Oil Prices To Rise On Strong Oil Demand

Friday March 9, 2018

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 demand picking up

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- The Baltic Dry Index, which measures freight costs, is about 25 percent higher than a year ago, according to Bloomberg. The index can be interpreted as a proxy for global trade, and offers a bullish indicator for commodities.
- Oil demand could end up being "way in excess" of last year's lofty levels, according to Saudi oil minister Khalid al-Falih.
- Part of the reason for strong oil demand is robust global trade, which the IMF sees expanding by 4 percent for three consecutive years through 2019, the strongest stretch in over a decade, according to Bloomberg.
- "Global synchronized economic growth -- across developed and emerging markets -- is driving a notable uptick in manufacturing and trade, boosting construction and freight movements which look to be behind renewed growth in diesel demand, after several years in the doldrums," said Eric Lee, an analyst at Citigroup Inc.
- Trade tariffs, which could spark a bout of protectionism, could put this run of trade growth in jeopardy.

2. China seeks to dominate clean energy

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- China already dominates global solar panel manufacturing and is making a strategic bet on clean energy for a variety of reasons, argues a new essay in Foreign Affairs.
- Not only is China hoping to clean up its air pollution, but it is also trying to reduce its dependence on maritime oil shipments through a few key chokepoints that are controlled by the U.S. Navy.
- Just as the U.S. shale industry dramatically lowered the cost structure of oil and gas production, China has been doing the same thing in clean energy, according to Bloomberg Gadfly.
- China has led the 80 percent drop in the cost of solar panels on a per-watt basis since 2010.
- The U.S. is rolling back policy efforts for renewable energy while China is hoping to dominate the production and export of clean energy.
- The upshot is greater competition, fuel diversity, and lower prices.

3. LNG supply gap emerging '

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- Royal Dutch Shell (NYSE: RDS.A) warned in a new report that the LNG market could end up short on supply by the mid-2020s because of the lack of investment over the past three years. The problem is a mirror image of what is going on in the oil market.
- It also flies in the face of so many forecasts over the past few years, which predicted a glut of supply for the next decade.
- But a surprisingly high level of demand from China, India, Indonesia, as well as Southern Europe, has helped soak up the extra supply. China, in particular, is emerging as a major LNG buyer, surpassing South Korea last year to become the world's second largest importer. China's LNG imports jumped nearly 50% last year.
- The changing nature of the market creates problems for new supply. LNG export terminals require huge levels of upfront investment and many years of development. That means buyers want fixed long-term contracts to ensure financing.
- But the market is becoming more liquid with short-term and spot market sales, creating problems for developers. With LNG exporters hesitating, Shell says that the world will be short on LNG capacity by the mid-2020s if new FIDs don't materialize soon.

4. Steel tariffs could hit oil and gas

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- The Trump steel and aluminum tariffs could significantly raise costs for oil and gas projects.
- The industry typically uses specialty steel that has to last for decades without corrosion. That kind of steel only makes up about 3 percent of the total U.S. steel market, which means that the oil and gas industry has to turn to foreign suppliers to find enough product.
- More than 75 percent of steel used in pipelines comes from abroad. The tariffs will raise the cost of new pipelines projects. For instance, Bloomberg Gadfly estimates that a project the size of the Dakota Access pipeline would have cost an additional $300 million.
- These costs will probably get passed onto oil producers. Oil and gas production could slow because of the tariffs.

5. Narrowing WTI discount leads to drop in U.S. oil exports

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- U.S. crude oil exports surged last year because of the steeper WTI discount relative to Brent, a development exaggerated by the effects of Hurricane Harvey.
- With more ports and more pipelines, more U.S. crude can now reach the coast. That means more crude can go abroad. But there is a self-regulating market mechanism at work - more exports smooth out the differences between the U.S. and foreign market, narrowing the WTI-Brent discount.
- The shrinking discount caps exports as U.S. oil becomes less competitive.
- U.S. crude exports to Asia averaged about 560,000 bpd in February, according to Reuters, down quite a bit from 676,190 bpd in January.
- March is shaping up to be worse. Reuters says U.S.-to-Asia oil shipments are on track to average just 290,000 bpd.

6. Mature oil fields add new reserves

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- Liquid reserves from mature oil fields grew by about 151 billion barrels over the last four years, according to Rystad Energy.
- That is almost 17% more than what was produced during those years - in other words, reserves in existing oil fields actually grew on a net basis over the past four years. Total reserves stood at about 1.227 trillion barrels at the end of 2017, Rystad estimates.
- Increases came from conventional onshore (+68 billion barrels), shale (+43 billion barrels) and offshore (+40 billion barrels).
- "Growth in mature fields can be driven by many factors, such as increased infill drilling, improved understanding of the reservoirs, EOR projects and technology improvements," Espen Erlingsen, senior vice president of upstream research at Rystad Energy, said in a statement. "The contribution from producing fields shows the importance of investing in mature assets."

7. ExxonMobil struggling

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- ExxonMobil (NYSE: XOM) has lagged its peers since CEO Darren Woods took over a year ago, with its share price down 18% since January 2017, while Chevron (NYSE: CVX) is only down 3 percent and Royal Dutch Shell (NYSE: RDS.A) is actually up 2 percent, Reuters reports.
- Many of the company's problems date back to the Rex Tillerson era. Exxon recently took a $200 million charge related to its derailed efforts in Russia. It also wrote down $1.3 billion on poor wagers on natural gas assets in Canada and Mexico. Production has declined over the past year.
- Exxon is hoping to dramatically scale up production in Guyana and the Permian, while also boosting downstream capacity.
- However, this will require heavy spending, something that shareholders are not enthusiastic about. Spending is set to jump from $17 billion to $24 billion this year, and will rise to $30 billion by the early 2020s. Exxon's share price fell 3% on Wednesday when the spending details were announced, although, to be sure, the broader financial markets were also down.
- Still, Exxon's shares are hovering at multi-year lows.

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