Oil Price Crosscurrents Become More Turbulent; North American Outlook More Stable

  1. Foreign oil output expectations send mixed signals
  2. Saudi Arabia near record output; talks up production cuts
  3. New trade agreement (USMCA) clarifies regional trade situation
  4. Natural gas shipped to Mexico particularly benefited

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Sincerely, Alan Levine Chairman of Powerhouse
(202) 333-5380


The Matrix

Global oil markets have been intensely focused on supply uncertainty. Expectations for foreign supply have been decidedly mixed despite dramatic growth in U.S. shale oil production. Saudi Arabia reportedly needs oil prices over $80 for its national budget to break even. Nonetheless, the kingdom produced nearly eleven million barrels per day in October and is expected to increase that amount in November. This higher output reflected U.S. Administration pressure to boost supply and lower prices.

OPEC meets on December 6. The principal focus of that meeting will be the extent to which the group will be able to initiate production cuts to support prices. This comes at a time when oil demand growth is expected to fall in 2019, continued expansion of U.S. shale output and support for more output from the U.S. President. Other bullish factors have been foiled too. Initiation of sanctions on Iran has proven to be ineffective as waivers granted to eight Iranian off-takers effectively blunted their impact.

Despite this global turmoil, the development of an agreement to assure a stable, predictable North American market for oil and gas has been signed. The United States Mexico Canada Agreement (USMCA) updates the 1994 North American Free Trade Agreement (NAFTA.) NAFTA controlled more than $1.2 trillion in trade among the three nations.

Most of USMCA does not become effective until 2020. When it does, the effect on energy interest should be profound. The new agreement assures “zero tariffs” on energy product trades among the three. U.S. refineries will have access to Canada’s 3.3 million barrels per day export market. Notably, documentary requirements for point of origin have been eased, saving around $50-$60 million annual cost to Canadian producers.

The new agreement must be ratified by national legislatures. Once that’s done, USMCA is good for six years and, if still working, for a full 16 years.


Supply/Demand Balances

Supply/demand data in the United States for the week ending November 23, 2018 were released by the Energy Information Administration.

Total commercial stocks of petroleum increased 2.4 million barrels during the week ending November 23, 2018.

There were draws in stocks of gasoline, propane, and other oils. There were builds in stocks of fuel ethanol, K-jet fuel, and residual fuel.

Commercial crude oil supplies in the United States increased to 450.5 million barrels, a build of 3.6 million barrels.

Crude oil supplies increased in three of the five PAD Districts. PAD District 2 (West Coast) stocks increased 1.7 million barrels, PADD 3 (Gulf Coast) stocks grew 5.8 million barrels, and PADD 4 (Rockies) stocks expanded 0.1 million barrels. PADD District 1 (East Coast) stocks declined 1.0 million barrels and PADD 5 (West Coast) stocks fell 3.1 million barrels.

Cushing, Oklahoma inventories increased 1.2 million barrels from the previous report week to 36.5 million barrels.

Domestic crude oil production was unchanged from the previous report week at 11.7 million barrels per day.

Crude oil imports averaged 8.162 million barrels per day, a daily increase of 608,000 barrels per day. Exports rose 473,000 barrels daily to 2.442 million barrels per day.

Refineries used 95.6 per cent of capacity, an increase of 2.9 percentage points from the previous report week.

Crude oil inputs to refineries increased 698,000 barrels daily; there were 17.553 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, increased 544,000 barrels daily to 17.789 million barrels daily.

Total petroleum product inventories fell 1.2 million barrels from the previous report week.

Gasoline stocks decreased 0.8 million barrels from the previous report week; total stocks are 224.6 million barrels.

Demand for gasoline increased 3,000 barrels per day to 9.188 million barrels per day.

Total product demand decreased 779,000 barrels daily to 20.485 million barrels per day.

Distillate fuel oil stocks increased 2.6 million barrels from the previous report week; distillate stocks are 121.8 million barrels. National distillate demand was reported at 3.569 million barrels per day during the report week. This was a weekly decrease of 701,000 barrels daily.

Propane stocks decreased 0.6 million barrels from the previous report week; propane stock are 81.1 million barrels. Current demand is estimated at 1.169 million barrels per day, a decrease of 84,000 barrels daily from the previous report week.


Natural Gas

According to the EIA:

Net withdrawals of natural gas were higher than the five-year average. Net withdrawals from storage totaled 59 Bcf for the week ending November 23, compared with the five-year (2013–17) average net withdrawals of 49 Bcf and last year’s net withdrawals of 35 Bcf during the same week. Working gas stocks totaled 3,054 Bcf, which is 720 Bcf lower than the five-year average and 644 Bcf lower than last year at this time.

Working gas stocks’ deficit to the five-year average increased while deficit to the bottom of the five-year range decreased. In the Lower 48 states, total working gas stocks are 372 Bcf lower than the five-year minimum.

USMCA will permit expansion of natural gas exports into Mexico without concern over tariffs. This is propitious because Mexico’s natural gas output has been in decline. EIA notes that “Dry natural gas production in Mexico has fallen 38% since 2012 because of declining reserves, a low price environment, and limited exploration and production of new wells. Mexico’s dry natural gas production was 2.4 billion cubic feet per day (Bcf/d) in October 2018, according to Petróleos Mexicanos (PEMEX). This level is down 7% from year-ago levels, when production averaged 2.5 Bcf/d, and down 21% from two years ago, when production averaged 3.0 Bcf/d.

Because of declining production and increasing demand, Mexico has had to rely on natural gas imports—from the United States by pipelines and liquefied natural gas (LNG) shipments by vessel—to meet demand. EIA’s data show that for the month of August, U.S. natural gas pipeline exports to Mexico grew 13% from year-ago levels as a result of several new pipeline projects that have entered service. U.S. pipeline exports to Mexico were 5.1 Bcf/d in August 2018 compared with 4.5 Bcf/d in August 2017. They comprised an average of 60% of Mexico’s natural gas supplies in 2018 through August, compared with 58% for the entirety of 2017.”


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