushing down the price of the Urals blend, the benchmark price that Russian oil sells for.
- However, Iraq has also dramatically increased oil exports to Europe.
- Saudi Arabia and Iraq have benefitted from Iranian sanctions. Increased market share came from the 1 mb/d that Iran used to sell to Europe.
- Iranian exports are set to begin again soon. Battle for market share in Europe will intensify, likely pushing down prices.
3. Decline in drilling leads to decline in production
(Click to enlarge)
- Surge in U.S. shale oil production came from proliferation of drilling.
- Collapse of oil prices means the number of wells spudded, flowing, and completed have all dropped by half.
- Gains in recent years made largely in Eagle Ford and Permian. Loss of production overwhelmingly coming from Eagle Ford.
- Permian is the last basin that remains attractive.
4. Alternative routes for Canada’s oil sands
(Click to enlarge)
- The 800,000 barrel per day Keystone XL pipeline would have provided an export route for Canadian oil sands to the U.S. Gulf Coast.
- A few options remain. Pipeline expansions will be much easier to complete than greenfield projects.
- Still, pipeline reversals and expansions are underway. Enbridge’s (TSE: ENB) Line 67 – completed in 2014 – expanded capacity from 450,000 bpd to 570 bpd. It runs from Alberta to Manitoba.
- Enbridge is seeking to expand its Line 3, from Alberta to Manitoba. That will nearly double capacity from 390,000 bpd to 760,000 bpd. Completion is scheduled for 2017.
- TransCanada’s (NYSE: TRP) huge Energy East pipeline would carry 1.1 mb/d to eastern Canada to refineries and for export. Permits and construction are uncertain at this point. Completion is tentatively scheduled for the end of the decade, but could be subject to delay.
- Kinder Morgan (NYSE: KMI) is proposing an expansion of pipeline from Alberta to British Columbia. The Trans Mountain Expansion would increase capacity from 300,000 bpd to 890,000 bpd. If approved, construction could begin in 2016 and it would be completed in 2018,
- Enbridge’s Northern Gateway would run from Alberta to the Pacific Coast, with a capacity of 525,000 bpd. However, the new Canadian government could ban tanker traffic in northern British Columbia, which may kill off the project.
5. Biggest asset write-downs since 2008
- EIA surveyed 46 upstream oil and gas companies
- These 46 wrote down a combined $38 billion in the third quarter, the largest since the 2008 financial crisis.
- 3rd quarter cash flows declined by 34 percent from a year earlier.
- Dividends fell by 16 percent. Share repurchases are down 92 percent.
6. Oil storage levels
- Crude oil inventories are rising around the world (see black line on charts above).
- Swelling storage points to ongoing glut in supply, not enough demand.
- Until stocks draw down, unlikely oil prices will rebound.
7. Baltic Dry Index
- The Baltic Dry Index continues to decline, hitting a fresh five-year low on November 19 at 504. The Baltic Dry Index measures freight activity, and measures prices for cargo. As such it is a good barometer of international shipping activity, and thus, it can provide some clues into the health of the global economy.
- The collapse of the index is an ominous sign, pointing to slowing economic activity. The months of October through December are typically more active, as holiday demand leads to brisk trading activity.
- China appears to be the main culprit. Lack of demand for commodities is causing a sector-wide slump. “This market is looking like a disaster and the rates are a reflection of that. It is looking scary for the market and it doesn’t look like there is going to be any life in the market in the near term,” an analyst told Bloomberg.
- Slowing trade poses a conundrum for central bankers. The U.S. Fed has every intention of raising interest rates, but deflationary pressure raises questions about the strategy.
8. U.S. Coal Production Declining
- U.S. coal production continues to decline, and is sharply down from even just last year.
- Coal prices are a fraction of what they were a few years ago.
- A massive build up in capacity took place over the past decade, during the boom in commodity prices.
- The supply boom crashed prices.
- At the same time, demand is weak – U.S. and Europe moving away from coal, and China is even reining in its coal use.
- U.S. coal mining companies are facing a permanent, structural decline.
That’s it for this week’s Numbers Report. Thanks for reading, and we’ll see you next week.