[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 ActivityOPEC+ Meeting Recap and Global Physical MarketGlobal Refined Products Intro to Inflation and Spending- more to come in next write-up U.S. Completion Activity The Dakota Access Pipeline (DAPL) will continue operation during the trial after the Army Corps said they don’t plan on asking for another delay and wanted to leave the matters to the judge. “A U.S. Army Corps official has told tribal advocates it doesn’t plan on announcing a shutdown of Energy Transfer LP’s Dakota Access oil pipeline during a key court hearing planned for later on Friday.” This is a small positive while the pipeline goes through the court proceedings. I don’t think DAPL will be shut down by the courts, but as we all know any trial can have many surprises. If DAPL is shut, it would create logistical problems within the Bakken as more crude competes for space on other pipelines or more is pushed onto rail. We will be following this closely over the next few months, but it is unlikely we see a big ramp in Bakken completion activity without more clarity on the situation. The pace of additions on a national level has started to slow, and we will see more leveling off throughout April as E&Ps digest the new crews and start picking up more rigs over the next 2 months. Completion crews have outpaced rig additions across key basins (Western Gulf and Bakken), and we will see rigs come back to start rebuilding the DUC count over the next few months. The Permian has already gotten to a point where completion crews and rigs are running at a pace to keep the DUC count flat, and over the next few weeks it will start to climb higher slowly. The Permian and Western Gulf were quick to respond to the increase in prices, but additions will be slow going forward through April and May. The Williston needs to see activity trend higher to keep production stable, but with DAPL uncertainty we will see E&Ps keep activity low until we get some clarity. The trend will still be up, but it will be a measured move to protect against any surprises. We typically get additions accelerating in the region as the Spring brings warm weather completions normally move higher, which will be the case- just much slower vs normal. The goal will be to get to a level to flat line production after steady declines, but we don’t expect any growth from the region (or even recover of lost production.) We expected Texas to be the biggest driver in the recovery (I know shocking right!), which was accelerated as the OPEC+ decision drove prices higher much quicker vs expectations and pulled forward activity. Last year- our assumption was a steady increase in activity to hold production and “survive” to Q3 before activity would start to accelerate. Instead, the drive higher in prices pulled forward a significant number of completions into not only Q2 but Q1. The pull forward means the U.S. will have more time to slowly climb the production ladder and stabilize production at 10.9M-11M barrels a day. As the new wells are brought online, we will see a steady climb in U.S. production. At this activity level, we expect a steady move to about 11.3M barrels a day, which at the current rate- will be achieved as we approach the end of June. “Permian Basin crude production is set to grow for a third month to 4.632m b/d in May, the highest since right before the global pandemic forced the shale industry to collapse, according to consultants Rystad Energy.” We aren’t the only ones seeing the writing on the wall for what is coming out of the Permian. The same can be said about the Bakken: “Oil production in Bakken, N.D., to decline for seventh straight month to 1.083m b/d in May, the lowest since July.” As the market digests the growth, the 4-week rolling average will get much closer to the underlying weekly number as the pace of additions pause within a tight range here. We will get some one-off activity in the smaller basins, with steady increases in the Uinta and Powder River Basin. The Permian will easily hold over 100, and we will see those numbers fluctuate slightly as crews move between jobs- but nothing is getting laid down any time soon. The same can be said about the Western Gulf, Appalachia, and TX-LA-SALT. The Anadarko will see another 1 or 2 added over the next few weeks, but it will be fairly fixed at about 10-11 on the 4-week rolling average. On the oil side of completions, we are approaching the levels we had back in 2017 (outside of the Williston) with the difference in the national numbers being driven by gas activity. NGLs and naphtha (liquid) pricing remains supportive as international demand and global pricing is strong with little chance of that adjusting over the next few months. We have been bullish liquids for over a year now, and we don’t see that stopping any time soon. The shortage of liquids in the market driven by reduced refinery runs and steady demand increases will keep pricing supportive of activity in the US market. The plastics markets also remain strong, which is a key end market that is searching for replacement volumes with global refinery run rates remaining at historic lows limiting product availability. The issue will be on the crude export level as spreads tighten and OSPs abroad fall to protect market share. The Brent/ LLS spreads sits at $1.53 and $2.47 for the Brent/ MEH, which will keep pressure on our exports into both Europe and Asia. We had a nice pop over the last 2 weeks as some contracts were filled to close out March and start April on top of the Houston Ship Channel fog shutdowns. As we proceed through April, the exports will come under pressure and average closer to 2.6M barrels vs the last 2 weeks at about 3.2-3.4M. As new wells come online and exports come under pressure, more crude will be pushed into storage and the spreads to the international markets will “have to” open up a bit to promote exports. This will keep the front months capped in the U.S. and put additional downward pressure on it. Our frac spread is a leading indicator by about 30-60 days depending on when the completion is initiated, simustim, and when it is brought online. So the pace of new completions will delivery a steady increase of production, and maintain those levels over the next few months. If we get crude prices holding here, we will get another wave of completion crews getting added in the summer/fall months. But, we will see about 205-215 the natural range over the next several weeks. OPEC+ Meeting Recap and Global Physical Market The OPEC+ meeting was an interesting one delivering a surprise vs what was expected heading into the meeting. We expected April to see a roll over of cuts, but we didn’t expect any commentary yet on May and beyond production. Instead, OPEC+ and Saudi gave an outline of production returning from May through July. We have to factor in the OPEC+ increases, and Saudi’s voluntary 1M barrels coming back over the next 3 months. Saudi Arabia is going to bring back their 1M barrels over the next 3 months: MaySaudi- 250k barrels a dayOPEC+- 350kTotal: 600k a dayJuneSaudi- 350kOPEC+- 350kTotal: 700k JulySaudi- 400kOPEC+- 441kTotal: 841k barrels OPEC+ made it very clear that they could reverse the cuts at any time if demand struggles with renewed COVID19 cases and limitations on economic activity. The additions were surprising, but OPEC tried to soften the blow by saying a large part of the additions would be consumed locally. Saudi Arabia increases fuel oil burns in their power generation in order to meet the increase in air conditioning demand. Over the last 5-10 years, KSA has also adopted more natural gas consumption for electrical generation- so the biggest thing to watch will be exports. We have been stressing the importance of exports vs production- so the key will be how much of this new production finds its way into the export markets. OPEC+ has planned another meeting for the end of April, but on the current trajectory it is unlikely they deviate from the May additions. OPEC+ could pause the additions in June based on what we see coming out of Europe and Asia on the demand front. The physical market remains weak with pricing coming in at steep discounts but off the 12-month lows with more pressure coming as refinery throughput remains weak. Lockdowns and general increases in COVID cases remain the biggest headwinds limiting activity within the country from a consumer as well as industrial/manufacturing side. The above chart doesn’t take into account the 1M KSA voluntary cut, but the above numbers give a snapshot of what is coming to market outside of Iran and Libya. The additional barrels out of Libya is putting pressure in Europe with pricing. There have been a rising number of “reoffers” and cargoes not moving as countries struggle to clear volumes- even as loading schedules rise for May and based on the OPEC+ meeting so will June. CPC pricing has also come under pressure with no Urals moving into Asia throughout March. The limited bids for Sonangol and Congo barrels points to the headwinds the market faces heading into Asia. The limitation in Asian demand will also keep pressure on U.S. flow into another big buyer of U.S. crude- China. “Russia didn’t ship any Urals cargoes to Asian refiners in March for the first time in six months.” Angola has yet to sell about 40% of its May-loading cargoes, while shipments for this month are now sold out. Sonangol cuts Saturno offer price to $1.50/bbl less than Dated BrentDrops from -$1/bbl on March 26; cargo for May 18-19 loadingSonangol sold Cabinda crude cargo for May 8-9 loadingFinal price not known; consignment was offered at +80c/bbl on March 26Republic of the Congo has yet to sell three Djeno cargoes for May, from a total of seven planned shipments. Gunvor sold 100k tons of Urals to Total for April 18-22 delivery at $2.35/bbl less than Dated Brent, CIF Rotterdam: trader monitoring Platts windowCompares with discounts of $2.65 and $2.70 on Tuesday, which were the lowest in almost a yearThe weakness in Urals comes after four cargoes were added to the April loading program, bringing the total exports from Baltic to 4.3m tons, most in three monthsLibya set its OSP for Es Sider for April at a discount of $2.35/bbl to Dated Brent, according to a price list seen by Bloomberg.The price is the lowest since May 2020, compared with a discount of $2/bbl for March Libya’s Sharara OSP at -$1.40 for April, also an 11-month low, compared with -95c/bbl for March Urals: Shell bought 100k tons from Trafigura for April 24-28 delivery at $2.65/bbl less than Dated Brent, CIF Rotterdam: people monitoring Platts windowShell bought another 100k tons from Litasco for April 27-May 1 delivery at -$2.60/bblPrices close to one-year low of $2.70 discount on April 6Gunvor withdrew offer for Urals for April 28-May 2 delivery at -$2.50/bbl The physical market is a problem when looking at the OPEC+ backdrop as pricing doesn’t support a tight market. We have seen an increase in floating and onshore storage as refiner turnarounds accelerate in Europe and Asia with the U.S. maintaining at seasonal lows. Global Crude Oil in Floating Storage The pricing above isn’t new, and is just holding the lows we have been highlighting for awhile now. As more supply comes into the market, we will see pricing hold the lows with discounts deepening especially with GCC (Gulf Cooperation Council) countries bringing back more capacity. The UAE’s futures contract Murban is trading with more volume and without a destination clause with other grades looking to price off of it. The contract settles in physical delivery, which provides optionality for customers and a true market test for UAE crude. On a percentage level, the UAE was the most impacted by the cut in production- and they want to be quick back to market. Iraq remains terrible at hitting their compliance level, and they will never make up for their overproduction. They have been well over on the export side every month, and now have completely abandoned even a small semblance of accommodating on the production front. The same can be said about Russia, but in the new allotment from May-July- Russia will only increase 114k evenly distributed across the 3 months to “make up” for increasing production ahead of other OPEC+ nations. But even under the “adjusted” numbers, Russia fails to meet their obligations and again will not be making up for overproducing. Global Refined Products The pressure remains across refined products with rising COVID19 cases impacting consumer behavior and limiting travel, mobility, and general engagement. India put up some strong March numbers, but the rise in COVID19 cases and statewide lockdowns at the end of Mar into April will mute those impacts going forward. While the data looks good across the year over year- it still weak across the month over month figures as pressure remains in the Indian markets: “FGE will revise 2Q, 3Q demand estimates lower, with consumption of key oil products -- including diesel, gasoline, jet fuel and LPG -- to grow ~30% y/y in 2Q vs earlier estimate of +34.6%.” India’s oil-product consumption in March rose 17% y/y, up the most since August 2016, to 18.8 million tons, according to provisional data published by the oil ministry’s Petroleum Planning & Analysis Cell. Gasoline consumption was at 2.74 million tons, +27% y/y, up the most since May 2013Diesel consumption +28% y/y to 7.22 million tons, the highest since December 2019Naphtha consumption -1.8% y/y to 1.36 million tonsLPG consumption -2% y/y to 2.26 million tons, the lowest since JunePetcoke consumption -3.2% y/y to 1.63 million tons The level of refined product in storage remains stubbornly high with pressure coming from limited end user demand even as refinery throughput remains well below normal. While mobility has improved, consumer behavior has adjusted and will remain different over the coming months/ years with more reliance on online shopping and flexible work schedules. This isn’t just a US phenomenon but something that is being adopted around the world. The two biggest costs to a company is labor and real estate, and if you can pay someone less based on cost of living and reduce your corporate footprint- it would be a huge savings. This is something very few companies are looking to pass up, and we have already seen steps made in that direction to adjust. The limited mobility isn’t going to get back to normal anytime soon as weekday activity remains well off normal even as weekend activity recovers. The below is just one specific data set we track that helps to visualize the limitation on weekday activity. International Enterprise Singapore Oil Products Singapore Stock Data The plethora of available refined products is shifting supply chains with pressure remaining in U.S. exports into our normal markets: Distillate to Europe and Gasoline to Lat Am. Instead, European exports to the US have been robust across diesel and gasoline, and imports have been low from the US with some increases coming from Asia as availability grows at discounts. The shift in supply chains won’t be shorted lived as activity remains sluggish in Europe, Asia, and Latin America. The below are just some examples: European imports of clean oil products from the Middle East, mostly middle distillates, are set to surge in April to the highest so far in 2021, posting a sharp recovery from the one-year low seen last month.23 tankers hauling 1.64m tons of Middle East refined fuels are due to arrive in Europe this month, the highest since December April-loading shipments of clean fuels from Asia to the Americas increased to 70k tons as of Tuesday, up from 35k tons a week earlier, according to fixtures and shipping data compiled by Bloomberg. European imports of clean fuels from India were well down y/y, continuing the pattern seen in recent months, according to ship-tracking data, tanker fixtures and port reports compiled by Bloomberg Two tankers hauling combined cargoes of about 140k tons -- one cargo diesel, the other jet -- arrived in MarchThat’s well down from the 440k tons of fuel that arrived in March last year, and a slight dip on February’s 160k tons U.S. imports of diesel from Europe recovered to more than 1m bbl in the 7 days through April 1, while gasoline shipments slipped to a 4-week low, according to bills of lading and ship-tracking data compiled by Bloomberg Weekly diesel arrivals from Europe rose to 147k b/d, or three cargoes totaling 1.03m bbl, vs 244k bbl total in the previous weekGasoline imports dropped to 359k b/d, lowest weekly flow since March 4Compares with the revised 364k observed in the previous weekEight tankers discharged about 2.34m bbl in U.S. Atlantic Coast and two tankers arrived with 168k bbl in the Gulf CoastEuropean oil-product shipments to the U.S. rose in March to the highest in more than three years and possibly longer, but multiple gasoline-laden cargoes are now idling near New York.About 2.6m tons, mostly gasoline and blending components, sailed for the U.S. in March, the highest volume in Bloomberg compiled data since January 2018At least 4 European gasoline laden tankers are floating off New York, while a fifth ship en route from Italy to New York has stopped near Gibraltar There is way more refined product just waiting in the wings to be imported into the U.S. US Imports of Distillate US Imports of Gasoline Even as the US sees some recovery in demand, it will be quickly met by imports, limitation of exports, and refiners shifting yields to maximize crack spreads. This is why refined product builds globally (especially in the US) will be difficult to shake with pressure mounting. Intro to Inflation and Spending- more to come in next write-up. There is more to it vs just COVID19, but also the ability for people to ultimately spend as jobless claims remain elevated and hours worked under pressure with inflation rearing its ugly head. Stimulus checks aren’t going as far with prices rising with more to come as we look at Prices Paid vs Prices Received/ PPI internally and abroad/ Export-Import prices/ delivery times/ raw material prices. The pain only now starting to show up with the full supply chain showing the rise in prices is just beginning as companies try to recovery pricing. US PPI Final Demand YoY UN Food and Agriculture World Food Price Index Due to the holiday, I will keep this one short but in the next write- up we will do a deep dive into China, global debt, Taiwan, inflation, and employment. We made a call back in March 2020 that employment was going to get a hard bounce off the bottom followed by a steady but slow addition once we recovered about 50% of jobs lost. The jobless claims continue to surprise to the upside, and while we expected a strong jobs number this week with more hospitality/ restaurant hiring- it has left little to be desired when looking at hours worked and hourly wages. This is resulting in wage compression as prices are driving higher around the world. We have been very adamant that rates will continue to rise increasing the cost of government borrowing, limiting emerging market borrowing, and cutting monetary policy capacity short. We have already seen emerging markets turn hawkish as inflation fears increase around the world. China is just one example with local travel 95% back to normal in this past holiday with spending 56% of normal. The world still has a long way to go for some normalcy, but the middle class in the developing world is shrinking. Inflation, lack of stimulus, and tepid recovery is going to weigh on that grouping even more. [/ihc-hide-content]