Crude Oil Markets, Structures, and Mechanisms. Jenna Delaney, Senior Energy Analyst, Platts Bentek Products May 2017

Transcription

1 Crude Markets, Structures, and Mechanisms Jenna Delaney, Senior Energy Analyst, Platts Bentek Products May 2017

2 Disclaimer Restrictions on Use: You may use the prices, indexes, assessments and other related information (collectively, Data ) in this presentation only for your personal use. You may not publish, reproduce, distribute, retransmit, resell, create any derivative work from and/or otherwise provide access to Data or any portion thereof to any person (either within or outside your company including, but not limited to, via or as part of any internal electronic system or Internet site), firm or entity. Disclaimer: S&P Global Platts ( Platts ), its affiliates and all of their third-party licensors disclaim any and all representations and warranties, express or implied, including, but not limited to, any warranties of merchantability or fitness for a particular purpose or use as to the data, or the results obtained by its use or as to the performance thereof. Limitation of Liability: In no event whatsoever shall Platts, its affiliates or their third-party licensors be liable for any indirect, special, incidental, punitive or consequential damages, including but not limited to loss of profits, trading losses, or lost time or goodwill, even if they have been advised of the possibility of such damages, whether in contract, tort, strict liability or otherwise. The Data is provided on an as is basis and your use of the Data is at your own risk. Copyright 2016 by S&P Global Inc. All rights reserved. No portion of this publication may be photocopied, reproduced, retransmitted, put into a computer system or otherwise redistributed without prior authorization from Platts. S&P Global Platts is a trademark of S&P Global Inc..

3 Agenda How US and Canadian production has changed in recent years Changes in infrastructure and the impact on trade flows Why the difference in crude quality matters US refining and end user demand What impacts prices besides the fundamentals 3

4 A BARREL S JOURNEY, FROM START TO FINISH

5 Global oil supply drives history MMb/d BP finds oil in Iran World War I IPC finds oil in Iraq Great Depression E. Texas field oil found World War II Ghawar discovered US offshore drilling OPEC created Suez Canal crisis Iran kicks out US oil US peak oil OPEC nationalizes Arab Arab oil Arab oil embargo Embargo embargo Gulf War Asian recession Gulf War Great Recession 2.0 Texas oil boom Oversupply Oversupply 0.0 US Crude Production 5

6 Getting a barrel of crude oil from the ground to end users takes many different players PRODUCE Fields Rigs and Wells TRANSPORT Waterborne Tankers/ Barges Ports Fixtures B/L Pipeline Rail Tank Cars Road - Tank Trucks REFINE Refinery Capacity/ Location/Logistics Assay Yields Turn Around STORAGE Terminals Short term SPR FSPO 6

7 Major producing basins in the US Williston DJ Permian Eagle Ford Offshore 7

8 Drilling & completion: location, efficiencies, and costs all matter Where to Drill? Onshore conventional Vertical Horizontal Offshore Sands (and other long lead time) Pump drawn to surface Crude 8

9 The quality of crude oil can be vastly different Light: API Gravity: Intermediate: API Gravity: Heavy: API Gravity: < 28 Sweet: Sulfur: <.5% Sour: Sulfur: >.5% 9

10 Different Types of Crudes Produce Dramatically Different Product Mixes 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Refined Product Yields WCS (21ᵒ) WTI (37ᵒ) LLS (38ᵒ) Brent (38ᵒ) Bakken (42ᵒ) Eagle Ford (47ᵒ) Eagle Ford (55ᵒ) Residue (1000+) VGO ( ) Diesel ( ) Kerosene ( ) Naphtha (C5-330) LPG (C1-C4) Utica (60ᵒ+) Source: Platts, crudemonitor.ca, Kinder Morgan, Chevron 10

11 There are several different ways to transport crude oil 11

12 Cushing major storage hub and benchmark location More than 77 million barrels of working crude storage capacity (~5 days of U.S. refining supply) 12

13 West Texas Intermediate (WTI), which prices at Cushing, OK, is the major US benchmark price WTI (Cushing) Brent (North Sea) Dubai (Persian Gulf) $120 $100 $80 $60 $40 $20 WTI Brent 13

14 Major refining centers in the US are primarily located along the coasts 14

15 THE ROAD TO CORRECTION

16 US Production Surged at Unprecedented Rates MMb/d 11 9 Crude Production US Field Production of Crude (since 2012) 7 5 Jan 2012 Apr 2012 Jul 2012 Oct 2012 Jan 2013 Apr 2013 Jul 2013 Oct 2013 Jan 2014 Apr 2014 Jul 2014 Oct 2014 MMb/d US Field Production of Crude (since 1983) Source: EIA, Data as of March

17 In 2014, the burgeoning imbalance pointed to one possible outcome Incremental Supply/Demand Additions (vs 2013) MMb/d Excess Production P R I C E S 0.0 Average > 2014 Production Refining Splitter Displace Light Sweet Imports Displace Light Sour Imports Blending 17

18 Imbalance Between Supply and Demand Caused Crude Prices to Fall Dramatically $120 $110 $100 $90 $80 $70 $60 $50 $40 Source: Platts Growing cargo glut Brent and WTI Libyan IEA Forecast Rebound Revision Saudi cuts OSP to US Japan enters recession OPEC meeting WTI Brent 18

19 Persistently low prices caused the rig count, and production, to fall steeply $65 $60 $55 $50 $45 $40 $35 $30 $25 Cumulative Change in Rigs and Production (200) (400) (600) (800) (1,000) (1,200) (1,400) WTI Price Rigs (units) US Production (Mb/d) 19

20 Onshore US Production Has Fallen by 900 Mb/d Since January 2015 MMb/d (0.2) (0.4) (0.6) (0.8) (1.0) Source: Platts Analytics Bentek Products Cumulative Production Change Total Onshore Permian Williston DJ Eagle Ford 20

21 Canadian crude oil production has also grown rapidly over the past several years Canadian Marketable Crude +130 Mb/d +60 Mb/d MMb/d Diluted Bitumen Conventional Syncrude Offshore 21

22 Non-OPEC, Non-US/Canada production also responded to the low price environment MMb/d Non-OPEC non-us/canada Production Source: Platts Bentek, EIA 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% -4.0% YOY % Change Supply YoY % Chg 22

23 After the price downturn, OPEC production steadily increased OPEC Production (MMb/d) Algeria Angola Ecuador Iran Iraq Kuwait Libya Nigeria Qatar Saudi Arabia UAE Venezuela Indonesia Gabon Total Cuml. Chng (ex Gabon, Indonesia) 23

24 US SHALE A WHOLE NEW BALLGAME

25 The Rig Count Continues to be Sensitive to the WTI Price $120 $100 $80 $60 $40 $20 $0 Rig Count vs. WTI Price Source: RigData, Nymex, Platts Analytics Bentek Energy # of Rigs WTI Price (3 months lagged) Rigs 25

26 Efficiency gains by US producers have been a major focus # of Wells & Rigs Wells per rig per month Wells Rigs Wells per rig per month 26

27 There are financial options, then there are DUCs $/bbl $120 $100 $80 $60 $40 $20 $0 Price Drove DUC Increase and Drawdown 4,000 3,500 3,000 2,500 2,000 1,500 1, Number of DUCs WTI Price DUCs Source: Platts Analytics 27

28 IRR Sensitivity to WTI 60% 50% 40% Half-Cycle IRR $70 WTI $60 WTI $50 WTI $40 WTI IRR 30% 20% 10% 0% WTI Sensitivity: Analysis based on fluctuating WTI prices while regional oil differentials are locked in at current spreads Natural gas remain at current 12-month forward curve prices for their respective regions 28

29 Persistently low prices caused the rig count, and production, to fall steeply $55 $50 $45 Cumulative Change in Rigs and Production (100) (200) WTI Price Rigs (units) US Production (Mb/d) 29

30 US onshore plays produce mostly light sweet crude & condensate, while Canadian production is primarily heavy Canadian Play US Play API Gravity Light Crude Condensate Heavy Diluted Bitumen Syncrude Offshore/Mars Alaska North Slope Niobrara Bakken Permian Horizontal Plays Canadian Resource Plays Anadarko Horizontal Eagle Ford 30

31 Barrels that differ from domestic and Canada production will be slow to displace 2.0 US Waterborne Imports MMb/d Heavy Medium Sour Medium Sweet Light Sour Light Sweet Source: EIA 31

32 Domestic US production will increasingly need to find a home in the global market Benchmark vs Regional Pricing Contracts Transportation Costs Quality 32

33 High yield of light end products impacts price for Eagle Ford crude Source: Platts July Yield (%) ($1.88) 0 WTI Midland (40 ) Eagle Ford (45 ) Eagle Ford (55 ) Resid VGO Kero/Diesel Heavy Naphtha Light Naphtha LPG ($11.93) LHS $

34 STUCK IN THE MIDDLE

35 Pipelines cheapest, preferred method of transport Sands Bakken 2.7 MMb/d 0.7 MMb/d DJ 3.9 MMb/d 1.2 MMb/d Permian Eagle Ford 9.7 MMb/d 35

36 But not all regions are adequately connected Sands Bakken DJ Permian Eagle Ford 36

37 Bakken case study how rail changed the US production story Mb/d Williston Basin Offtake Production Refinery Truck Pipeline Capacity Source: NDPA 37

38 When production surged and pipeline capacity was constrained, rail stepped in Mb/d Williston Basin Offtake 80% 70% 60% 50% 40% 30% 20% 10% 0% Production Pipeline/Truck/Refining % Rail % Pipe Source: NDPA 38

39 Persistent oversupply has cause US inventories to surge over the past several years 550 US Crude Stocks (excl. SPR) 500 MM bbls Min-Max Range Avg Source: EIA 39

40 GIVE THE PEOPLE WHAT THEY WANT!

41 Crude inputs to US refineries have risen over the past several years US Refining Demand 17 MMb/d Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Min-Max Range Avg 41

42 Refineries vary in complexity, but the end goal of all is to create refined products Gases Topping Refinery Atmospheric Distillation Topping is the simplest refinery configuration Light Naphtha Separates crude by boiling point Crude Atm. Dist. Naphtha Kerosene Gas s Heavy Naphtha Jet / Kerosene Distillates Feed quality largely determines product quality Operates at atmospheric pressure and 650 o F feed temp. Flux (as needed to meet viscosity) Atm. Straight-run Resid / Fuel 42

43 More complexity is needed when trying to run heavier crudes Full Conversion Refinery Full conversion = cat cracking refinery + coker or other resid conversion Coker also makes coke for a variety of uses Crude Gases Atm. Dist Atm. Resid Naphtha Kerosene Atm. Gas s Atm. Gas s Vacuum Resid Vac. Dist Hydro- Desulfurization Light Naphtha Heavy Naphtha Kerosene Distillates Coker Naphtha & Distillate Vacuum Gas Coking Coker Gas Cat cracker LPG Catalytic Reformer Cat Cracker Cat Distillate Cat Naphtha Cat Slurry Alkylation HDT To Mogas LPG Mogas Jet Fuel ADO & Heating Fuel / Asphalt 43

44 Refiners and blenders in the US produce many different valuable products US Refiner and Blender Production Average production from refiners and blenders in 2016 was 19.4 million b/d Domestic demand for finished products was 16.2 million b/d 2% 13% 25% 51% Gasoline Jet Fuel Distillates Fuel Other 9% 44

45 As refinery runs have risen, exports of refined products have steadily climbed Gasoline Distillates MMb/d MMb/d MMb/d MMb/d Domestic Demand Imports Exports Domestic Demand Imports Exports 45

46 BUT FUNDAMENTALS AREN T EVERYTHING

47 The US dollar and crude oil prices have influenced each other over the years $120 $100 $80 $60 $40 $20 $- US Dollar and WTI Price WTI Inverse Trade Weighted U.S. Dollar Index Source: Platts 47

48 Money flows also impact prices $65 $60 $55 $50 $45 $40 $35 $30 $25 Speculative Length Thousand Contracts WTI Speculative Length 48

49 The state of the economy impacts demand 5% 4% 3% 2% 1% 0% -1% -2% -3% -4% 10 Years 9 Years 8 Years 7th Year GDP per Capita (YoY Growth) Global Demand (YoY Growth) 49

50 Key Takeaways The Shale Revolution has been a game changer for global markets The quality of the crude oil being produced makes a difference for where it will be consumed US midstream companies have been agile in adjusting to shifting production trends End user demand dictates how hard refineries run Fundamentals aren t the only thing that drives the crude oil price 50

51 Questions? Platts Analytics BENTEK Energy is an energy market analytics company, focused on the natural gas, NGL and crude oil markets. Thank you! Jenna Delaney, Senior Energy Analyst, (713)