A team from Ursa traveled to Geneva this week for a global oil conference hosted by Argus. The event draws from the large pool of Geneva-based oil traders, as well as folks from around the world.
There was plenty to discuss. The topics included:
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The September 14th attacks on Saudi Arabia oil infrastructure
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Shipping fuel regulations going into effect next year
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The US-China trade war
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The recent jump in global freight rates for large tankers
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Continued growth in US production and export infrastructure.
Here are the key takeaways:
Oil prices fail to hold higher after Middle East attacks
In the last few months, we’ve had two “Grey Swan” events – the attacks in the Strait of Hormuz and the attack on the Abqaiq processing facility – which traditionally would’ve led to oil prices in the high-two digits, low-three digits and justified the release of strategic oil stocks.
Yet a few weeks later, we’re struggling to hold onto a flat price of $60 a barrel.
The futures market structure is hinting at contango. The backwardation has become shallower than a year ago.
Geopolitical risk shifts to trade policy.
There are signs of an economic slowdown and then you have the US-China trade war where macroeconomics and geopolitics cross.
There are supply risks from Venezuela and Iran, but one contention is that geopolitical risk has shifted to demand side and has added bearish aspects to the market.
One spin-off of US sanctions on Iran and Venezuela, a portion of global fleet isn’t available when tankers are preparing for IMO 2020.
Four Seasons Geneva, October 2019
There was speculation that the UK was considering reducing strategic stocks [in the event of Brexit]. In addition to its [International Energy Agency] commitments, there are European Union commitments. It may be that the UK will reduce stocks when/if it leaves the EU.
There has been a flight to safety with investors buying the US dollar and gold. Yet if you look at the Chinese energy space, it’s up year-to-date because of demand. The wheels aren’t falling off. This speaks to some of the fundamental dislocations in the market.
Possible revisions to Dated Brent assessment
Since the early 2000s, the number of crudes in the Brent basket has increased, while the number of trades has declined.
Future benchmarking options look to add more liquidity resulting in a more robust benchmark.
The start of the Johan Sverdrup field as been touted as a potential benchmark, but first there needs to be a liquid market and an adjustment made because it’s a very heavy crude.
US imports to Europe have overtaken by volume the production of crudes in the Brent basket.
There are times when US imports to Europe have been more than 1 million barrels per day which is more than the BFOET [Brent, Forties, Oseberg, Ekosfisk, Troll) production.
Argus Global Crude, Geneva, October 2019
Lots of Forties heads to Asia when the arbitrage opens. Forties crude is important because it can set the Brent benchmark, yet it often isn’t refined in Europe. Can Forties represent the clearing price for light crude in Europe?
Brent futures has become a type of global benchmark, but Dated Brent is supposed to represent the clearing spot price in Europe
US physical market looks robust
US physical grades have exceptional physical liquidity because it’s a pipeline market. You buy and sell in pipeline-sized batches of around 1,000 barrels per day.
There are 300 trades per month on average in the WTI physical market with more than 30 unique participants.
There are new futures contracts offered by ICE and NYMEX specifying physical delivery to Houston, but the market prefers swaps contracts instead. This could be because futures contracts are new and there is some inertia in the market.
Midland prices disconnect
Two new pipelines caused a dislocation in WTI Midland prices. The EPIC and Cactus II pipelines are better connected to the Plains All-American terminal than Enterprise’s terminal.
This caused a significant premium for WTI Midland at the Plains terminal above Enterprise’s terminal. Argus proposed changing the WTI Midland assessment to exclusively reflect prices at Enterprise’s terminal.
Houston & Corpus Christi
WTI Houston at the Magellan East Houston (MEH) terminal has replaced Louisiana Light Sweet as the coastal crude export market.
Corpus Christi is the most likely location of a new crude price assessment. There’s lots of new crude arriving from the Permian. You can load onto an Aframax or partly load a VLCC at Ingleside. However, limited storage capacity makes Corpus primarily an export market.
Could offshore buoy projects spur a VLCC FOB market? There are 5-6 proposals to build offshore buoys or mooring points in deep-water where a VLCC can fully load.
China’s oil demand looks strong
There is the perception that the Chinese economy is doing badly, but Chinese oil demand is far stronger than official data suggests.
The Chinese government’s attempts to stimulate the economy are bearing fruit.
In Shandong, we see an under-reporting of diesel production. Because of the new tax scheme, refiners don’t fully report diesel production.
Gasoline vs diesel consumption
This year saw structural demand changes. Gasoline demand slowed down while diesel saw slight positive growth. This resulted in wholesale diesel price higher than gasoline, which is unusual for China.
Sluggish car sales are dragging down the growth of gasoline consumption. For the new generation of Chinese consumers, they never experienced poverty. They don’t need to have a car to save face.
Argus Global Crude, Geneva, October 2019
One reason for the increase in diesel consumption is the infrastructure investment by the Chinese government. The stimulus package was more than $10 billion. China is building three new airports.
Also, some ports along the Yangtze River required the use of [Emission Control Area] compliant fuels, supporting diesel demand.
New refineries boost throughput
Refinery run rates have been rising and this will underpin import requirements. Shandong refiners are expected to receive import quotas soon, likely in late October or early November.
We expect China’s refinery runs in 2019 will average 600,000 bpd more than in 2018 and peak this quarter [Q4 2019].
One reason is the huge expansion of refining capacity. Two new refineries came online adding roughly 1 million bpd in CDU capacity.
One of those refineries – Rongsheng – is still ramping up and its full impact will be felt in 2020.
Large private refineries coming online are squeezing margins. High crude differentials and freight rates are killing [China’s] refinery margins in 2019.
Teapot refineries with low capacity will be shut down by the Shandong government.
China’s imports up
China’s crude imports will average around 1 million bpd more this year than last year.
The main changes in imports year-to-date versus 2018 have come from increases in supply from Saudi Arabia, Brazil and Russia. Declines have come from Venezuela, Iran and the US.
Argus Global Crude, Geneva, October 2019
Unconventional production from the Americas will likely be the source of supply in the 2020s to meet growing Chinese oil demand. This includes US shale, heavy crude from Canada, extra heavy from Venezuela and offshore Brazil.
Latin America debts to China
Commodities in Latin America are mortgaged to China. Countries in Latin America borrowed more than $60 billion in oil-backed loans from China over a 13-year period.
PDVSA shifted focus of production from Syncrude to Merey Blend and export markets from the US to Asia, mostly China and India. This helps Venezuela pay down its oil-backed debt.
Venezuela instability
The epicenter of risk in the region is Venezuela. The region has broken ties with Venezuela in terms of oil. But there is a tendency by Latin America governments to blame Venezuela for domestic ills. And it’s true, there is meddling by Venezuela in other countries.
Colombia was on the verge of getting its peace process on track, then Venezuela provided oxygen to non-state actors. The main threat to Colombia is security. There is a 2,200 km border shared with Venezuela that is porous and lawless.
Opportunities & challenges
Brazil’s production has exploded thanks to pre-salt discoveries offshore. In the next month there will be two offshore auctions. Massive reserves are at stake. This is for the big players.
Argentina is a huge shale play with huge political constraints. Argentina is back in crisis mode. Things are worse now at the end of Mauricio Macri’s term than at the beginning. All eyes are on the election October 27. The left is scheduled to come back to power.
There’s always a pie-in-the-sky refinery plan. That plan is now in Mexico. The government is determined to build a 300,000 bpd refinery. It doesn’t make sense. Mexico is right next to the most efficient refining hub in the world on the US Gulf.
One source of optimism in the region is Guyana given the country’s strong production trends.
