[ihc-hide-content ihc_mb_type="show" ihc_mb_who="10,13,14,16,18,19" ihc_mb_template="1"] By Mark Rossano The market is maintaining a steady march higher with the US dollar heading lower, which is apparently bullish for everything under the sun. Oil pricing is no different given its historical correlation to USD (as the dollar falls crude- and other commodities go higher), and it has also become the fan favorite way to express or position for “risk on” and “back to normal” post COVID. Gasoline and distillate pricing (especially gasoline) have helped fuel the rallies with gasoline leading the charge higher over the last few weeks. Even as economic data deteriorates, the steady march continues which will keep completion crews active through year end. Based on normal seasonality, this week starts off the beginning of the Holiday slowdown that accelerates into year end. In normal years, there would be a drop of 30-60 spreads for the last half of December, which would quickly reverse in the first half of January. Even with this not being a normal year, we expect the normal seasonal slowdown, but the drop won’t be as steep as previous years due to the low level of current activity that has taken place so far in 2020. There is normally a 10-14-day lull that kicks off at Christmas, and doesn’t start to reactive until the end of the 1st week or 2nd week in Jan. Many E&Ps are wrapping up activity for the year, and with fresh capital in Q1- we will see some completion work return quickly. Even with some work returning, there are seasonal components that will keep the steady march higher from 54 spreads to today from maintaining its trajectory and stall out in this range. We expect to see a reduction of 3 spreads in the Bakken, 2-3 in Appalachia, and some of the smaller basins reduce activity back to 1 or 0 spreads. This will keep us range bound through most of January after the final push into the end of 2020. Even after the current surge in activity over the last two weeks, the 4-week rolling average on the national level sits at 142. It will get pulled higher again this week, but as we said heading into Q4- we expected to see a pick-up of activity in all basins- even smaller and fringe basins. Into year end, many of these basins will revert to either 0 or 1 spread with reductions across all basins. We will close out the year around 145 spreads but based on the current WTI pricing- we will quickly see 10-15 crews come back to work. It will be difficult to see the US get back above 165 spreads in January based on the current strip pricing. We have already heard indications from E&Ps that some crews will be released for Q1 in order to let the market stabilize and assess OPEC+ actions through the first 2 months of production increases. This can all change quickly if WTI prices keep trending higher- with $55 being an important level in order to attract more activity. The focus was to close out the year on a strong production footing and setup 2021 to weather at least the first quarter. Most companies have targeted bridging the first 2 quarters, and the activity in the WTI curve points to an increase in hedging to protect cash flow and stabilize activity. Primary Vision Seasonal National Frac Spread Texas will remain the biggest beneficiary of activity- especially the Delaware as E&Ps get more active in the region. The Permian will be able to maintain at least the 4- week rolling average, but it will likely trend higher through January and average above 70. The below Permian seasonal chart helps to breakdown just how activity recovers post the Holiday season and experiences a general increase through the month of January. The Bakken will see some reductions in January and average closer to 7 spreads over the period with the Anadarko staying in the 5-6 range through the same time period. The Bakken being in North Dakota and the surrounding area- it should be no surprise to see a reduction in anuary given the tough winters with a typical increase through early spring. Primary Vision Seasonal Williston Frac Spread Primary Vision Seasonal Permian Frac Spread The Appalachian basin will also see some reductions, but it is likely we see it hold 10-13 through the winter months. The Haynesville will shift closer to 10-12, but with LNG exports staying so strong- we will see activity remain elevated in the region. There is enough support in the market to see the national spread count hold over 140 spreads through Jan and Feb, and will likely settle out closer to 150 driven by Permian and Eagle Ford activity remaining strong. There has been a draw down in DUCs (drilled but uncompleted wells) across most of the basins over the last 6 months, but we have seen rig activity increase as well, which has stabilized the draw down of DUC inventory. We still expect to see DUCs get completed through Q1, but the pace of draw downs will slow. The Eagle Ford and Permian still have running room to support elevated activity, but the next question comes down to realized pricing and general refining/ export activity. The WTI Cushing curve has seen the front months rally hard off the lows as the curve shifts into steeper backwardation further down the curve as small contango persists in the very front months. We can see how the curve has come under pressure since November as shifts were made driven by hedging activity and pressure mounting from spare capacity coming back online from OPEC+. The US now has LLS and MEH trading above $50 at about $50.46 and $50.26, which is helping realized prices in the region. The current Brent-LLS spread of $1.46 and Brent-MEH of $1.70 will keep exports stable through year end, but we won’t be seeing a big increase given the lack of attractive pricing. The current spreads offer up little incentive, but in-line with global light crude pricing that will keep us in the mix but not taking a bigger percentage. This will help the US hold exports at about 2.7-2.8M barrels as Europe buying remains consistent m/m, but Asia purchases have reduced keeping us fairly capped. U.S. production will hold about 10.9M barrels a day into year-end, which we will be able to hold given the current activity in the market into year end. The bigger issues will be the slow down in US refining capacity and general reduction across the globe- with India/China the only region seeing a meaningful recovery and increase in activity. China has brought online new refining capacity into year-end with more coming on over the next 4 years. This will push more refined product into the international markets keeping the oversupply in the market elevated. We have already seen builds rising across Singapore, U.S, Europe, and Fujairah as demand wanes in Europe and the US for refined products with lockdowns and COVID19 slowing demand. Asia is also facing some outbreaks- specifically in South Korea and Japan with some renewed concerns in India. The increases in India are in specific locations, which is why we are seeing the rise in stringency indexes but not a broader increase to the case count. The activity within India on a refining side has been directed for internal use with the refiners specific for export have increased from the lows but remain at about 85% utilization rates (off the lows of 45%-50%). India High Frequency Data Points China has seen an increase in throughput as new capacity comes online, but utilization rates across the system have been holding at about 75%. Storage levels across the system elevated as China pulls more off the water and fill storage across the country. There are about 980M barrels of missing crude, which is estimated to have been put into storage in “opaque” countries with China accounting for about 500M of those barrels. The rise in OSPs and slowing purchases have been indictive of a cooling physical market as builds rise in OECD crude and refined product levels. “China set a record for daily crude oil processing for a second straight month as plants utilized new capacity and refiners boosted run rates due to strong fuel demand. Crude processing was at 58.35 million tons in November, data from the statistics bureau showed. That’s equivalent to 14.26 million barrels refined each day, according to Bloomberg calculations. The previous record was set in October as holiday sales helped to boost consumption. South Korean crude imports fell to 9.3 million tons in November, down 25% from a year earlier, according to data posted on Korea Customs Service website. That’s the least since June 2010. Imports from Saudi Arabia rose by 3.5% year-on-year to 3.33 million tons.” South Korea purchases have slowed over the last few weeks driven by a renewed increase in COVID cases and slowing exports into the market. Global trade remains under pressure, which is showing up in India, Japan, South Korea, and Germany as China looks to take a bigger share of the trade market. The cost for China to maintain these levels will be prohibitive unless we get a real demand surge, which remains fleeting. Shandong Independent Refiner Storage “The IEA expects the crude glut left behind by the pandemic -- about 625m bbl -- to clear by the end of the year“Demand is clearly going to be lower for longer than expected,” the agency said in its monthly report. While the IEA lowered projections for global demand growth in 2021 by 110,000 b/d -- because of sustained pressure on jet fuel and kerosene use -- it nonetheless projects a significant jump of 5.7 million a day, or about two-thirds of the amount lost this year. Consumption will average 96.9 million b/d in 2021. Purchases of gasoline and diesel will be “particularly strong,” returning to about 99% of pre-crisis levels.” There have been some declines in OECD stocks, but the pace has slowed down with new builds in Europe and the US as we remain well above the 5-year average. This also comes as we see an increase in production from OPEC+ countries as we head into 2021. Libya has accounted for a big increase in activity and most of the increase in the OPEC+ grouping: Libya has been able to get back to about 1.3M barrels a day of production that will put about 1.2M barrels a day into the market, which will impact US and WAF grades flowing into the European markets. European demand remains depressed across the board, and the new increase in production will keep storage elevated and realized prices depressed in the physical market. With Iran- “On the high end, U.S.-based TankerTrackers.com, which uses satellite imagery to follow deliveries, estimated Iranian crude oil exports hit 1.2 million barrels a day over the fall, up from 481,000 barrels a day in February.” The new OPEC+ agreement solidifies an increase in production by 500k barrels into January, which doesn’t include the rise in Libya or Iran. The current deal trajectory plans for a 500k barrel a day increase every month from Jan to April bringing back 2M barrels a day over a 4-month period instead of in January. We have been highlighting how global estimates for demand will keep adjusting lower and come closer to our estimates over the next few months, and the below shows the new expectations that are still too high. The decline in gasoline and distillate has accelerated over the last few weeks, and won’t be shifting higher quickly with COVID cases increasing in key demand areas. The shifts lower are highlighted below- we also cover this weekly in our YouTube shows where we point out the slow down in general economic activity. The biggest headwind we see remains the lack of jobs in the market persisting limiting purchasing power in the US. Unfortunately, the jobs issue isn’t limited to just the US with other areas experiencing problems as well that will be a broader problem. The slow down in jobs and rising unemployment is also happening as high frequency data points show a continued slowdown in the US and on a global level. The pressure in activity is appearing in the export market, which will result in less diesel demand as consumer are looking to do “less” and resulting in a slowdown in gasoline demand. While the vaccine is disseminated around the world, it will take an extended period of time before we see consumer behaviors start to normalize. Many companies used COVID19 as a reason to let people go, and it is unlikely that we will see a quick return of hiring even after we get some normalization in the market. Small businesses continue to struggle across the broader economy with less revenue being generated and bankruptcies rising. The rally we have seen in refined products and oil has been impressive to say the least, but how much of it is sustainable as demand remains lackluster around the world. Asia has been a bright spot, but buying always starts to slow into year end and remains weak through the Lunar New Year. We have started to see some softness come into the market after a tightening in Dubai and Angolan spreads. The physical market and underlying economic data keeps us cautious as we see the market as overestimating economic growth/strength in 2021. We will have a bigger report at the end of Dec/beginning of Jan mapping out our views for 2021… stay tuned for more! [/ihc-hide-content]