Friday November 8, 2019
1. Keystone outage boosts Bakken
- The Keystone pipeline is offline because of a significant spill in North Dakota, interrupting around 590,000 bpd of throughput. The outage has depressed prices for Western Canada Select, with the discount to WTI widening to as much as $23 per barrel.
- But the outage has also pushed up prices for Bakken oil, providing a temporary boost to Bakken drillers.
- Meanwhile, rail shipments are expected to rise quickly. "We are expecting crude-by-rail volumes into the south to rise as the Keystone outage has caused Alberta oil prices to decline, and with the province set to grant waivers to production that is shipped by rail from Canada," Stephen Wolfe, an oil analyst at Energy Aspects Ltd, told Bloomberg.
- Shipping oil by rail requires a WCS-WTI discount of $15 to $20 per barrel in order to break even, according to Scotiabank. That compares to about $10 to $13 per barrel for pipeline. The current discount in excess of $20 per barrel means that rail shipments will likely increase.
2. Private equity's fortunes in oil
- Private equity became a huge source of capital in U.S. shale in the last few years. The plan for PE is to acquire assets, turn them around, and then sell them a few years later.
- PE funneled more than $64 billion into oil assets since 2015, with $44 billion specifically in the U.S., according to Wood Mackenzie.
- It doesn't always directly…
Friday November 8, 2019
1. Keystone outage boosts Bakken
- The Keystone pipeline is offline because of a significant spill in North Dakota, interrupting around 590,000 bpd of throughput. The outage has depressed prices for Western Canada Select, with the discount to WTI widening to as much as $23 per barrel.
- But the outage has also pushed up prices for Bakken oil, providing a temporary boost to Bakken drillers.
- Meanwhile, rail shipments are expected to rise quickly. "We are expecting crude-by-rail volumes into the south to rise as the Keystone outage has caused Alberta oil prices to decline, and with the province set to grant waivers to production that is shipped by rail from Canada," Stephen Wolfe, an oil analyst at Energy Aspects Ltd, told Bloomberg.
- Shipping oil by rail requires a WCS-WTI discount of $15 to $20 per barrel in order to break even, according to Scotiabank. That compares to about $10 to $13 per barrel for pipeline. The current discount in excess of $20 per barrel means that rail shipments will likely increase.
2. Private equity's fortunes in oil
- Private equity became a huge source of capital in U.S. shale in the last few years. The plan for PE is to acquire assets, turn them around, and then sell them a few years later.
- PE funneled more than $64 billion into oil assets since 2015, with $44 billion specifically in the U.S., according to Wood Mackenzie.
- It doesn't always directly lead to more drilling. "In the Permian, most won't spend much on drilling wells - it's about building well inventory to put in the shop window for buyers with offset acreage," WoodMac analysts said.
- However, the down market is making an exit very tricky for PE. There are few buyers, and IPOs are essentially out of the question.
- "The sell-off in US Independents' shares this year reflects the difficult market - perennially weak cash generation, soft commodity prices and a lack of access to finance have killed investor interest," WoodMac analysts added. "Critically for PE sellers, perceived value in drilling inventory has evaporated."
3. Gold awaits trade result
- Gold prices have sunk recently as the prospects of a trade breakthrough climb. Gold is often viewed as a safe haven in times of stress, so the notion that the economy could rebound is dragging prices down.
- Prices dropped below $1,470 per troy ounce on Thursday, a three-month low. That came after news surfaced that the U.S. and China may agree to simultaneously lower tariffs.
- A series of other data coming from China and Europe have slightly eased concerns about a pending global economic recession.
- Still, gold sentiment is not all negative. "Record-high stock markets despite subdued economic prospects, record-high debt and ultra-loose monetary policy pursued by the leading central banks continue to argue in favor of gold as an alternative investment," Commerzbank wrote in a note.
4. Low-sulfur fuels rising in importance
- The spotlight is on the market for low-sulfur fuels as IMO regulations kick in in less than two months' time.
- The disruption could be less severe than some had feared. More ships than expected are undergoing retrofits with scrubbers, reducing the burden on the low-sulfur fuel market.
- Refineries have retooled and are already supplying very low-sulfur fuel oil, and capacity is rising by more than expected, according to OPEC.
- Meanwhile, overall demand is weak.
- "All in all, the transition is likely to be more 'gentle', which also means that the gasoil/diesel market shouldn't tighten as severely as expected before," Commerzbank said in a note.
- OPEC says that demand for diesel may only jump by 0.5 mb/d in 2020, which is half as much as the IEA predicted earlier this year.
5. Permian gas flaring at new record high
- Natural gas flaring in the Permian basin reached a new record high in the third quarter, averaging more than 750 million cubic feet per day, according to Rystad Energy.
- "This represents a new all-time high. Oil production in the Permian Basin is growing at an accelerated pace again, and we observe high, sustained levels of flaring and venting of associated gas in the basin," says Artem Abramov, head of shale research at Rystad Energy.
- "The most recent increase in flaring is predominantly driven by the Delaware Texas portion of the basin, which accounted for more than 40% of basin-wide flaring and venting as of the third quarter of 2019," Abramov added.
- The CEO of Pioneer Natural Resources (NYSE: PXD), Scott Sheffield, made a point to call out the industry on his company's latest earnings call. "It's a big black eye for the Permian Basin. And so we don't want to become what's happened to the Bakken over the last five years," he said.
- He noted the political peril for the industry. "We're taking steps internally, to do something about it. And I want every other company in the Permian Basin do the same thing," Sheffield said. The industry needs "to take the black eye off, especially going into the next election."
6. Tightening the aluminum market
- Speculators have been "extremely negative" on aluminum in recent weeks, but as a result, there is less of a downside opportunity than there is a snap back in the other direction, according to Commerzbank.
- "The downside potential for the aluminum price is very limited because the risks are already priced in," the bank said.
- Still, the high cost of production is one of the main reasons why prices could rise.
- Moreover, supply fundamentals also point to a tightening market, which has increasingly been reflected in futures prices.
- "It was striking recently that the aluminum market on the LME fell into backwardation for the first time since the beginning of the year, the spot price exceeding the LME standard three-month forward," Commerzbank said. "This points to a tightening of supply and is likely to support prices."
7. Gasoline margins rebound
- The margins for producing gasoline have rebounded sharply after collapsing to near zero at the start of 2019.
- "The attacks on Saudi infrastructure, coupled with scheduled refinery turnarounds, have helped temporarily tighten product balances over the past month," Bank of America Merrill Lynch said. "In addition, IMO 2020 is likely keeping gasoline supported as market participants remain wary about lost supply as refiners divert low sulfur vacuum gasoil from fluid catalytic crackers (FCC) to the fuel oil pool."
- However, demand for gasoline remains weak, especially in OECD countries. That is the result of much weaker economic growth compared to prior years.
- The manufacturing sector has dropped into contraction in many countries. The services sector has been in positive territory but has slowed dramatically.
- "In [developed] countries like the US, where the service sector represents a larger share of the economy, a drop in services PMIs is more significant and could lead to meaningful job losses and result in more pronounced gasoline demand weakness," Bank of America said.