[ihc-hide-content ihc_mb_type="show" ihc_mb_who="10,13,14,16,18,19" ihc_mb_template="1"] By Mark Rossano Summary U.S. Completion ActivityRising U.S. Storage and Spreads Limiting ExportsCrowded European Markets as Their Economic Activity SlowsU.S. Driving Demand Remains StagnateDeeper Dive on U.S Distillate DemandLibya Update and Geo-political Update on the RegionIraq Persistent Increases in Exports Now with Official Production IncreasesNigeria Cutting OSPs as Demand WanesSingapore Refined Products at Seasonally Adjusted All-Time HighsRussia Production and Exports Non-Compliant In the next report, we will do a deeper dive across the global economy for Q4 and 2021. We cover some of the topics weekly in our Economy Show on YouTube, but we will go into more depth as we prepare for a U.S. election and 2021. U.S. Completion Activity The completion market remains active with the national count now at 130 crews working across the U.S. The 4-week rolling average is now at 114, which is well above our expectations as we came into Oct. The Delaware remains a bright spot of activity with the Permian still showing some additional growth through the remainder of Oct. We had some big announcements over the last few days with the COP/CXO deal and now PXD/PE. The COP/CXO deal will benefit from Conchos extensive midstream and splitting capacity to maximize capacity, manage cost, and increase quality of the barrels. The consolidation of companies will continue in order to cut costs, attempt economies of scale, maximize fixed infrastructure utilization, and other cost reducing moves. The other key component is trying to reduce or consolidate debt loads to limit the onerous nature of massive balance sheet leverage. For some companies, this will be near impossible without some form of either consolidation, asset sale, or bankruptcy. While the U.S. works to streamline, the global energy market faces new supply as Libya formalizes a ceasefire and just announced oil production back to 1M barrels a day in 4 weeks. They have already reached levels of 550k barrels a day, and with the final two ports opening Ras Lanuf and Es Sider- the ramp will be relatively quickly. This will cause some major issues for the expected OPEC+ 2M barrel a day increase in January. We are expecting this to adjust by at least 1M barrels a day as demand weakens with renewed COVID cases hitting Europe and the U.S. Completion activity has been driven by a surge of activity in North Dakota, Texas, and Louisiana- with more to come in the Permian, especially the Delaware. Natural gas action has also remained robust with activity across Appalachia and the Haynesville remaining very elevated. The biggest increase has been the Permian (specifically the Delaware), TX-LA-SALT, and the Western Gulf. Natural gas activity has been stable with Appalachia between 15-17 spreads and the Haynesville attracting some new spreads hitting about 15. We had some one-off completions in fringe acreage that will come and go over the next few weeks, but the sticky growth remains across Texas. We expected another 6-9 frac crew additions in the Permian, and so far, we have an additional 3 being deployed. We still see activity picking up with another 3-6 throughout the remainder of Oct. The Eagle Ford will stabilize around these levels while the Bakken remains steady through Oct. We were expected the Eagle Ford to hold closer to 15, but the addition of 3 spreads just pulls forward activity we expected levered in Nov. The Permian remains the core area of additional activity over the coming 2 weeks, while we see activity in Arkoma and Fort Worth fall off. The increase in Denver will be one to watch as some activity could pick up over the next few weeks. The election in Colorado will be one to watch as several initiates make it on the ticket. The issue will be around noise, setbacks, and general oversight in the region. The increase in activity has pulled forward some of what we expected in November and is specifically addressing the decline curves as we head into 2021. If we consider the average delay from start of completion to first oil/gas is 30 days (up to 90 based on tie-in capacity), the activity will be key to bridging any significant production declines and seasonal declines we normally see between Thanksgiving and Christmas. We have targeted an exit rate of U.S. production at about 10.5-10.7M barrels, which is down from the peak of 13.1M barrels a day. We expect about 300k-500k barrel decline as we head into year end, with the main goal of E&Ps to bridge the gap to Q3’2021. In order to bridge the next 8 months or so- we will need to see oil frac spreads increase further to about 150. Without fresh production heading into 2021, the decline curve will accelerate, and the hope remains that there is a recovery in the economy and demand. Based on our research, we don’t believe economic growth will hit the levels expected in the market. We go through that in more detail throughout our Economy Show on YouTube, and will do a deeper dive in 2 weeks as we prepare for year end and the election. United States DOE Crude Oil Total Production Data Total United States Shale Oil Production Rising U.S. Storage and Spreads Limiting Exports The problem many E&Ps are facing is pressure across realized prices- specifically in oil exports. Pressure is mounting in Europe as builds rise onshore and offshore due to limited demand locally and in the broader market. We have started to see some draw sales across spot cargoes that were remaining in Oct, and an increase in Dec-Jan purchases that were deferred out of Nov. The pressure building in the international market is capping flows of U.S. crude out of Cushing and keeping crude storage elevated across the U.S. complex. Exports will be limited as the spreads don’t support any new flow into either Europe or Asia at the current pricing. This is keeping U.S. flow in Cushing and limiting new exports after the recent spike due to the Hurricane Delta “make-up.” The current levels of crude in U.S. storage is very close to levels in April across the board, and soon “tank tops” will become the buzz word again. DOE Crude Oil Storage at Cushing The current spreads with Brent at $42.05 and LLS at $41.54 doesn’t come close to covering the shipping costs, which will keep volume trapped in storage. As completions activity ramps up to protect decline curves into year end, crude production will remain at about 10.5-10.7M barrels a day and with limited crude runs and struggling exports- storage is the only solution. The front months will have to come under pressure in order to price in one of two options: increased exports or storage. In order to get exports rising, we will need to see the LLS/Brent spread to open to about $1.50 or see contango steepen to push more into commercial storage. The problem with commercial storage is the growing tightness that exists at Cushing with slow builds over the last few weeks, which needs to be alleviated by sending more into PADD 3. There remains space at the coast, but the ability to push it into the international markets is very limited with LLS and MEH pricing at the current levels. There have been some purchases out of South Korea, but so far they are a bit light for this time of year for delivery in Dec/Jan. The issue in Asia (limiting U.S. exports) is the run cuts throughout the area (outside of India) which is leaving more crude in the market. Libya now pushing more into a crowded European market will keep U.S. crude from flowing across the Atlantic as well. DOE PADD 3 Total Commercial Storage The front end of the curve has started to weaken, but there remains a bid that appears at about $39.25 in the market and drives it back to about $40.90. “Differentials for Mars Blend and Poseidon crudes trading against Nymex oil futures sank this week to the weakest levels in five months as a narrow WTI-Brent and WTI-Dubai spreads discourage interest from overseas. Regional sour crude benchmark Mars trading at 25c/bbl above Nymex WTI futures, after sinking to 5c discount Tuesday, according to data compiled by Bloomberg. Mars last traded at discount to oil futures in May.” The crude being loaded currently is due to a backlog and previous purchases, but volumes are set to be cut as we head into Nov and these loadings slow. A large part of the current exports are destined for Asia- specifically China and South Korea. WTI Cushing Crude Curve Exports rose to 3.036M barrels a day after dropping off due to Hurricane Delta, and as we head into the final two weeks of Oct- they will slow to about 2.7M barrels a day and head even lower (at the moment) as we start Nov based on the current pricing. Prices have limited flow into Europe for the month, and at the current differentials November will be a slow month for exports. “On Tuesday, WTI traded at $1.40/bbl below Brent, narrowest discount since Sept. 30. WTI was trading at 89c/bbl below Middle East benchmark Dubai also on Tuesday, smallest discount since April.” The limitations in pricing will keep crude trapped at the coast, and with limited growth in refinery runs- we will see builds accelerate. The pressure remains in Cushing as storage rises, and pricing keeps product from moving to the coast. DOE U.S. Total Oil Exports Another key factor is the limited refining capacity across the U.S. complex. So if we can’t go into the international markets, the below shows the utilization rates we have seen across key demand areas- specifically PADD 3. The limitations will keep any U.S. production increases stuck in storage, which will be an ever-increasing issue. The whole complex is operating at 72.9% and will hold at about 72%-75% over the next 2 weeks as we come to the end of shoulder season. Even though we are exiting shoulder season, the increase in activity will be WELL below seasonal norms as refiners maintain economic run cuts with terrible crack spreads/margins. The below chart puts into context just how low refiner runs are vs histroics. The above chart helps to highlight the physical barrel limits as we have cut 2.8M barrels a day out of the system with almost 50% of the cuts coming from PADD 3. The chart earlier on PADD 3 storage levels demonstrates that even with record low imports- we remain well above seasonal averages for total crude in storage. We are almost 10% off of the next lowest point for refinery runs, and even at such depressed runs- we still haven’t been able to right size product levels due to the pressure across refined product demand. The limited imports will remain across the complex with PADD 5 (West Coast) the only bright spot for imports from the floating market. DOE PADD 3 Imports The bigger issue will be the maintained economic runcuts that will remain throughout the winter, and we will see some increases that will likely move closer to 80% utilization rates as we head into the end of Nov. The limitations will be pressured crack spreads not only internally, but also slowing demand in the international markets. Our distillate exports will remain well below seasonal norms as U.S. flow competes with shipments coming from Asia and the Middle East into the European markets. DOE Refinery Utilization Rates Crowded European Markets as Their Economic Activity Slows The European markets have seen steady builds across the complex as demand has waned with rising COVID cases and slowing economic activity. Exports of gasoline have increased into the U.S. as the arbitrage remains open into PADD 1, and more flow of distillate comes from Asia. The growth in kerosene will be blended into distillate and some gasoline in order to account for the falling demand across the region. Total flight departures have been sent lower as panic starts to increase across Europe with rising cases. Hoarding activity has increased across Europe as COVID cases continue to rise in key demand centers- Germany, UK, France, and Spain. The pressure is building with crack spreads weakening and diesel spreads pointing further to the downside across Europe. We have building onshore oil inventories in Europe that is happening with COVID spiking, refinery runs getting cut, and loadings increasing from the North Sea/Norway. The crude has to go somewhere, and at the current point it is heading into onshore and offshore storage. This is seasonally a time when we can see builds (as shown by the white line), but the unique situation of today’s world is going to push it higher especially as offshore storage gets crowded. The below areas are key areas of storage or where European cargoes will be sold, and we are seeing storage levels shift higher in the North Sea and Europe with more volumes sitting in the offshore market. There have been some spec sales to China over the last few days, but so far the loadings schedules is still showing strong production out of Norway. Norway Loading Schedule The increase in volumes and storage issues remaining across West Africa and the Middle East, will keep European volumes stuck as U.S. volume is trapped in storage. All the while- crack spreads for European refiners weaken- the pressure will keep cracks depressed and the below chart on gasoline helps to highlight the oversupplied situation. Gasoline remains well above the 5 year high seasonally adjusted, which will price itself more aggressively into the US east coast. We have seen shifts across Europe that have driven demand lower with refinery run cuts rolling out as well as shifting traffic patterns. Behavioral economics are real, which has shifted the way people are willing to go about their daily lives. “Italy’s Sarroch refinery -- the largest single-site refinery in the Mediterranean -- has cut runs at its Sarroch refinery to a minimum, maintaining operations so as to keep the local electricity grid supplied. The reductions will take place from Oct. 26-June 30. Spanish refiner Cepsa idled part of a facility in southern Spain, highlighting weakness in the jet fuel market in particular.” COVID cases have been rising across Europe, which has resulted in reduced travel across the board with curfews or lockdowns being enacted in various cities. The issues will keep people inactive or at least reduce activity within their respective economies. COVID Cases In Key European Countries There is more a fear factor that triggers and pushes people to stock up due to the unknown we have seen before with stressed supply chains. Germany handled the first outbreak well, so to see a rising panic in the country speaks to a broader issue that we can expect in other areas. Traffic adjusted quickly over the last 2 weeks as major cities went from flat to small growth back to being down 30%-50%. This will put more gasoline into storage as demand drops, which we have seen week over week even as refiners increase total run cuts. We have also seen an increase of exports into the U.S., which will start to appear in the middle of Nov. This flow is also coming into the U.S. market as gasoline demand slows with our own rising cases limiting demand. The impacts on demand aren’t just limited to driving as we see even walking/ transit moving lower across the Eurozone economies. This is all going to lead to not only less retail sales (consumption), but a total limit to manufacturing/production as there will be less demand and less need to restock inventory. The below ShopperTrak looks at three specific countries that have seen pressure remaining since Sept, and now the new increase in confirmed cases will keep pressure on total activity. ShopperTrak European Data The below data is from Apple, which covers only 13% of the market with the highest average income and it calculates by search and not actual travel. For example, if you check the traffic 4 times and drive the 5th- it recognizes all 5 as a trip. Even this data has started to show the pressure and total declines in the search/travel. Apple Mobility Data All of these issues culminate with slowing activity across Europe. The below chart shows how some of the impacts have been realized but pressure is mounting that will send economic activity lower. The shift helps to show daily activity against the rise in total cases that are shifting. The “solid circle” is where total activity vs cases currently reside. The pressure is mounting in Europe, and it is already appearing in the economic data across the board. U.S. Driving Demand Remains Stagnate The U.S. is experiencing its own increase in COVID cases with spikes centering around the Midwest, which accounts for a large part of the driving miles in the U.S. The below DOT data is from Aug, but it helps to highlight just how big different areas are for miles traveled. The Northeast accounts for the least amount of driving with more miles consumed throughout the rest of the country. The impacts on cumulative miles continues to shift lower, and now with rising cases pressure is mounting with slowdowns in the U.S. The Google Mobility data has started to show declines across the 7 days average, and while it is small declines- they are starting to appear across the EIA/ GasBuddy data points. Department of Transportation Miles Driven in August U.S. Rising COVID Cases We believe that gasoline demand will be relatively stable at these levels unless another severe lockdown takes hold, which is unlikely given the current hospital infrastructure and ICU capacity. There have been some announcements of curfews or lockdown restrictions, but they have been relatively limited at this point. Some incremental growth came from back to school where parents (myself included) opted to drive my kids to school instead of relying on the school bus. I am sure others have taken the same approach, and while this is not huge consumption- it can cause some increases- especially in middle America and rural areas where school can be a 20-30 min drive (each way). The below GasBuddy data shows some of the incremental gains once school was fully re-opened. Since reopening, the trend has been fairly stable at these levels with a small gain of .5% expected this week. Without additional school closures or lockdowns, we will see these levels experienced over the last 4 weeks to be the “new normal” as we head into year end. The new normal is at around 8.3-8.4M barrels a day in gasoline demand as shown by the EIA. Gasoline exports will be stable as Latin America sees consistent demand over the remainder of the year. The problem could be more competition in the region, which will just keep our exports limited to around the 9-year average through the remainder of the year. Gasoline demand has been hit hard in Europe, which will put more product on the water keeping US exports limited. DOE Gasoline Demand DOE U.S. Exports of Gasoline Deeper Dive on U.S Distillate Demand The other big issue remains distillate demand with refined product storage elevated in Europe and Asia, which is limiting where the U.S. can export distillate. The arb from US into Europe remains closed, and it still has some pricing options into the U.S. Midwest distillate demand has been strong with a robust harvest and shipments of grain to the coast due to the strong export market. This will slow as we head into the middle of November as most of the harvest is about 75% complete. Another big headwind is the slow down in the supply chain as inventories normalize throughout the system. There are still some areas that are catching up, but on the average- we are about 85% of the way to being fully “recharged.” Inventory to Sales Ratio Across Multiple U.S. Industries The slowdown in restocking has been a big driver with the shift lower in imports: “The volume of goods arriving at U.S. ports in the four weeks through October 8 is down 13% from January levels.” The pressure remains on new imports as we had a big surge to re-supply, which was also corroborated by the rail and trucking data. Trucking demand is starting to stabilize at the current levels, and intermodal flows are starting to slow as we head into Nov. All of this will lead to a slowdown in total distillate (diesel demand) as exports remain under pressure into the international market. Total Imports into the U.S.- 4 Week Average Trucking Demand Levels and Rates in the U.S. Truck demand will sit at about 95-105 for the remainder of the year as we see strength remaining in the market Grain flow remains well over last year and even into year-end it will be strong as exports are sent into the global market. The shortage in the global market will keep volumes flowing, which has been confirmed with the sales that carry well into Q1’21. The overall pressure will still be in COVID cases rising across major demand centers with the U.S. moving back to the July highs. Based on the current trends, we will see another spike as we head into the core fall/winter season and people in the North are sent back indoors. These adjustments will be big headwinds for demand as consumers adjust overall spending patterns. Libya Update and Geo-political Update on the Region While demand concerns persist, we are getting more crude pushed into the market with U.S. activity rising, Iraq increasing production by 250k barrels a day, Libya reaching 550k barrels by month end, Norway loading at 2012 levels, and Nigeria keeping flows elevated into year end. Russia was also non-compliant by 200k barrels a day this past month, and they have no intention of stopping. We also have refinery runs picking up in Russia and the Middle East, which will put even more product on the water as China/ Singapore sends more product into the market. “Libya seaborne oil exports were 378k b/d for the first half of October, up 200k b/d month-over-month and off the March low of 58k b/d, according to data intelligence firm Kpler. Abu Attifel oil field restarts as Libya pumps over 500,000 b/d: sources. Currently, the rise appears to be entirely due to storage draws, with Libyan inventories declining 3.64m bbls, or 230k b/d, through the first two weeks of October. Zueitina is the biggest contributor to the draw, with about 1.75m bbls leaving the facility over the period; followed by Mellitah and Hariga, with declines of 1.13m bbls and 810k bbls, respectively.” The new guidance is for an Oct exit rate of 550k barrels a day, and a year end target of 750k barrels. Libya crude has been shipping into Spain and Italy, which is displacing U.S./ Russian/ Nigeria supply as demand continues to move lower with run cuts. “The rivals have agreed to restructure the Petroleum Facilities Guard, the UN said on Wednesday. The paramilitary unit was originally formed to protect oil infrastructure but transformed into a force that blocked export terminals. A deal to reorganize the Guard could be an important step toward boosting crude output. Officials from both sides are meeting in Geneva this week for a fourth round of military talks with the aim of ending the civil war. “We expect the cease-fire to keep holding, which means the resumption of normal activities at the remaining ports and storage facilities is only a matter of time,” said Kristoff Potgieter, an analyst at NKC African Economics in South Africa. “We are less optimistic about the prospect of a more comprehensive and lasting deal.”” While some normalcy has moved into the Libyan market- there still remain some residual shutdowns- with Ras Lanuf still under force majeure, which is sending more volume to Zueitina for export. Due to the limited FX reserves and ability to keep financing the blockade, it is unlikely we will see another halt to crude flow out of Libya. Libya has announced a ceasefire that all sides have agreed to, which makes sense given the shift on the ground and problems on everyone’s balance sheet. The UAE/Russia/ France/ Egypt supports general Haftar, and it should be no surprise to anyone reading this that those countries have terrible balance sheets. Mercenaries and blockades are expensive to deploy and maintain with bigger issues facing each country. Turkey/ Qatar/ Italy were backers of the UN recognized GNA, but each of those countries also has deteriorating balance sheets with bigger geo-political fights out there. Turkey and France have been facing off in the Mediterranean as Turkey claims “new” parts of the ocean for themselves- especially Greece and Cyprus Economic Zones. Turkey and Russia are facing off in several countries outside of just Libya- including Syria, Armenia-Azerbaijan- but Turkey has announced utilizing S-400s again with a test firing taking place today. This is important because it signals Turkey is going to need Russia for equipment, tutorials, and ammunition. The signal here shouldn’t be ignored as it points to more cooperation because by Turkey doing this it also flies in the face of NATO and the directive that they SHOULD NOT be using the S-400 system. Mercenaries are supposed to exit the country within 3 months- now this is a very lofty goal and will likely be missed- but the signing of the ceasefire and the same day a test of the S-400 system is a big shift. “Libya’s warring factions signed a permanent ceasefire agreement on Friday, but any lasting end to years of chaos and bloodshed will require wider agreement among myriad armed groups and the outside powers that support them.”[1] The path forward is going to be bumpy, but without proxy capital it will be hard to turn off the cash cow again. Revenue sharing will “shockingly” be top priority as well as future influence over the political direction- but the groundwork is being laid and given the current backdrop- Libya will be able to quickly hit 750k by year-end and possibly push to 1M. The entrance of a potential 1M barrels as we head into Jan complicates the OPEC+ agreement that was supposed to see another 2M barrels of production enter the market according to the deal. It is likely that the deal is adjusted to reflect the additional barrels because when the original deal was struck- Libya was on its way to produce/export 100k barrels a day. The country is now back to 550k in production with the ability to hit between 750k-1M by year end. Under the OPEC+ deal, Libya is excluded from the production cuts so there are no restrictions to total production/exports. This is coming at a time where their biggest customers- Spain/Italy are also rolling out economic run cuts at their largest refiners. The growth in supply into the Mediterranean and falling demand will displace Saudi, Russian, Nigeria, and Iraq crudes into other markets. This is also coming at a time where Iraq has increased production and exports by about 250k for the month of oct. The below chart on the Lira is important when we factor in adjustments in Libya and other proxy wars impacting Turkey’s balance sheet. The currency has been pummeled and required a “surprise” rate hike at the central bank to control some of the bleeding. The countries balance sheet remains stressed with little to correct the declines as exports remain weak and proxy battles drain resources. Turkey pulling back in Libya and limiting influence in the Armenia-Azerbaijan fight is a likely outcome as they focus more on the Mediterranean and Syria. The biggest country exposed to Turkey is Spain, and if you look at the European GDP and growth data (which we cover weekly on the YouTube Channel)- Spain is the worst off and weakening. Any breakdown in Turkey would reverberate throughout Europe, which complicates the current relationship between Turkey- France- Russia. Turkey and the interactions in the region are going to be a fluid situation with some significant impacts that can cycle around the Med. Iraq Persistent Increases in Exports Now with Official Production Increases Iraq has been increasing their total exports over the last 3 months even as they were supposed to cut production to make up for “cheating” or overproduction vs the OPEC+ agreement. So far in Oct, Iraq has been maintaining an increase of 222,000 barrels a day over Sept and 622,000 barrels a day above the target. The narrative of compliance has now been fully forgotten with “making up” for overproduction- “Iraq's Oil Ministry has ordered more than 250,000 barrels per day (bpd) in production hikes this month, according to officials at eight fields that have received instructions to raise output. The new increases reverse a recent set of cuts that brought Iraq's September production down by 200,000 bpd to its lowest monthly average in five years, as the ministry sought to compensate for previously exceeding its OPEC quota.”[2] Iraq has been talking about how their balance sheet has been struggling at this point, and to see them abandon any hope of cuts makes sense. Countries will push for volume if they can’t get price as the country level balance sheet struggles across the board. Iraq Export Breakdown Nigeria Cutting OSPs as Demand Wanes Nigeria is no different with protests across the country against police brutality and reform. The problems with the country balance sheet is no secret, so to see elevated flows out of Nigeria is no surprise. November has seen an increase of volumes with some flow being deferred into Dec, which has also happened with Angolan cargoes. The slowdown in Oct means some cargoes will reside in floating storage or sit in coastal tanks waiting to be pushed into the market. We have been talking about rise in West African storage, which is creeping higher even as some Nigerian spot cargoes are finally sold. “Nigeria cuts November OSPs for Bonny Light and Qua Iboe grades to the deepest discounts since June. India’s IOC seeks WAF crude for mid-December loading via two new tenders.” The cuts are an attempt to clear the spare capacity sitting in floating storage, and the remaining spot cargoes which will become more difficult to move with Libya returning and more COVID cases impacting demand. Shipments from West Africa to Asia estimated at 1.99m b/d in October, made up of 69 shipmentsNear steady vs revised 2m b/d in September; YTD average is 2.18m b/d Key importers: China steady at 1.28m b/d vs 1.29m b/dIndia gains to 397k b/d vs 359k b/dKey exporters:Angola slips to 930k b/d vs 992k b/dNigeria gains to 440k b/d vs 370k b/d There has been some movement over the last few trading days with some traders jumping ahead of an expected buying spree in January. “Oman crude, a key Middle Eastern crude grade and regional benchmark, gained this week following a buying spree by traders and Chinese companies ahead of an expected demand surge come January. Oman traded at a premium against Dubai crude, another oil-price marker, on the Dubai Mercantile Exchange for the first time in two months on Thursday, according to data compiled by Bloomberg.” Some prices have started to trade at a better premium as speculative buying increased with spare spot cargoes floating in the market. The speculative nature of the purchases are important to track, but so far has not shown any real buying from refiners above contracted quantities so far. Floating Storage Metrics The problem with West African crude is the growth of Libya crude that is pushing Nigeria out of the Med, and trying to push more into Asia. Asia registered another increase in floating storage even as India has increased runs ahead of the festival season. Global oil in transit is the one to keep an eye on as additional barrels start heading into the water with increases in total exports. Australia is now talking about cutting runs which will put more Malaysian crude om the water competing for a home within Asia. “Malaysia's crude oil exports to Oceania could be in jeopardy as major Australian buyers of its light sweet crude grades struggle to run their refining business operations due to tepid oil product margins and weak fuel demand caused by the prolonged coronavirus pandemic.”[3] The crude getting displaced will have to find a new home, and prices have already fallen in an attempt to place the cargoes. While crude has been displaced, there has been some movement in total product flows with some additional imports of products needed to make up for the shortfalls. “Australia received 851,000 barrels of the auto fuel from the Southeast Asian supplier in August, up 52% from 561,000 barrels imported in July. Australia received zero gasoline cargoes from Malaysia in the same period a year earlier. Singapore also managed to boost its gasoline sales to Australia in the same month. Australia took 1.46 million barrels from the Asian petroleum trading hub in August, more than double the 688,000 barrels it received a year ago.” This is all important because the Malaysia crude competes directly with blends from WAF and Lat America, and everywhere we look more crude is being pushed into he market. There have been more sales of refined product, but even with the increase in sales from Singapore- storage remains at record highs. The pressure created by Malaysia results in more crude being trapped in floating storage at this point- especially West African blends. The pain increases when we look at Nigeria and Angola increasing total exports as we head into Dec. Angola announced an increase in Dec (accounting for deferrals from Nov) and Nigeria is expected to be relatively consistent month over month. Nigeria Loading Schedule Angola Loading Schedule Singapore Refined Products at Seasonally Adjusted All-Time Highs Singapore remains flooded with product, which includes additional exports into Europe and Australia. The pressure will remain in the system, but the hope remains that run cuts across China/ South Korea/ Australia will take product out of the market and help alance storage levels. India has seen an increase in total runs for the festival season. “Indian refineries utilized 86.2% of crude throughput capacity last month, an improvement from 76.1% in August, according to oil ministry data.” Even at the increased rates- refinery output was stil down several tons with this year at 17.7M tons vs 19.4M tons last year at the same period. India will start to wind down as we head into Dec, but will stay strong as we go through most of Nov. It will remain a bright spot as we head into a tough winter season given current runs throughout Asia. Singapore Total Refined Product Storage Singapore Middle Distillate Storage Singapore Light Distillate Storage Based on the run cuts being implemented throughout Asia, floating storage will keep rising throughout the region. Some benefits for floating storage have been the total reduction in purchases which will limit new flow into some regions over the next 8 weeks or so. Many of the purchases have been made for Dec/Jan deliveries, which we can see in West Africa where total exports for Oct is going to be down M/M and y/y. Flow will remain stable into Nov, but sit below the year over year averages as demand struggles well into 2021. Floating Storage Metrics Russia Production and Exports Non-Compliant Russia has been cheating by about 200k barrels a day, but if we layer in the cheating from the beginning of the agreement it is much closer to 760k barrels. Russia has been sitting much closer to 10M barrels a day (including condensate)- after agreeing to a reduction. “Lukoil PJSC is seeking to develop new oilfield projects in Iraq even as slumping crude prices and OPEC+ supply cuts have compelled the company to slash production in the country. Still, Iraq is “undoubtedly” one of Lukoil’s “prioritized regions,” he said. Lukoil has a 75% stake in West Qurna 2 and is working on projects to explore other parts of the field as well as the separate Block 10 area.“ Russia is positioning itself for the otherside of OPEC+ cuts, which will likely remain much longer due to the prolonged slowdowns in the market. Russia has been investing in Iraq/ Iran and is well positioned to invest in Libya. There remains a significant amount of crude and liquids sitting behind artificial walls created by sanctions/ embargoes or impacted by conflicts that are starting to run their course. The remaining unknown is Venezuela, and given the situation down there- it will remain stuck behind a wall of sanctions and limited investments. Oil will sit in storage at this point as the “normal” buyers- IE China- have slowed purchases as we head into the end of the year. This will keep volumes trapped in storage at the coast with limited buyers as sanctions hit directly. The current situation will remain well into 2021 regardless of who wins the U.S. presidency. Between Iran and Venezuela there remains almost 3M barrels a day that have been taken out of the market. This is ON TOP of the OPEC+ deal that has taken crude out of the market. The below chart helps put into perspective how much crude has been pulled out of the market. This all happened as refiner demand collapsed- “In fact, refinery intakes plummeted to historic lows of 68.7 mb/d in May 2020, down sharply from the pre-pandemic level of 83.1 mb/d in December 2019. Italy’s Sarroch refinery -- the largest single-site refinery in the Mediterranean -- has cut runs at its Sarroch refinery to a minimum, maintaining operations so as to keep the local electricity grid supplied. The reductions will take place from Oct. 26-June 30. Spanish refiner Cepsa idled part of a facility in southern Spain, highlighting weakness in the jet fuel market in particular.” Given the headwinds on the economic level, it is unlikely we will see a meaningful recovery. We provide a deep backdrop of the current economic backdrop on our YouTube Channel, and in the next report we will go deeper on Q4 GDP outlook and leading indicators as we head into year end. [1] https://uk.reuters.com/article/uk-libya-security-ceasefire/warring-libya-rivals-sign-truce-but-tough-political-talks-ahead-idUKKBN278195 [2] https://www.iraqoilreport.com/news/oil-ministry-orders-250000-bpd-october-production-hike-43198/ [3] https://www.spglobal.com/platts/en/market-insights/latest-news/oil/102320-analysis-malaysian-crude-sales-under-threat-as-australian-refineries-fight-to-survive [/ihc-hide-content]