Stable supplies and unstable prices will characterize global oil markets during 2019, speakers generally agreed during a Feb. 21 discussion at the Center for Strategic and International Studies.
“Volatile prices are still the primary energy expenditures driver. We’ve had kind of a wild ride,” observed Howard Gruenspecht, a CSIS senior nonresident energy and national security associate who formerly was the US Energy Information Administration’s deputy administrator.
“From an oil demand perspective, we analyzed what would happen if US tariffs on goods from China escalated to 25% in March and found that demand for US oil could drop as a result,” said Ann-Louise Hittle, a vice-president of oil research at Wood Mackenzie who was part of conference’s first panel discussing production cuts by the Organization of Petroleum Exporting Countries, at-risk demand, and US production growth.
Likely market influences on prices include Venezuela’s crude production falling below 375,000 b/d by the third quarter with full implementation of US sanctions, Iran’s production also remaining uncertain because of sanctions, and OPEC’s production restraint possibly not continuing through the second half, Hittle said.
“In the long term, US growth has triggered unusually high global supply levels. We see demand peaking at around 12 million b/d around 2025. That’s going to start tightening the market once we get through the oversupply we’re going through right now, and change the dynamics,” Hittle said.
Asian economies decelerate
A second panelist, Michael Wittner, global head of oil market research at Societe Generale in New York, said, “It’s worth mentioning than when it comes to nonfundamentals, investor flows, which last year were bouncing around at near-record levels, started to slide and took a real dive in the fourth quarter. They don’t create trends but can create momentum and exaggerate trends.”
Wittner said India, China, and other nearby countries represent two thirds of global oil demand growth. “We’ve seen real deceleration of economies there out of fear, but there’s debate whether it’s real. The fear for oil markets is rational,” he said. “On the non-OPEC side, the US clearly is still driving. Most non-OPEC growth should slow down this year.”
With what OPEC and OPEC+ already have started to do, Wittner said he sees balanced oil markets this year. “OPEC+ has its hands on the steering wheel. The key players still are Saudi Arabia and Russia, which is the country that matters,” he said. “It goes beyond oil and oil ministers. This is being personally overseen by Prince Mohammad bin Salman and Vladimir Putin. It’s at the highest level.”
A third panelist, Edward Morse, managing director and global head of commodities research at Citigroup in New York, noted, “The quest for stability creates instability. US policy and OPEC-OPEC+’s actions will be the main influences. The most critically interesting part of what’s happening in demand is that it’s peaking in just about all areas, except for petrochemical feedstocks which now are about 35% of total demand. Natural gas liquids are becoming a major petchem feedstock source.”
Finding and development costs are falling, and efficiency of capital deployed is rising, Morse said. “Despite the talk of capital discipline affecting development, it didn’t seem to have much impact last year. But something is occurring in the industry,” he said. “If you look at the 51 top companies, more are hedging high levels of production this year than in 2018. But the majors now are 15% of the drilling in the Permian basin and are expected to be higher in 2020. They don’t do this in a rash manner, and it won’t be affected by falling prices.”
Exports’ US production share
Leading off a second panel discussion on midstream, downstream, and export bottlenecks, Frank A. Verrastro, a CSIS senior vice-president and trustee fellow in its Energy and National Security Program, said, “The notion is that everyone is looking for stability, but no one can find it. The more you tinker with something, the less stable things become.”
He said, “One reason US production and exports were able to increase was that similar light crude from Algeria and Nigeria were off the market. When they come back, US crude exports will have more competition.”
Rusty Braziel, president and principal energy market consultant at RBN Energy LLC, said, “There’s going to be a lot of crude coming to US export locations. The question is how it’s going to get there. About 10 bcfd of gas is going to export markets, about 12% of US production. LNG export capacity is expected to grow in 2019, and exports’ gas production share will increase. If you look just at propane, 55% of total propane capacity is being exported—to the point that weather in Europe matters more to the US propane market than weather in Minnesota.”
Braziel suggested that US production, excluding gas liquids, could reach more than 16 million b/d by 2024. “All that production needs to go someplace, and fortunately we’re building a lot of pipelines, particularly out of the Permian basin,” he said. “Everybody and their dog is coming up with another pipeline project, and they’re all going to the Gulf Coast. There also will be pipelines from the Cushing area and the Rockies totaling 2.2 million b/d, all targeting the Gulf Coast export market.”
Braziel said, “The welcome mat on the Gulf Coast is out. There are already 16 facilities that can export there, and in the last 6 weeks, 525,000 b/d was exported from Corpus Christi alone from five docks. If you just assume that the 16 Gulf Coast facilities are about 40-50% utilized, another 16 million b/d could be exported. But there’s a lot more to come. There are over 12 million b/d of additional export capacity planned, most of it offshore so they can accommodate partially filled [very large crude carriers] and fill them the rest of the way up.”
Light, sweet limits
Sarah Emerson, president and managing principal at ESAI Energy LLC, said transportation’s share of total US oil demand could reach 5 million b/d, excluding bunker fuel, which requires its own category. “Industrial demand is the other main growth area and is expected to grow about 20% to 4 million b/d,” she said.
“Not all of this demand will be supplied by oil,” Emerson noted. “A lot of industrial demand will be satisfied by natural gas, principally as gas liquids. But because of the [International Maritime Organization] requirements, refinery throughput will need to go up to supply enough of the specified bunker fuel by 2020, followed by fairly significant cuts in 2021 and 2022.”
Emerson warned that there could be only 600,000 b/d more of light, sweet crude demand worldwide by 2022, which could have an impact on US crude exports. “If the US really exports all that it’s talking about, it would have to capture every barrel of new demand. I don’t think that’s going to happen,” she said. “Products derived by crude oil should rise by about 700,000 b/d/year. Refining capacity, if everything is built, should rise by 1.7 million b/d/year, so the question arises where many of these facilities will get their feedstock.”
John Auers, executive vice-president at Turner, Mason & Co., said, “The US refining industry is the largest in the world, and one of the most dominant manufacturers globally. We have twice as much upgrading capacity than the rest of the world. Even though we have higher wage rates, we have even higher operating efficiencies. US refiners have been able to take advantage of lower gas feedstock costs. All of this is underpinned by a free market environment that refiners in other parts of the world don’t have.”
Auers said, “This means US refiners have been able to thrive during a period of stagnant demand, but there are challenges going forward from peak demand, more competition coming on overseas, and increased regulation domestically,” he went on. “Refiners have had strong demand growth the past few years because product prices have been low. That could slow down. Chinese demand growth, which has been strong, is expected to slow down. Latin America will be an increasingly important products market. But there will be increased competition for refiners from gas liquids, biofuels, and electric vehicles.”
Auers said that pipeline constraints have limited Canadian heavy crude production and Mexico’s heavy crude production also is down. “We think Canadian production could move mostly by rail for the next 3-4 years. Refiners meanwhile have invested to run more light, tight oil. There are more problem crudes, such as waxy grades out of Utah, coming to market that can cause transportation problems. Guys who can handle such problems best will have the best opportunity to control feedstock costs,” he said.
Ongoing Venezuela problems
The third panel addressed sanctions, tariffs, and other trade issues. “Sanctions have come to the foreground because US producers so effectively solved domestic supply problems. Washington is more comfortable using these economic tools, and they’re weighing heavily on our global trade,” said Kevin Book, who directs oil, gas, and coal policy research at Clearview Energy Partners LLC.
“It initially looked as if the Treasury Department was trying to keep US crude going into global markets, but there could be problems in April,” Book said. “More immediately, there’s the confrontation at the Venezuela-Colombia border, which could escalate. If deliveries from Venezuela fails, it could affect China’s perception of being able to work with a Guaido administration. The Maduro regime remaining intransigent also could lead to secondary sanctions.”
William A. Reinsch, a CSIS senior advisor and Scholl chair in international business, said US President Donald Trump likes uncertainty and unpredictability. “I think some of his advisors encourage that because they want to see American companies build more facilities onshore. This president believes he’s only president of the people who voted for him. That’s why he’s trying to get more jobs for workers in Ohio and Pennsylvania,” he said.
Reinsch said, “This administration believes in managed trade. I suspect steel and aluminum will go away because a significant part of Congress thinks they need to in the [US-Mexico-Canada Agreement’s] context. Otherwise, it will be a slow, piece by piece, evolution. That’s possible because the Commerce Department grossly underestimated the number of exclusion requests it received when it first proposed tariffs.”
Scott Miller, a senior advisor with the Abshire-Inamori Leadership Academy focusing on leadership development programs for public and private-sector executives, said Trump administration officials missed the steel import tariffs’ complexity. “Who there could have anticipated dog food can manufacturers relied so heavily on a specific kind of steel plate?” he asked.
“Donald Trump is like any other kind of corporate executive: They find their lines of authority that can be used without other people’s approval,” Miller said. “There’s at least a steel and aluminum constituency with manufacturers, but that’s not the case with automobiles where every company—Ford and General Motors included—think of themselves as global. The last thing they want is tariffs, which would wind up in consumer prices immediately and President Trump would be blamed.”
Contact Nick Snow at [email protected].
