The Energy Report 06/13/18

Spare Production Capacity Going to All-Time Lows 


While the markets await the outcome from the Fed meeting and oil traders fret about whether OPEC and Non-OPEC might raise production and the weekly supply report, the biggest threat to the price of oil and the global economy may be the lack of spare oil production capacity. While the International Energy Agency (IEA) and OPEC and the Energy Information Administration (EIA) released reports that show they are confused about the outlook for demand, the truth is that OPEC and Non-OPEC decided to raise oil output, the amount of oil that the world can bring on quickly will be almost non-existent.


Reuters reports that global spare oil production capacity could fall from more than 3 percent of global demand now to about 2 percent, its lowest since at least 1984, if the Organization of the Petroleum Exporting Countries, Russia and other producers decide to increase output when they meet on June 22-23, quoting U.S. Bank Jefferies. Some analysts say spare capacity could even fall below 2 percent, after years of low oil prices drove down investments in new production across the industry to a historic low. These numbers are very much in line with what we are looking at and it is a situation that we have warned was going to develop for some time.


In other words, the risk for oil price spike based upon weather or geospatial events is higher than it’s ever been. While the U.S. shale producers are the main reason that we have any spare capacity at all, their ability to sharply increase production in a short time to meet a supply disruption does not exist.


Speaking about weather outlook, we are on storm watch in the Gulf of Mexico. Top futures weather forecaster Michael Schlacter says that a disturbance in the Gulf of Mexico is very much like "Alberto" in May. The western Caribbean & Yucatan region continues to be ripe for Tropical development; we're monitoring disturbances that pose a risk to Gulf of Mexico.


In the Eastern Pacific you have Hurricane Bud, which poses only minimal risk to oil instillations but according to Schlacter will bring storminess and copious rains to western Mexico and up into the Desert Southwest; this will act to enhance Ridging/Heat for the Pacific Northwest and USA East-of-Rockies. Micheal is the man when it comes to weather.


So many oil agencies are reporting on the same things and sometimes adding more confusion. The International Energy Agency (IEA) has a lower projection for global demand than any other agency. That should not be a surprise because they almost always do and they are almost always wrong. The IEA say that global oil demand growth for 2019 of 1.4 mb/d, similar to this year’s level., which they missed. Of course, they say there are downside risks: these include the possibility of higher prices, a weakening of economic confidence, trade protectionism and a potential further strengthening of the U.S. dollar.


They also revised its estimate for 2018 non-OPEC production growth to 2 mb/d and in 2019 we will also see bumper growth, albeit slightly reduced, of 1.7 mb/d.  Yet, even the IEA warns that spare production capacity will remain tight. They warn that exports from Venezuela and Iran could be 1.5 mb/d lower than it is today.



Summer driving season:


“By now, consumers are seeing the effects of recent increases in crude oil prices at the pump. EIA’s June outlook expects regular gasoline prices to average $2.87 for the summer driving season, which marks a 46-cent increase from last summer’s average. However, EIA believes prices will generally decline after June, falling to an average of $2.84 per gallon by September.” Brent crude oil spot prices averaged $77 per barrel (b) in May, an increase of $5/b from the April level and the highest monthly average price since November 2014. EIA forecasts Brent spot prices will average $71/b in 2018 and $68/b in 2019. The 2019 forecast price is $2/b higher than in the May STEO. EIA expects West Texas Intermediate (WTI) crude oil prices will average almost $7/b lower than Brent prices in 2018 and $6/b lower than Brent prices in 2019. NYMEX WTI futures and options contract values for September 2018 delivery traded during the five-day period ending June 7, 2018, suggest a range of $52/b to $81/b encompasses the market expectation for September WTI prices at the 95% confidence level.


For the 2018 April–September summer driving season, EIA forecasts U.S. regular gasoline retail prices to average $2.87/gallon (gal), up from an average of $2.41/gal last summer. The higher forecast gasoline prices are primarily the result of higher forecast crude oil prices. Monthly average gasoline prices are expected to reach a summer peak in June of $2.92/gal and are forecast to decline gradually afterwards to $2.84/gal in September.


EIA estimates that U.S. crude oil production averaged 10.7 million barrels per day (b/d) in May, up 80,000 b/d from the April level. EIA projects that U.S. crude oil production will average 10.8 million b/d in 2018, up from 9.4 million b/d in 2017, and will average 11.8 million b/d in 2019.


EIA forecasts that total U.S. crude oil and petroleum product net imports will fall from an annual average of 3.7 million b/d in 2017 to an average of 2.5 million b/d in 2018 and to 1.6 million b/d in 2019, which would be the lowest level of net oil imports since 1959.


EIA forecasts crude oil production from the Organization of the Petroleum Exporting Countries (OPEC) will average 32.0 million b/d in 2018, a decrease of 0.4 million b/d from the 2017 level. OPEC crude oil production is expected to increase slightly to an average of 32.1 million b/d in 2019. The increase in production in 2019 is expected to occur despite falling production in Venezuela and Iran. EIA assumes these decreases will be offset by increasing production from Persian Gulf producers, primarily Saudi Arabia.


Natural Gas


U.S. dry natural gas production averaged 73.6 billion cubic feet per day (Bcf/d) in 2017. EIA forecasts dry natural gas production will average 81.2 Bcf/d in 2018, establishing a new record. EIA expects natural gas production will rise again in 2019 to 83.8 Bcf/d.


Growing forecast: U.S. natural gas production supports increasing forecast liquefied natural gas (LNG) exports. LNG exports averaged 1.9 Bcf/d in 2017. EIA forecasts LNG exports to average 3.0 Bcf/d in 2018 and 5.1 Bcf/d in 2019. Dominion Energy’s Cove Point LNG facility is ramping up exports. In April, the facility exported an estimated 13.4 Bcf, implying baseload utilization of 65%, and in May, it exported an estimated 23.5 Bcf, implying baseload utilization of 94%.


EIA expects Henry Hub natural gas spot prices to average $2.99/million British thermal units (MMBtu) in 2018 and $3.08/MMBtu in 2019. NYMEX futures and options contract values for September 2018 delivery that traded during the five-day period ending June 7, 2018, suggest that a range of $2.38/MMBtu to $3.57/MMBtu encompasses the market expectation for September Henry Hub natural gas prices at the 95% confidence level.


The Energy Information Administration predicts that U.S. oil imports will be at the lowest level since 1959. Still, they  raised the forecast for Brent crude oil spot prices in 2018 and 2019. The forecast for Brent crude oil is for spot prices to remain above $70 per barrel this year, as global oil demand outpaces supply. Global oil supplies have been lower than expected, notably because of outages in major oil producer, Venezuela. Our forecast indicates Brent crude oil prices will decline to an average of $68 per barrel in 2019, as U.S. crude oil production continues to grow at a rapid pace.   Yet, “the current outlook for U.S. crude oil production continues to expect robust growth, with production increasing by more than 15% from 2017 to 2018, eclipsing an average of 11 million barrels per day during the fourth quarter of 2018.”


The Weekly report will be watched as well, but the Fed statement may move oil more! The Fed will raise rates and the trade is worried that the dot plot for future rate increases may slow oil demand. Still the EIA comes first. The API reported that API Crude +833k (-1.25mm exp) • Cushing -730k (-900k exp)Gasoline +2.33mm Distillates +2.1mm .


The “EIA’s June outlook increased the forecast for U.S. dry natural gas production this year. We now expect production to increase by more than 10% from 2017, reaching a record 81 billion cubic foot in 2018.”


Increased production and added infrastructure have positioned LNG exports for considerable growth in 2018 and 2019. EIA’s June outlook is that U.S. LNG exports will exceed an average of 5 billion cubic feet per day in 2019, compared to last year’s average of just under 2 billion cubic feet per day. Assuming the forecast holds, U.S. exports of LNG will more than double over a 24-month period.


Reuters reported that rising demand on both the domestic and overseas fronts spurred a cut in the U.S. Agriculture Department’s outlook for corn and soybean stockpiles, the government said on Tuesday. In its monthly supply and demand report, USDA pegged soybean ending stocks for the 2017/18 crop year at 505 million bushels, down from 530 million bushels a month ago. It boosted its soybean usage by crushers to 2.015 billion bushels, up 25 million bushels. For the 2018/19 marketing year. On the corn front, USDA pegged 2017/18 ending stocks at 2.102 billion bushels, down 80 billion bushels from May. That was below the low end of analysts’ estimates that ranged from 2.132 billion bushels to 2.192 billion bushels. The government raised its 2017/18 corn export outlook by 75 million bushels to 2.300 billion. USDA said that corn exports in April hit a record high, topping the monthly shipping record set in November 1989. For 2018/19, corn ending stocks were seen at 1.577 billion bushels. In May, USDA pegged corn ending stocks at 1.682 billion bushels. USDA boosted its 2018/19 ethanol usage estimate to 5.675 billion bushels, up 50 million bushels from May. USDA also pegged domestic wheat ending stocks at 1.080 billion bushels for 2017/18, up 10 million bushels from May, and at 946 million bushels for 2018/19, 9 million bushels lower than May.


Do you ever feel a little isolated? Now that President Donald Trump has cut a deal with North Korea, Iran is feeling a little isolated and they are warning them not to trust him. I think Iran is worried that the Rouge nation club might be getting smaller soon. 


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