By Mark Rossano
We should start to see frac spread activity slow down as we head into the Christmas/New Year holiday. Our expectations for the year were a peak of 275 active spreads, and we hit 274 last week- so pretty close to the top. There may be one more push higher from the smaller basins as we normally peak around this time of year, but we will see activity start to slow over the next 2 weeks and re-accelerate in Q1 next year. Activity is starting from a lower-level vs “normal” years so the reduction in activity won’t be as steep on a percentage basis. There is likely to be a drop of about 25 spreads or so, but that will be picked up quickly as we move into the 2nd week of January. The crude curve has shifted down with the front month falling back closer to reality following a huge surge higher (more on that below). The curve has flattened, which still helps support longer term investment after seeing a steeper drop off in activity.
US Oil & Gas Exploration & Drilling Frac Spread Count
The crude curve has shifted down with the front month falling back closer to reality following a huge surge higher (more on that below). The curve has flattened, which still helps support longer term investment after seeing a steeper drop off in activity. It will still be guarded, but we are seeing more announcements around the world on a pickup in investment. “The United Arab Emirates is raising investment in oil and gas production as the OPEC member looks to boost capacity for energy exports and pump more cash into its economy before the energy transition squeezes out hydrocarbons. Abu Dhabi National Oil Co. will spend $127 billion over the next five years, according to a post on the Twitter account of Abu Dhabi Crown Prince Mohammed bin Zayed Al Nahyan. That’s up from the $122 billion earmarked for the period from 2021 through 2025. The company will also evaluate plans to double production capacity of liquefied natural gas to 12 million tons a year.” We believe their remains support on the back end of the curve as production returns and demand normalizes post COVID. The biggest issue we see on demand is really on the macroeconomic backdrop that we will do a deeper dive on next week when we cover inflation into stagflation.
Investments on the upstream side increased in ’21, and we expect to see another bump in ’22. The investment focus will remain on the upstream and electricity network as countries address the growing shortfall and issues we have seen in many grids. Renewable investment will remain stable while nuclear sees a step up in underlying activity. There is a lot to unpack in the charts below, and we will do a deeper dive into year end and at the beginning of the year as to where we see investment dollars over the coming next 1-3 years.
The investment in grids will increase in ’22 and it will be around the world, and not just located in one specific region given the recent issues. These are also problems we identified in 2019 and a primary reason for creating the Energy Infrastructure Fund.
OPEC UPDATE
Our expectation heading into the OPEC+ meeting was for a production increase of about 250k barrels a day. The view was that the Middle East countries and Russia would share the increase, while there was a “pause” for West African nations. This would provide the optics of “slowing”, while still allowing some countries to keep increasing. West African nations have been over compliant with their production due to their inability to sell loading schedules, so if crude demand did pick-up- they would already have space to ramp production even with the “pause.” The Middle East and Russia haven’t had the same difficulties in moving cargoes, which is why they would keep production moving higher in the near term.
What actually came to pass was a normal increase of 400k barrels a day, but they will “leave the meeting open” so that if demand slowed further, they would reconvene to adjust production into January. “Prior to the meeting, OPEC+ ministers indicated they were concerned about the impact of omicron on crude demand but were struggling to figure out how serious the new strain would become. By effectively keeping its monthly meeting open, the alliance now has more flexibility to address price swings.” After a huge drop in crude prices, this was a smart way to put a floor in pricing because it will be difficult to say when or if OPEC+ will make an adjustment. The only way we see an adjustment is if the key nations: KSA, Kuwait, Iraq, UAE, and Russia see a drop in their sales, which we track through exports and floating storage. If we see more cargoes stranded, we expect to see more aggressive action taken, because they have shown little interest on the builds and struggles from West Africa. Instead, these Middle East nations and Russia have effectively taken market share from WAF, Europe, and the U.S. This was achieved by the wide price discrepancy of Dubai vs WTI/Brent- so even as OSPs went higher- these countries were still very competitive in the pricing landscape. Since the broad drop in crude prices, some of the discount has evaporated and pulled a bit more crude into the international market from Europe and the U.S.
Flows from many of these key OPEC+ countries have pushed crude on the water to record highs. “Saudi Arabia, Iraq and Kuwait added a combined 640,000 barrels a day of cargoes last month compared with October. The U.S. increased shipments by 861,000 barrels a day. Those gains more than offset large declines of Russian Urals crude and Algerian exports.” We always distinguish between product and exports because they are key pieces to the underlying puzzle of what the physical market can bear. We have been highlighting (for far too long!) that the underlying physical market didn’t support the paper market front months. There was way too much crude sitting in floating storage and in the market as demand weakened in Asian markets. But, as we have said- the physical and paper markets can remain disconnected for far too long, which all comes down to money flows. The BIGGEST reason we had such a huge reversal in the paper markets was the “end” of the macro inflation trade. This crowded trade sparked a huge unwind on a day with low volume and algos/ momentum piling on. Because there was no true “fundamental” backstop- the selling pressure continued even after the holiday and has since hung around below $70 WTI. The commentary from Powell and other Fed officials have suggested a more hawkish stance with an accelerated tapering. Inflation fears have finally reached the Fed, and those comments helped to deflate the “reflation trade”, which had crude sitting front and center. Without the physical market to support pricing, there was just an air pocket until it found some support at about $65. The below chart helps to highlight the amount of new crude that hit the waters in November with exports in a position to maintain their strength heading into December.
The biggest driver of the growth remains KSA, Kuwait, Iraq, and the UAE.
Kuwait exports rose to a 19 month high adding to the recent surge in flows from the region. Exports surged last month to the most since April 2020 as OPEC+ added supplies to the market, with bigger flows to Asian destinations including Taiwan and South Korea offsetting a drop in loadings for biggest-buyer China.
• Total shipments from the OPEC member gained 326k b/d, a jump of 18%, to 2.1m b/d in November from a revised 1.78m b/d in October, tanker-tracking data compiled by Bloomberg show
West African flows stayed fairly stable in Nov even as floating storage sits at seasonal records and Nigeria/ Angola cut loading schedules.
Observed shipments of crude and condensate from West Africa remained stable in November, with increased flows from Nigeria and Gabon offsetting declines from the Republic of Congo and Cameroon.
• Combined shipments from 10 countries were 3.34m b/d in November, little changed from October, according to tanker-tracking data monitored by Bloomberg
o Shipments from Nigeria, the region’s biggest exporter, rose by 86k b/d to 1.53m b/d
o Angolan exports were steady at 1.02m b/d
o Combined shipments from the smaller West African producers fell by 10% to 783k b/d, with a big drop in flows from the Republic of Congo and Cameroon
• Flows from Nigeria’s Bonny oil terminal slumped to just 32k b/d, despite Shell lifting force majeure at the terminal on Nov. 22
• Observed shipments to China fell by 111k b/d to 935k b/d in November; another 230k b/d are on ships showing destinations as either Singapore or Malaysia, which may well go on to China
• Shipments to Europe dropped to 718k b/d from a revised 908k b/d in October
• Exports to the U.S. fell to 62k b/d, from 123k b/d in October
• Figures for China and Europe will almost certainly rise when ships that currently are not signaling a destination begin to show where they are headed
• About 15.6m bbl of crude and condensate — equivalent to about 520k b/d — is on tankers not yet showing a final destination; of this, 2.9m bbl, or 95k b/d, is heading west, 5.8m bbl, or 192k b/d, is heading east; the rest is on tankers that are still at West African terminals
Even with a broad cut in Dec loadings out of Nigeria- there is still a significant amount of crude (relatively speaking) available for sale. Angola with the drop in Brent/Dubai seeing steady slightly stronger buying than Dec. Still some cargoes to shift in Jan Nigeria seeing little interest. Still 8mb of Dec cargoes unsold and some 40mb of Jan.
The Loading Schedule shows a big drop out of Nigeria as Russia is now pushing above 4M barrels a day as we expected. Nigeria deferred a few cargoes into January, which would help them clear some of the glut on the floating storage front.
The key to watch will be floating storage in the Middle East. It remains elevated against historical norms, and now we have more crude allowed to come to market in Dec and January (so far). There could be a broad reduction in OSPs to help offset some of the decline between Dubai and WTI/ Brent.
The surge in oil on the water is going to continue as OPEC+ brings more barrels to market in Dec. We have some cargoes converting from floating storage to transit and will just backfill some recent declines we have seen in Asia. The U.S. has seen a pick-up of floating storage as PADD3 manages tank levels and crude slates to limit their tax bill while producing heating oil/diesel.
There have been some recent sales from WAF and European floating storage that has helped move some of their totals lower with Asia pulling some more crude off the water and into onshore storage.
As these transit barrels reach their destination, there will be an increase in the floating storage data. Asia is the most likely place we will see some of these additional cargoes show up based on the recent purchases.
China has seen a steady rise of product in storage, which will start being pushed back into the market by year end. The government banned the export of diesel and gasoline but lifted the restriction recently on the gasoline front. Fuel oil storage is now at a new all time record, and we are likely to see some diesel cargoes allowed to enter the market. The swing in demand and cracks pushed a lot of the refiners in Asia to run more distillate that has now seen a flip to oversupply, which we are seeing even more on the light distillate front. “China’s diesel stockpiles rose 1.9% over the past week to 15.54m tons, the highest level since Oct. 8, according to data tracked by local industry consultant OilChem.
• Inventories are at 35% of capacity
• Gasoline stockpiles rose slightly w/w to 14.68m tons, or 42% of capacity
• Fuel stockpiles expanded after refiners ramped up production”
The total market remains fairly close to the levels seen between ’17-’19, which will remain the case as we see oil products starting to build a bit over the next 2-3 months. We expect crude levels (offshore +onshore) to remain close to the current levels as products build on the back of some sluggish demand. We normally see declines on a seasonal basis, and we don’t see that adjusting this year either.
The global economy remains in a tenuous spot as inflation ramps around the world, while it slows a bit in the U.S. The new COVID variant won’t adjust demand all that much outside of normal consumers looking to avoid any undo risk. So just a little less driving and flying with consumers opting for one less trip to the store. We have seen it before, and we will see it now- so the demand will creep lower and remain below the 2019 levels as we head into Dec-Feb. We expect to see the pace of inflation slow in Dec-Feb and potentially see a small decline within that time frame before it ramps for one final push in Q2’22. This will give way to stagflation that will persist through the end of the year and well into ’23. I will provide a deep dive on this next week.
