[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. Onshore Activity UpdateOPEC+ Deal Recap- Cheating Now Accepted!Asia Crude Buying BreakdownRefined Product DemandWhat is Next in Iran? U.S. Onshore Activity Update As the market shook off a bearish EIA number, crude prices continue to push higher across the board driven by optimism in Asian buying- especially China (more on that later). Physical spot market activity heated up in the first 7 days of the month- driving up pricing. Activity has since slowed down out of Libya (Malta) and West Africa with prices reflecting the same. The areas to watch will be Libya, Nigeria, and Basrah (Iraq) as a gauge for spot buying. Norway was also to sell a slug of crude out of floating storage into China- but so far selling has cooled. We are getting more data on OSPs from OPEC nations with price cuts into Europe and the US with mostly increases into Asian markets (with Iraq cutting prices). The increase in WTI pricing has been supportive of U.S. activity as we have seen a rise in completion activity across all but one basin. The San Joaquin is the sole basin that doesn’t have activity, with 16/17 registering completion work taking place. Denver (DJ Basin) has gone from 0 to 8 spreads operational in a 6-week period as E&Ps focus on limiting decline curves and completing work ahead of regulation changes. We believed that the Permian would see another 5-7 spreads added in December ahead of the holiday slowdown, and the additional came in the first week of December. The expectation was for the Delaware to see a bigger share of the increase vs the Midland. Due to the rapid increase, we believe another 3-5 spreads will be added in the Permian over the next 2 weeks with just a temporary reprieve into the end of the year. The decline in activity will be short lived (and seasonally normal) with the Permian maintaining activity levels. Completion work in the Williston will hold firm at a 4-week rolling average of 9 and be able to sustain activity between 7-13 spreads through the 1st quarter. The Western Gulf will find support with LPG exports and a steady flow of Gulf of Mexico crude coming onshore- as the Eagle Ford and GoM blended provide a very good slate of oil. We still expect another 2 spreads to come online in the Eagle Ford, but as we head into January, the activity will moderate slightly. The Anadarko, TX-LA-SALT, and Appalachia will hold at their 4-week rolling average given the current pricing environment and stable activity in the regions. The National Spread count will cross over 150 this week as pricing rallies and the final push into year end intensifies to stem decline curves and setup production schedules for Q1’21. The smaller basins will hold their 1 or 2 spread counts over the next 2 weeks but will see a reduction as we head into the holiday period. It is unlikely some of the work will return immediately, but if we see crude prices hold recent gains and push closer to $50 activity will remain elevated in the smaller basins. WTI started to move out of Cushing as some of the spreads opened up WTI-LLS spread opening up to $2 and WTI-MEH at $1.60. This pulled crude down from OK and into PADD 3 as refiners looked to capitalize on spreads. US crude exports into the market will start to pick-up, but with OPEC+ nations cutting OSPs into Europe and the Mediterrainian as well as rising Norway and Libyan exports- it will be difficult for the US to see an increase heading across the Atlantic. China remains a big buyer of Alaskan North Slope (ANS) oil given its underlying properties making it ideal for complex refiners. At the moment, Brent is $50.62 with the current spreads of Brent-LLS at $1.84 and Brent-MEH $2.24 opening up some avenues into the broader market. The glut of product in Europe and reduced refinery runs makes it a difficult market for U.S. crudes to compete even as spreads widen. We had US exports come under pressure this past week driven by spreads being tight over the last few weeks, but also caused by a shut down of the Houston ship channel for 1.5 days. The logistical delays caused some impacts, but it was also caused by the lack of purchasing that is now showing up. We will get some make up movements of volume, but total exports will be down into year end. DOE U.S. Crude Exports We have discussed how 130-140 completion crews are needed to keep oil production flat, which is a number the U.S. keeps inching closer too. There are about 105 completion crews in oil basins at the moment with the rest focused on natural gas. We have seen a recovery in the U.S. after peaking at 13.1M barrels a day we will close out the year at about 10.9M barrels a day. We initially thought the exit rate in the US was going to be between 10.5-10.7M barrels a day, but as we have seen a steady increase in activity around the US- we have shifted the spread to 10.7-10.9M barrels. Based on the current trajectory of activity into year-end, we can easily hold the top end of that range, which is supported by the EIA expecting to hold production near these levels. We still need additional spreads to get activated to maintain 10.9M, but with a recovery in current prices and hedging activity accelerating- we will get close to the needed spreads to hold production levels. Rystad US Production Numbers DOE US Crude Oil Production The EIA is expecting the below reduction in production for the year, which is based on the average for the year. The U.S. was struck by several named hurricanes causing shut-ins around the Gulf of Mexico that shaved about 70M barrels out of US storage. Shell is bringing back several GoM platforms that were down for maintenance, but 2021 we face hurdles as we see more production from OPEC+ nations and an uncertain economic recovery. We have covered the underlying problems in the macro world every month in these reports as well as in our YouTube shows. OPEC+ Deal Recap- Cheating Now Accepted! The OPEC+ deal structured a deal that increases production Jan-April by 500k barrels a day each month. The ministers will get together each week to review the underlying crude markets, and decide if they should go ahead with the planned increase or if it should be delayed or even walked back. They could probably find some consensus on pausing increases, but I find it unlikely they would be able to build support for cuts. Russia and the UAE wanted to see some increase heading into January, and the easiest way to craft a deal all parties would sign off on was to “legitimize” previous cheating. The bigger victory from the deal was just to hold 23 countries together, but it was at the expense of getting “make up cuts” and allowing for an additional 500k barrels a day in January- which doesn’t include the increase of 1M barrels a day from Libya. The below chart highlights what production will look like in January, and you will notice that many of those target numbers are very close to Nov- which includes cheating from Russia, Iraq, and Nigeria. OPEC+ Production Levels You can see in the chart below- essentially what everyone was already cheating by is now baked into January production numbers. So now we have crude rallying to 6 month highs, no penalty for cheating, and weak balance sheets in most of the OPEC+ nations… why would this not lead to additional cheating based on the lack of repercussions? Or is that the reason for the monthly increase… it takes away the ability for countries to “cheat” by providing an avenue to increase production and still maintain control. The UAE has already started to increase their production, and have already told Asian buyers they will have additional crude available for sale in Dec and Jan. Saudi Arabia isn’t really capable of calling out Russia directly for cheating, but they allowed the UAE to come out swinging and highlighting just how many countries were producing over their allotment. KSA underestimated just how angry the UAE was about them being lambasted by Saudi Arabia for overproducing 2 months in a row. The UAE acted as a main backer (and financer) of the Libyan blockade by providing money to General Hafter, and once the ceasefire was signed- the UAE was quick to turn around and sell more crude in order to make up for the cash they paid on behalf of the GCC. The fact that they were called out so aggressively definitely didn’t sit well, and it came out during the OPEC+ meeting. Now- we always thought there would be an agreement even with them expressing their displeasure, but it also shows there is very little ability to cut production again. Under the agreement, the UAE will be able to pump what they did in September, but the UAE has also announced a pick-up in investments to explore onshore and offshore fields to increase production and replace declines. The other side of the anger is also built on the basis that the UAE has taken a much larger percent of cuts versus Russia and Saudi. Well, the market continues to drive higher with little regard to any data points that might get in the way of its relentless bid. There are some bright spots in Asia, but the issues persist across storage in the U.S., Europe, Singapore, and the UAE. The weak dollar has propelled crude higher as OSPs (official selling prices) from Saudi Arabia shifted higher for January loading schedules. Iraq just posted their OSPs, and they are coming in at discounts vs Dec across the board. Iraq sets Basrah Light for January shipment to buyers in Asia at 40c/bbl premium to Oman/Dubai average vs Dec +.45cBasrah Heavy to Asia at -$1.60 for January, vs -95c for December Pricing to Europe for January vs December, against Dated Brent Basrah Light set at -50c/bbl, vs -20c for DecemberBasrah Medium at -$2.05Basrah Heavy at -$3.30, vs -$1.85/bblKirkuk at +50c, vs +65c Pricing to Americas for January vs December, against ASCI: Basrah Light at parity for January, vs +40c/bbl for DecemberBasrah Medium at -90c/bblBasrah Heavy at -$1.75, vs -80cKirkuk at +$1, vs +$1.30 Kuwait also posted OSPs showing a discount to Europe and the US, while showing an increase in premiums to Asia. Iraq is the only one (so far) to show a reduction in pricing into the Asia as the market share game starts to heat up. Iraq has also signed a deal with the state-owned ZhenHua under the following 5-year terms. The company will purchase 4M barrels a month (130k barrels a day) and will pay upfront for one year of supply, which is about $2B dollars. The remaining 4 years won’t require an upfront payment, because that will only be for year 1. This is a way for Iraq to bring in need USD to help shore up their balance sheet and close some near-term liquidity gaps. China has been structuring similar deals with Angola, Venezuela, and Ecuador. The Angolan deals are slightly different as the Chinese crude contracts on the exchange settle with a large percent from Angola, which accounts for about 80% of their production. As we have described in previous reports (and in detail in our yead-end report), China has an increasing demand for heavier crudes and specific grades as their refiners come online. China has started increasing their purchases from Iraq already, and this new deal helps secure long-term volume into the country. As China brings online new refining capacity- imports of oil will inherently rise, but we need to pair that with a rise in refined product exports and falling product imports. The backdrop is interesting as we head into a period of competition following the OPEC+ agreement to increase production 500k barrels a day in Jan’21 instead of the 2M that was initially agreed upon. The announcement essentially legitimizes the cheating given where the current production numbers sat at the end of Nov factoring in overproduction. The UAE has already started increasing production in Nov and Dec ahead of the allowed allotment in Jan. The fallout from the adjusted OPEC+ deal helps to highlight that there is no penalty for cheating, and we expect to see more crude get pushed into the market as long as it is tolerated. Libya has increased production now at 1.26M barrels a day with more exports slated in December vs what was previously expected. The flow has increased out of Libya from 166k in sept to at least 1.1M in Dec based on the adjusted estimates. The shift in Libyan flow has hurt the exports of U.S. crude into the market over the next few months as Europe demand are met by discounted Libyan, Nigerian, and Russian volumes (Urals remain at 3-month lows). We also have OSP cuts from competing OPEC nations into Eurfope and the Mediterranean that will keep pressure on US exports into the region. Loading Schedules for Countries Listed Below Asia Crude Buying Breakdown China remains a key buyer and here are some preliminary numbers out of the region: Once we back out the new refiner, Chinese throughput is up less than 100k barrels a day in Nov over October. As we have been talking about, independents have been trying to get in front of their 2021 quotas- and once these are filled- buying will slow down into the region. Crude imports were down y/y by about .8% but saw an increase over Oct by 6.6%. October also saw an increase in crude product exports- reaching a 6-month high. “Meanwhile, the country's oil product exports fell 14.5% to 4.95 million mt in November from the six-month high of 5.79 million mt in October. The volume also slumped 32.2% year on year, GAC data showed. Over January-November, China's total oil product export volume fell 6.9% on the year to 55.93 million mt, resulting in the country's net oil product exports declining 9.3% year on year to 29.76 million mt.”[1] This dynamic is interesting when we dig in further- “Combined stocks of gasoil and gasoline fell 61.9% on month to 437,000 mt in November, the lowest since January 2014.” “This came after major oil companies Sinopec and PetroChina started to procure oil products from Shandong independent refineries from mid-November, which helped to deplete stocks. This was despite independent refineries increasing their combined output of gasoil and gasoline by 6.6% on month to 8.367 million mt in November. For gasoline, output surged 15.4% on month to 3.04 million mt as oil majors increased their purchasing.” The low refining margins and glut in the international markets made it more profitable to purchase the product internally instead of purchasing crude and making it themselves. The international market also isn’t conducive for more exports so it was better for the teapots (independent refiners) to send it to other areas of China. This also freed up the Independent refiners to import more crude off the water and maintain elevated refinery throughput. INDEPENDENT REFINER STORAGE LEVELS IN CHINA As new state-owned facilities come online- the teapots will be pressured to cut runs in order to make room for the new facilities with all of them being refiners/petrochemical facilities. The mixed capacity provides flexibility on some feedstocks, but the complexity of the asset will require an increasing amount of heavy crudes vs light. South Korea and Japan have been large providers of the lighter end of the barrel, and with the new facilities and RCEP trade deal- the flow will continue. The buying of crude into China always accelerates ahead of the Lunar New Year, as we have seen purchases increase from West Africa and Norway/Europe as well as some from the Middle East. OSPs rising into Asia will be interesting to see if buying slows following the big increase in spot purchases the last few weeks. “Two VLCCs with North Sea crude are now sailing to Asia after loading earlier this month, while at least three more are expected to ply the route by end-December, according to port agent reports, ship tracking data compiled by Bloomberg.” “A total of nine VLCCs loaded North Sea crude last month: five are heading to China, two to South Korea, one to an unknown Asian country, and only one, Takahashi, is still floating at sea. Cargoes on board include 8m bbl of Forties, 8.8m bbl of Johan Sverdrup, and 1.2m bbl of Grane.” There has been an increase of “missing barrels” in the market with a large part of it flowing into China: “The volume of so-called missing barrels in the oil market -- the gap between observed and implied stockpiles -- rose in the first half of the year to about 940m bbl, the highest in records since at least 1990, according to a report from the Oxford Institute for Energy Studies.” We have been highlighting the shift in crude flows into China, and estimates have them as a buyer of nearly half the missing barrels in the market. Chinese refiners have been operating below seasonal norms at the SOE level driven by weaker demand, which means the increase in purchases is putting crude in storage onshore. The big test will be rising crude prices to see if China remains a big buyer as the US and Europe face rising storage levels. Europe had a small draw in November, but oil shifted higher- and now even with a big increase in exports to the US and a drop in imports from Asia/ME-m refined products are building again. The builds come on the same day that France extends their lockdowns and curfew- with the new curfew going into place 8pm Dec 15th as case counts remain elevated: Europe 16 nations oil inventories fell by 2.70mb m/m to 1,178.28 in November according to Euroilstock Crude +0.37mb Gasoline -0.09mb Middle distillate -3.00mb Fuel oil -0.07mb Naphtha +0.09mb Gasoline and Gasoil have seen builds accelerate even with a big increase in exports as the European markets face lockdowns and limited activity. The increase in product also coincides with large cuts in refinery activity, but the steady stream of high frequency data highlights the limited demand across the region. The reduction in imports has just pushed more product into the floating market and storage regions in the UAE, Singapore, and the US to name a few. India has also been a bright spot with more refiners increasing activity in Nov following a slower October. “Average capacity utilization for all categories of refineries in India improved to 87% in October compared with 86% in the previous month, showed the latest survey of the oil ministry Nov. 25, reflecting gradual improvement in oil demand as Asia's third-largest economy unlocks. However, the October run was lower than the previous year's run rate of 104%. In October, state-run refineries recorded 89% run compared with 104% from a year ago and 83% in September. Private refineries recorded 80% run in October compared with 103% a year-ago and 89% in September. The private refiners' lower run rate was mainly due to lower processing at Reliance operated export focused unit at 82% after maintenance shutdown of a Crude Distillation Unit at its Jamnagar complex and a poor run of Rosneft part-owned Nayara Energy at 33%.” November saw another increase: he crude oil throughput of Indian Oil’s refineries rose to 100% in Nov. from 88% a month earlier, according to an emailed statement from the state-run firm, while a year ago throughput was at 99%. India has refiners that are specifically setup to export, and the rising tide of products in the market will hurt utilization rates at these facilities. While local demand is encouraging, the rise in inflation and stagnate/falling diesel demand calls for caution when we look at the ability for India to get back to normal. Diesel has always been a great bellwether for the Indian economy. Inflation fears have also risen with thing beginning to overheat, which will limit the ability of the central bank to continue easing and most likely result in rates going higher. Consumption of all petroleum products has almost reached pre-Covid levels, IOC said Nov. gasoline sales 1.06 million tons, 4% higher y/yDiesel sales still down 9% y/y but 2% higher m/mLPG demand 1.4% higher y/y at 1.09 million tonsNov. jet fuel demand 45% lower y/y, but 4% higher compared with Oct. COVID cases have slowed but remain elevated in areas that have resulted in an increase in lockdowns, which has slowed general activity, consumer sentiment, and congestion in the region. The rise in Singapore storage, Fujarah, and China keeping exports of refined product flowing will result in the product gluts remaining around the world. The increase in lockdowns and cases in key demand areas: Europe and the US- will keep pressure in the crack spreads. Refined Product Demand Refined product demand in the US and Europe have remained depressed with some small upticks in Europe, but still well off normal levels: Road use in Italy, Spain, France and Britain moved higher last week as movement restrictions in some countries eased, according to data from toll-road operator Atlantia and the U.K. government. Italy traffic was down 36% y/y in week to Dec. 6, vs -38% in previous weekSpain at -34% vs -31%France at -33% vs -36%U.K. vehicle was 17% below pre-pandemic level last week, data show; compares with -25% a week earlierHeavy goods vehicle use was 11% higher than normal level; it peaked at 26% on Dec. 6, the most in data since MarchFor the four countries combined, average traffic was down 30% last week, compared with -33% during the previous period, according to Bloomberg calculations We have been highlighting the lopsided recovery in products with a focus on distillate around the world as levels remain well above seasonal norms. In many cases, they are either at or near all time highs heading into an expected warm winter. Gasoline demand has fallen in the U.S. as case counts, deaths, and hospitalizations shift higher across the country and sparking renewed concerns and shutting causing states to limit activity. These numbers will cause consumer behaviors to change in order to avoid exposures- especially ahead of Christmas. There was an increase in activity last week following the weak comp w/w of Thanksgiving weekend, but the strength remains in trucking miles- which remain about 6% above y/y. Diesel demand has been supported in the US with trucking remaining strong as we have been follow in our EIA part 2 segment looking at total demand drivers. LPG and general propane demand will remain strong as the pull into Asia has been robust with demand not only recovering quickly and now outpacing y/y numbers. There have been structural issues with the Panama Canal and the reduction in OPEC crude volume has limited total available LPG for the market. The U.S. has been able to fill that void with LPG exports hitting record levels as new facilities come online along the Gulf coast. India, China, and South Korea have been big buyers of US LPG and even as OPEC crude comes back online- the “pie” of demand is getting bigger- so our exports will remain strong into the market even as they return. DOE Total US Propane/Propylene Exports Another big storage center is seeing a rise in builds as demand slows and exports into Europe slow down. Europe is normally an importer from the US, Asia, and the Middle East- but as lockdowns persist in the area- Germany talking about additional lockdowns and France increasing curfews- storage levels in the region are rising even as exports from Europe rise into the US. Total products increased to 23.088 million barrels as of Dec. 7, which is the highest since Sept. 14, according to the data provided exclusively to S&P Global Platts. Heavy distillates rose 18%, while middle distillates including jet fuel and diesel jumped 13% and light distillates such as gasoline and naphtha rose 3%. It was the first time since August that all three categories showed week-on-week gains. Exports of all three categories have slowed in recent months, according to commodity data company Kpler. For November, some 96,000 b/d of middle distillates was headed out of Fujairah, down from 137,000 b/d in June, while 213,000 b/d of fuel oil was exported, down from 282,000 b/d in October, Kpler data showed. There were some declines in Singapore, which normally happen at this time of year. The problem remains the elevated state of many refined products globally, and as Europe remains a weak buyer and exports remain elevated (while off all time highs) from Asia- builds and elevated storage will persist. Demand characteristics remain lopsided around the world, but the biggest importers in he world remain trapped in rising cases and sluggish economies. International Enterprise Singapore Oil Products Singapore Stock Data What is Next in Iran? We already did an extensive breakdown of China, which we carried over into our year end report as well- but a renewed focus is the growing pressures within Iran. Iran has been a big focus for us over the last several years as the tides continued to shift away from the regime. Intelligence and information has been leaking from Iran at an accelerating rate as the regime loses influence and the “fear” factor. Generational cycles are at play here with those responsible for the 1979 revolution are either old, dead, or losing influence. The IRGC will always be key to what happens going forward- but their allegiance can be purchased and is waning given recent attacks. There have been over 20 recent attacks within the country ranging in severity, with the most recent being the assassination of Mohsen Fakhrizadeh. He was killed by a remote controlled (apparently) machine gun attack that was satellite controlled. His ovements were closely guarded, and he always traveled with an extensive security detail. The fact his location was known with such sophisticated equipment already in place- just provides more support regarding the information leaking from a very high level. Someone is helping outside forces strike at VERY high-level people- essentially cutting off the head of the snake in many avenues. Iran’s presidential election is set for June 18th, 2021, and the social construct of the populace are shifting away from the regime. “Meanwhile, Iran’s crackdown on free speech and its levels of oppression have peaked on Rouhani’s watch. During his tenure, thousands of people have been executed, tortured or killed by the regime’s forces. For more than two years, the regime has brutally suppressed the unprecedented levels of social, economic and political unrest it has faced. During the widespread protests of 2017 and 2019, many slogans such as “Death to Rouhani” and “Shame on you, Khamenei — Step down from power” became popular for the first time. Despite the Iranian president’s supposed reformer credentials, arms to violent groups and proxies such as Hezbollah, Hamas and the Houthis have continued to flow unabated; domestic protests with brutal reprisals have erupted on numerous occasions and Iran’s proxy network of disinformers and destabilizers seems to be stronger than ever. Until his assassination at the start of the year, the terrorist mastermind Qassem Soleimani appeared not to have seen the memo that a “reformer” president was in charge.”[2] The death of Soleimani was a victory for the US, and those that have been persecuted throughout the Middle East by his methods. The pivots at the civilian level are real with more favorable views towards the west accelerating. Israel continues to sign new accords with surrounding Muslim nations, which is tightening control around Iran and suffocating the Shia Crescent. Given the shifts in Iran, it is unlikely that Biden will “unlock” capital for the current regime- especially given the tactics that have been carried out by those in power. President Trump made the move to capture the Generational Shifts surrounding Israel and broker as many deals as possible to solidify control before starting to remove troops from hot spots. We are seeing spurts of terrorist activity in Iraq, but they are more the flailing actions of a movement losing steam. The U.S. has been pushing aid into Iran through the Swiss consulate to make sure the locals appreciate that we have NOT forgotten about you and things will adjust once the regime is “replaced.” We have been smart to avoid any potential risk to civilian life and have struck at military targets with other soft targets being conducted to minimize civilian casualties. These are targeted/ well-choreographed attacks that require real-time and extensive intelligence. The country is moving closer to a full regime change that doesn’t need to be a bloody conflict, but rather an exhaustion of the 1979 movement that will naturally adjust. Obviously- all of this is easier said than done and calling a regime change is about as easy as telling you when the algos will stop buying the market to ALL TIME HIGHs in the middle of a global pandemic and negative global GDP growth. Corruption is real in the Iranian government, and the IRGC still carries the lion share of fire power- the coffers are runnin dry and it may be time to find a “new financer.” Iran was bale to get to 3.5M barrels a day quickly, but the strength of the new sanctions has helped push exports closer to 2.5M. We don’t believe they are as low as the chart indicates of 1.91M, but the recovery would be quick and deliver a significant amount of high value heavy crude to the market. China has entered into agreements already with Iran, and required India to be pushed out of the country- which also annoyed the local populace that has called India a “friend” since Persia. The UN and Europe have let many restrictions expire, so any adjustment with the U.S. on a political level could be carried out fairly quickly. Iran also provides a strong investment opportunity given the extensive amount of reserves in the country. Iran is also a big provider of LPG to the global market (we cover in our end of year report), and a shift on internal politics would go a long way to open up the country. In conclusion, Biden will not be quick to reinstate the JCOPA or create a new agreement ahead of the election. Many civilians may look to protest the election, so we will need to watch how things progress next year into a very contested election. Inflation in the country has moved higher as the economy remains depressed due to COVID and sanctions. The government lost more and more support over the last 18 months from some very key geo-political impacts: The shooting down of the Ukraine jet, handling of COVID, and deals with China (just to name a few). More to come… because this will be a big shake-up to the oil markets depending on how it progresses forward. Bloomberg OPEC Crude Oil Production Output Data on Iran [1] https://www.spglobal.com/platts/en/market-insights/latest-news/oil/120720-china-data-nov-crude-oil-imports-rise-10-from-6-month-low-in-oct-to-1108-mil-bd [2] https://www.arabnews.com/node/1760166 [/ihc-hide-content]