Crude Supply Increase along with Exports

11/15/2019 10:44 am EST

Focus: COMMODITIES

Phil Flynn

Senior Energy Analyst, The PRICE Futures Group

The EIA reported a build in crude supply buoyed by a release from the Strategic Petroleum Reserve, reports Phil Flynn.

The Energy Information Administration (EIA) reported a 2.2 million barrel build in crude oil supply helped by a 1.443 million release from the Strategic Petroleum Reserve (SPR), yet once again it was the oil import and export numbers that raised more eyebrows surrounding EIA data.

While the EIA points out that the weekly crude oil export data does not impact the actual oil survey barrel count, the fact that it was reported that exports increased slightly to 2.6 million barrels a day raises concerns for tanker tracking services that know the overall export number is likely twice what is being reported. The EIA says they don’t count exports until the paperwork clears customs and it is obvious that customs is running behind. So, if the EIA is telling us to wait for the monthly export data, one would assume that there is a big upward adjustment coming. Imports, on the other hand, fell to 5.75 million barrels-per-day the lowest level since February of 1996.

Oil watchers were also amazed that the EIA estimate of U.S. crude production showed an upward leap to 12.8 million barrels-per-day. That number seemed to be an attempt for the EIA to get in line with their monthly projections that are predicting U.S. oil output will exceed 13 million barrels-per-day. The only problem is that many shale producers are pulling back, making those loftier projections a bit suspect.

In fact, Reuters News reports that, “The U.S. shale industry plans another spending freeze next year, and a sharp slowdown in production growth, as prolific oil and natural gas output has pressured prices and squeezed profits. Blistering growth in shale fields propelled U.S. crude output to a record 13 million barrels-per-day this month. 

Reuters noted, “As production swelled, U.S. crude futures dropped 7.5% in the third quarter on worries about global trade tensions. Investors have fled the sector as returns have lagged those of market indexes for years. Shale companies have been cutting spending under investor pressure to improve returns, and OPEC Secretary-General Mohammad Barkindo said this week that U.S. shale supply could underperform in 2020. All of these companies need to start posting a profit and free cash flow. Investors are demanding it, said Alex Beeker, an analyst with Wood Mackenzie. “You have to cut capex to make that happen.” 

Reuters’ report also noted producers have already said they expect to spend about $4 billion less in 2019 than in 2018, according to U.S. financial services firm Cowen & Co. So far, 21 exploration and production companies tracked by Cowen have released 2020 capex guidance with 15 projecting declines, five with increases and one unchanged, for a 13% year-over-year spending decline. The spending cuts coincide with expectations for a sharp slowing in U.S. production growth. U.S. oil output is expected to average 12.3 million bpd for 2019, up by 1.3 million bpd from 2018, according to U.S. Energy Department data. The DOE expects 2020 growth at 1 million bpd, but numerous analysts expect much slower growth.”

The other problem with the report was the fact that refiner demand has been less than spectacular. The EIA shows imports at 15.9 million barrels-per-day and refinery run at only 87.8% of capacity. That lack of passion is not helping the U.S. build distillate inventory as it fell by 2.5 million barrels and is 10% below the five-year average. Gasoline, on the other hand, saw supply increase by 1.9 million barrels putting supply 2% above the five-year average. 

Natural gas popped on the weather forecast but why is the U.S. production of natural gas exciting the world? Just one word, plastics. NPR reports that on a quiet street overlooking Scotland's largest refinery and chemical plant, Kevin Ross surveys the newest outgrowth of the American oil and gas boom.

Since 2016, natural gas from the U.S. has been feeding Scotland's largest refinery and chemical plant, Grangemouth petrochemical plant, a vast complex of cooling towers, flaring towers, and pipelines. The gas is originally harvested in Western Pennsylvania, sent through a pipeline to Philadelphia, and put on ships to cross the Atlantic. "It comes here, is taken off the ships, put into large storage tanks," explains Ross, who's president of the Scottish Plastics and Rubber Association and runs a local plastics testing company. Natural gas is mostly used for heating homes or fueling power plants. But when it comes out of the ground it contains another key ingredient — ethane, a building block of plastics — and that is now fueling another booming industry.

America is producing so much ethane that over 300 new petrochemical and plastics plants are either planned or under construction around the country. President Trump has touted the economic benefits of this, recently telling workers at a Shell ethane plant in Pennsylvania that, "we are reclaiming our noble heritage as a nation of builders.” But there's more ethane than existing U.S. plants can use, so in short order, the U.S. has also become the world's leading exporter of ethane. That's feeding growing plastics industries in India and China, as well as Europe — including the Grangemouth plant in Scotland — and those exports are expected to keep growing. 

America's ethane boom was a lucky break for the European chemical company INEOS. In 2011, its own supplies from the North Sea were running low, says Warren Wilczewski, an economist with the U.S. Energy Information Administration. INEOS looked at the United States, where ethane supply was growing, and especially in the Appalachian region, that ethane had, like, no place to go," Wilczewski says, "And they recognized an opportunity." Check it out!     

Trade strategy may be key to ride out the crazy moves that will come with the headlines so keep in touch with our daily analysis. We had a great response to our Money Show in San Francisco! Watch for our Videos! Thanks to all. Makes sure you are getting my Daily Trade Levels! Read Phil’s energy report at Price Futures Group. Twitter: @energyphilflynn | Facebook: Phil Flynn

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