Last week (February 19, 2015) Enterprise Product Partners announced the start of line fill on their 780 Mb/d ECHO to Beaumont/Port Arthur pipeline. The new route will open access for Canadian heavy crude shippers on the recently completed Seaway Twin pipeline from Cushing to Houston to 1.5 MMb/d of refining capacity in Beaumont/Port Arthur including 0.3 MMb/d of heavy crude coker processing. These refineries were a key target of the Keystone-XL pipeline from Canada to the Gulf Coast that still awaits approval. Today we look at demand and competition for Canadian heavy crude on the Texas Gulf Coast.
Posts from Sandy Fielden
Freezing weather along the Atlantic Coast has disrupted refinery operations threatening supplies of refined products – in particular distillates – in an already tightly balanced market. The resultant spike in heating oil prices has encouraged European traders to ship cargoes to New York – a reversal of flow patterns seen in recent years. Today we look at northeast distillate fundamentals and explain why European imports are headed across the pond.
While producers are licking their wounds after a more than 50% oil price crash, refiners have continued to enjoy healthy margins – even in the face of the largest refinery strike since 1980. Strong refining margins, supported by an ongoing boom in refined product exports, continue to encourage high levels of refinery utilization in the Gulf Coast region – home to more than 50% of U.S. refining capacity. Today we look at how Gulf Coast refiners are faring after the oil price crash.
While many companies in the energy sector – particularly in the producer community – are licking their wounds and reporting lower profits and reduced capital expenditure to their stockholders this quarter, refiners have continued to thrive. Lower refined product prices have begun to increase domestic consumption of gasoline and diesel in the face of longer-term decline trends. And strong refining margins continue to encourage high levels of refinery utilization. Today we start a two-part look at how U.S. refiners are faring after the oil price crash.
Since December the first significant volume of Canadian heavy crude - an average of 240 Mb/d - has flowed to the Gulf Coast on the Seaway Twin pipeline. It’s been a rocky road to the Gulf Coast for Canadian heavy crude producers – beset with delays and congestion that they probably never envisioned when they planned their oil sands projects (including the wider political battle over Keystone – currently back in the President’s hands.) And Canadian crude that does make it to Gulf Coast refineries faces stiff competition from incumbent suppliers. Today we chart the progress of the Seaway Twin and Flanagan South pipelines and look at price competition for heavy crude at the Gulf.
A new light sweet crude oil trading market is developing in Houston at the Magellan Midstream Partners East Houston terminal – delivery point for that company’s Longhorn and BridgeTex (50/50 owned with Plains All American) pipelines delivering crude from the Permian Basin. Light sweet crude from the Permian is also known as West Texas Intermediate (WTI) the domestic U.S. benchmark crude - widely traded at Cushing, OK where it underpins the CME NYMEX futures contract. Today we review the developing market and the price relationships that underpin it.
At the end of last year the Department of Commerce Bureau of Industry and Security (BIS) issued clarifications designed to clear the way for greater U.S. exports of processed condensate. More companies have received BIS approvals to export – the latest being Plains All American last Thursday. Last year expectations were that as much as 230 Mb/d would be shipped in 2015. But narrowing price differentials have reduced the arbitrage necessary to make exports economic. Nevertheless midstream companies continue to invest in infrastructure to deliver processed condensate to marine docks. Today we review the state of the export market and ongoing infrastructure plans.
The combination of crashing crude prices and freight costs for long distance transport to refinery markets is tightening pressure on Bakken crude producer break-even economics. There is plenty of more expensive rail transportation capacity and not enough cheaper pipeline capacity to carry all production to market. For the moment producers appear to be sticking to favored markets on the East and West Coasts that can only be reached by rail. New pipeline capacity is two years away. Today we review the big shifts in North Dakota crude transport options.
With crude prices close to six year lows and the futures market pointing higher, a number of the larger commodities trading houses are buying and holding cheap crude in huge floating tankers for later sale. For the trade to work, prices today must be lower than they are in the future and the spread must cover the storage cost and other expenses. Players in the floating storage game have to be high rollers – the minimum cost of a bet at this table is ~$100 million. Today we complete a two-part series on contango-spread trades with a look at floating storage.
On Friday (January 23, 2015) West Texas Intermediate (WTI) futures prices closed under $46/Bbl for the second time this year. RBN’s analysis of producer internal rates of return (IRRs) for typical oil wells indicates that Bakken IRRs have fallen from 39% in the fall of 2014 to just 1% today. IRRs for typical Permian wells are down to 3% and typical Eagle Ford wells are at breakeven. Everything is underwater or close to it except for the sweet spot wells with higher production. Today we present highlights from RBN’s IRR and breakeven analysis – published in full today in our latest Drill Down Report.
Since the start of 2015, crashing crude prices have opened up a new opportunity for traders to profit while producers bite their nails. In today’s oversupplied market, prices for prompt delivery are lower than they are for further out months – a market condition known as contango. That’s when traders put on contango spread trades that involve buying and storing crude to sell at a higher price later. Rapidly rising crude inventories at Cushing (up 3MMBbl last week according to the Energy Information Administration - EIA) suggest it’s a popular strategy. Today we explain how the trade works at the Cushing, OK trading hub.
CME NYMEX crude oil prices were down again yesterday – with the West Texas Intermediate (WTI) contract closing at $46.39 down $2.30 over the holiday weekend and over 55% lower than its high 7 months ago in June 2014. Some are billing the free fall in crude prices as a showdown between U.S. shale producers and OPEC. That is because OPEC has apparently decided not to cut production to prop up prices in an over supplied market in hopes that lower prices would squeeze out U.S. shale producers. If that was the strategy then it isn’t working so far. Today we review crude producer plans for 2015 and find lower capital expenditure budgets and cuts in rig deployment contrast with expanded production.
There was no open outcry trading on the CME NYMEX yesterday because of the MLK holiday but after rallying on Friday U.S. crude prices resumed their descent here in electronic trading and the London ICE Brent contract lost $1.40/Bbl to close at $48.77/Bbl. Unsurprisingly the Baker Hughes oil drilling rig count is down by 209 (13%) since December 2014 as producers take a hard look at their production budgets. Yet production is still expected to increase in the short term – in part because the rigs that are left will focus on “sweet spots”. In today’s blog “It Don’t Come Easy – Low Crude Prices, Producer Breakevens and Drilling Economics – Part 2” Sandy Fielden looks at the assumptions behind RBN’s IRR and breakeven scenario analysis.
One positive element to the oil price crash is that consumers are paying less at the pump for their gasoline. Of course it is natural that prices at the pump don’t fall as fast as they do in spot or futures markets – there is a lag – usually measured in days. However, while average retail gas prices have fallen over $1/Gal in the past year – more or less in line with spot and futures markets, it seems that changes to diesel prices at the pump have lagged further behind refinery prices. The result is that retail buyers filling their diesel truck at the pump have benefited far less from the oil price windfall than gasoline powered vehicle owners – at least so far. Today we review the data.
By Friday (January 9, 2015) crude prices had fallen 55% since June 2014, natural gas prices are at the lowest since 2012 and natural gas liquids are suffering as well. The potential revenues from U.S. shale oil production in 2015 would be a whopping $66 billion lower at $50/Bbl than when oil was $100/Bbl last year. In this new world where prices may not return close to pre-crash levels for a number of years, producers are scrambling to reconfigure drilling budgets and locations. The exercise is all about rates of return and figuring out breakeven prices. Today we start a new series looking under the hood at production drilling economics including results from our own models.