With crude oil, the big fish eventually eat the small fish, writes Phil Flynn, Senior Energy Analyst, PRICE Futures Group.
With crude oil, the big fish eventually eat the small fish. We saw this in the earliest days of crude oil production when John D. Rockefeller bought out his competitors and now big oil has it eyes on shale and they won’t let it go. Big oil is going big in shale and that may be the beginning of the end of smaller shale producers, especially if Chevron (CVX) and Exxon Mobil’s (XOM) plans for U.S. shale are any indication.
Small shale producers led the way in shale patch, but many are struggling financially and may eventually be bought and squeezed out by big oil. Big oil, that was slow to move on shale because of the issues with decline rates and their reliance on more expensive traditional projects, are now upping up their commitments to the new shale world. Yet Chevron and Exxon Mobil both are now betting big on shale, promising big increases in shale oil production. Chevron is projecting that they expect to raise production in the Permian basin by 600,000 barrels-per-day by the end of next year. That would be a 59% increase above current production. They also plan to add another 900,000 bpd by the end of 2023.
Exxon Mobil, not to be left out, are projecting that their shale production will hit 1 million barrels-per-day in the Permian as early as 2024. Chevron Chief Executive Mike Wirth poked fun at Exxon by saying that “Our investors don’t need to wait several years for the story to come together.”
The question for oil traders really is whether the shale projections are going to come into place fast enough to avert a supply squeeze this summer. With OPEC cuts already in full force and refiners getting ready to come out of maintenance, it may be too little too late for this summer driving season. Besides, some are questioning the actual shale production numbers.
Still oil is being weighed down by data from the American Petroleum Institute (API) that showed a larger-than-expected build of 7.29 million barrels. The builds were a reversal of last week’s big draw and may also be the API way of catching up with previous Energy Information Administration (EIA) reports to get the reports in line. Bad weather in the Houston Shipping Channel may have also impacted the numbers.
We also saw another big 1.1-million-barrel increase at the Cushing Oklahoma delivery hub. Rbob gasoline supplies also fell by a less than expected 391,000 barrels.
On the bullish side the API reported a larger than expected fall in distillate supply of 3.1 million barrels. This is because of the unseasonably cold weather, but also because shale oil does not yield as much heavy distillate. The lack of Venezuelan heavy oil is having an impact.
The EIA explains in a special report that, “U.S. Gulf Coast gasoline crack spreads had been declining since mid-2018 and briefly went negative in January and early February 2019 before rising, while distillate crack spreads remained relatively stable, (The gasoline crack spread is the difference between the spot prices of gasoline and crude oil). The EIA attributes relatively low gasoline crack spreads to more costly crude oil inputs and high gasoline inventories.
Crack spreads in U.S. Gulf Coast petroleum product markets are typically among the world’s highest because, among other factors, Gulf Coast refineries have upgraded their equipment to refine lower-cost heavy crude oils into more valuable refined products, such as gasoline. Their complexity also facilitates relatively high yields of higher value products such as distillate and jet fuel and low yields of lower value residual fuel oil compared with simpler refineries.
Since December, prices of medium and heavy crude oils with higher sulfur content have increased relative to prices of light, sweet crude oils. This price increase is likely because of the reduction in output from producers within OPEC and Canada and the threat of production disruptions in Venezuela.
These countries tend to produce medium and heavy grades of crude oil with higher sulfur content, so a large share of the global oil supply reductions since January has been of this quality. Because U.S. Gulf Coast refineries have upgraded equipment such as cokers, they typically process crude oils that have lower API gravities (meaning they are relatively dense and heavy) and have higher sulfur content, which are typically less expensive than light, sweet crude oils.
Based on a five-day moving average, the price spread between the price of Mars—a medium, sour crude oil produced in the U.S. Gulf of Mexico — and the price of Light Louisiana Sweet (LLS) crude oil narrowed to within $1 per barrel in late January after trading between $3 to $4 per barrel less than LLS for most of 2017 and 2018.”
A great read!
Despite the coming shale wave, in the short term we are looking for a tight market. Make sure you are hedged.
