The Energy Report 12/12/19

Walk The Line

Oil prices are shaking off the snowstorm related demand drop in oil products reported by the Energy Information Administration (EIA), and are now focusing on an accommodative Federal Reserve with an eye of another limit up day for Saudi Aramco. The International Energy Agency (IEA) has once again released the most bearish oil market forecasts as compared to its rivals at the EIA and OPEC. The Federal Reserve signaled rates would stay on hold until next year. That will weaken the dollar and increase domestic oil demand. It will also make U.S. crude oil exports look more attractive.  The IEA is predicting a potential rise in global oil inventories despite the recent OPEC production cut.

The Energy Information Administration shook the oil and product market confidence as we saw big drops in refinery runs and big increases in gasoline and diesel supply. Yet on further review, it was clear that snowstorms had a dramatic impact and demand as planes were grounded and traffic slowed. Oil Bulls got frozen as the EIA reported commercial crude oil inventories increased by 800,000 barrels, helped with a small release from the Strategic Petroleum Reserve.  The market was shocked by a 5.4 million barrel increase in gasoline supply and a 4.1 million barrel increase in distillates that caused consternation. Demand dropped significantly as the EIA reported that demand the last four-week period averaged 20.4 million barrels per day, down by 2.4% from the same period last year. Over the past four weeks, motor gasoline product supplied averaged 9.1 million barrels per day, up by 0.1% from the same period last year. Distillate fuel product supplied averaged 4.0 million barrels per day over the past four weeks, down by 2.1% from the same period last year. Jet fuel product supplied was up 2.6% compared with the same four-week period last year.

Yet a report on U.S. pipeline-fill may give the market a different sense about the real scope of U.S. crude oil supply. More oil that is reported as inventory is line-fill that will never go away. The EIA in their “This Week in Petroleum report said that with pipeline development, U.S. crude oil pipeline fill has increased by more than 60% since 2011. The EIA says that crude oil held in pipelines (pipeline fill) in the United States grew from 75 million barrels in March 2011, the earliest data available, to nearly 124 million barrels in September 2019, a 64% increase, according to the U.S. Energy Information Administration’s (EIA) “Working and Net Available Shell Storage Capacity” report. The increase is due to the significant expansion of the U.S. crude oil pipeline system over that period. Almost 97% of the 48 million barrel increase in crude oil pipeline fill, which includes some volumes of crude oil in transit via water and rail, occurred in the Gulf Coast (Petroleum Administration for Defense District, or PADD, 3) and the Midwest (PADD 2).

The EIA says that “Pipelines are the primary method of transporting crude oil in the United States. The increase in U.S. crude oil production in recent years has required construction of new pipelines and reconfiguration of existing pipelines, including conversion of natural gas pipelines to crude oil pipelines. The Gulf Coast region, which was responsible for 70% of the growth in U.S. crude oil production between 2010 and 2018, has experienced the largest pipeline buildout during that time period. The Permian Basin, covering West Texas and southeastern New Mexico, contributed the most to crude oil production growth and supported higher crude oil inventories in the region, including increased pipeline fill.”

About 64% of crude oil production, 52% of U.S. petroleum refining capacity (measured by operable distillation capacity), and 52% of crude oil storage is located in the Gulf Coast . Rising Permian crude oil production, decreased crude oil imports, and increased demand for crude oil at petroleum refineries have coincided with several projects aimed at increasing crude oil pipeline deliveries to Gulf Coast refineries. For example, the 264-mile Kinder Morgan Crude & Condensate Pipeline (KMCC), which includes a converted 109-mile natural gas pipeline, initiated deliveries of crude oil and condensate from the Eagle Ford region to Houston in 2012. Kinder Morgan later included a 27-mile lateral to Phillips 66’s refinery in Old Ocean, Texas. In 2014, TC Energy’s Keystone Gulf Coast Expansion was placed into service to supply refineries in Port Arthur, Texas.

In the Midwest, Cushing, Oklahoma—a key crude oil storage hub—has experienced significant increases in crude oil pipeline capacity as new crude oil tank farms were built to handle rising supplies. Crude oil working storage capacity in Cushing rose 59% between March 2011 and September 2019 to reach 76 million barrels. Cushing receives large volumes of crude oil by pipeline and rail from various areas such as Canada and the Rocky Mountains (PADD 4). For example, TC Energy’s 2014 expansion of the Keystone Pipeline transports crude oil that originated in Alberta, Canada, to Gulf Coast refineries via Cushing. Several additional pipeline projects that entered service between 2014 and 2018 were designed to move crude oil from the Rocky Mountains, which includes the Bakken formation, to Cushing.

Growing crude oil exports have also supported increases in crude oil pipeline capacity. The removal of restrictions on U.S. crude oil exports at the end of 2015, combined with higher crude oil production, allowed an increase in crude oil exports in the Gulf region, which grew from 3,000 barrels per day (b/d) in 2010 to 1.8 million b/d in 2018. Petroleum terminals in the Gulf Coast that once imported large volumes of crude oil now load crude oil tankers for export to international destinations. Enterprise Products Partners L.P. recently completed an expansion to its Midland-to-Sealy Pipeline and conversion of its Seminole Red Pipeline to service the Enterprise Crude Houston (ECHO) terminal, a facility where shippers can load U.S. crude oil for export.

We are looking for some nice moves in the coming weeks.

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HOT COMMODITY PODCAST!

In case you missed it! Phil’s guest appearance on the McKeany-Flavell Hot Commodity Podcast last Friday, September 20th talking about current energy market dynamics. LISTEN HERE!

Phil Flynn

The PRICE Futures Group

Senior Market Analyst & Author of The Energy Report

Contributor to FOX Business Network

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