Daily Energy Blog

In January 2016 the ICE futures Exchange changed the expiration calendar for its flagship Brent crude contract. The March 2016 contract expired on January 29, 2016 under new calendar rules that stipulate expiration one month and one day prior to delivery. This was done belatedly to reflect a change in the assessment of the physical Brent market that was implemented back in January 2012. On paper the change is just an overdue action by ICE to properly align the timing calendar for their popular futures contract with the underlying physical market. But in practice - as we suggest in today’s blog, the change has significant impacts on the calculation and analysis of the commonly utilized spread between ICE Brent (the international benchmark crude) and the U.S. equivalent West Texas Intermediate (WTI) crude futures contract traded on the CME/NYMEX.

For the past, year many shale oil producers have defied the expectations of many and kept output at or near to record levels in the face of falling oil prices and much tougher economics. Improvements in productivity, cost cutting and a concentration on “sweet spot” wells that generate high initial production (IP) rates have all helped cash strapped producers survive. But with oil prices so far in 2016 stuck in the $35/Bbl and lower range and with the worldwide crude storage glut still weighing on the market – producers are finally pulling back. Today we look at how increased pressure on North Dakota producers is putting the brakes on Bakken crude production.

Crude oil production growth in Oklahoma over the past two years has been so rapid that apparently the State of Oklahoma “misplaced” (under-reported?) as much as 100 Mb/d of output according to a recent Energy Information Administration (EIA) report. Whatever the true production numbers a couple of central Oklahoma plays continue to attract new drilling and infrastructure investment in the face of the oil price meltdown. Today we describe new infrastructure in the region.

Crushing oil prices are hitting U.S. shale producers hard and the outlook for 2016 shows little sign of a let-up. Production has continued to prove resilient but the odds are that something has to give at these prices. However there are still sweet spots in U.S. shale plays where producers are increasing acreage and drilling new wells. The headline plays that many analysts talk about are the Delaware and Midland basins in the West Texas Permian but as we outline in today’s blog there is also continued interest in the relatively less well-known central Oklahoma SCOOP and STACK plays.

Most Canadian oil sands crude production comes from very expensive mining or underground steam heating operations designed to produce consistently for decades that are costly to shutter in a downturn. Right now the crude netbacks (market price less transport costs) for these projects are more or less under water depending on transport routes. Yet production continues and new projects are still coming online. Today we estimate the netbacks (market price less transport cost) that Canadian producers are realizing.

Crude prices are hovering around $30/Bbl making crude–by-rail (CBR) transport an expensive option for hard pressed producers looking to conserve cash – especially where pipeline alternatives are available. The crude price differentials that once justified shipping inland crude to coastal destinations by rail have all but disappeared. In November, 2015 pipeline shipments exceeded rail out of North Dakota for the first time since 2011 and by 2017 available pipeline capacity out of the region should exceed producer’s needs. In the circumstances, rail shipments would appear to be living on borrowed time but as we describe today - some North Dakota rail shipments are continuing in spite of the poor economics.

With crude prices below $30/Bbl and the price spread between U.S. domestic crude benchmark West Texas Intermediate (WTI) and international equivalent Brent trading in a very narrow range – the economics of moving Crude-by-Rail (CBR) rarely make sense any more.  Rail shipments are down across all regions and railroads are reporting sharply lower revenues from CBR shipments.  Today we start a new series revisiting the regions where CBR traffic boomed a couple of years back and contemplating its future value to shippers and refiners.