Primary Vision Insights – September 15th, 2021

The oil markets remain in flux with a mixture of bullish and bearish news impacting prices- the question remains: “Which one will win out?” Hurricane Ida still has about 1.4M barrels a day of Gulf of Mexico production offline and about 1.7M barrels a day of refining capacity. The Hurricane took down Port Fourchon, which is the launching point for companies supporting the offshore space. About 90% of deep-sea activity is supported from this port, which took a direct hit. E&Ps have had to adjust operations by either using other slips in the port, shifting to nearby facilities, or operating out of Texas- some are utilizing all three. Now that the supply chain has been restored- the speed at which offshore production comes online will accelerate over the next 2 weeks. We should see about 90% of production restored by next week with the remaining 10% potentially down longer as some damage appears to be a bit more severe- taking longer to repair.

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Refining on the other hand is still struggling to normalize based on their ability to get oil and power to the region. The LOOP was taken down impacting imports more than exports and limiting the availability of oil in the region. Power has been the biggest issue, but for the most part it has been restored to the refining regions. It isn’t as simple as just firing up the furnace and running crude through the coker- it takes time to run all necessary protocols to ensure safe and proper operation. The LOOP didn’t experience any structural damage, but it has taken time to bring power back to the onshore pumps. It was also difficult for ships to pull up to the platforms until everything was fully vetted, which was also delayed by all the port damage. The LOOP is now fully functioning and will be able to normalize some of the import capacity to the Gulf of Mexico.

Based on the below, we should have another 1M barrels a day of capacity back online by next week with some of the residual down because of Hurricane Ida as well as normally seasonality. There is some refining capacity that just won’t come back for now as the hurricane struck just as some run cuts begin for maintenance and shoulder season. We will see some of it kicked to Oct to try to take advantage of the current markets getting back to about 87% utilization rates with a possible upside to 89%. The below Bloomberg refining downtime is a bit elevated- with the EIA number much closer to what I believe to be offline.

We have been here before- especially when we look at Hurricane Harvey impacts in 2017. The below is a look at refinery throughput over the last 29 years, and you can see we have been here before. The drop wasn’t as severe as Harvey given where it hit- Louisiana vs Houston. The amount of refining capacity in Ida’s path was less, so the impact won’t be as severe even if some of the down time is prolonged.

As the LOOP returns to operation and the Gulf of Mexico production platforms start up, we will see a build as some of the import backlog starts to clear from the coast. Refiners will be slow ramping, which will increase crude in storage- like what we have seen in previous hurricanes. We will still see the effects of the hurricanes over the next several EIA reports, but additional cargoes will be coming into the U.S. market as GoM production comes back online and the LOOP increases imports.

US completion activity remains stable with more upside coming in the natural gas space with more measure moves in the oil basins. We will see a steady increase in the Haynesville as front month natural gas hovers around $5 with the curve become more supportive through 2023. The situation in Europe continues to deteriorate with a steep shortfall in Europe and an expanding one in Russia. This will keep Europe a key buyer of U.S. LNG maintaining steady exports even as Henry Hub pricing remains elevated. As I have said over the last few weeks, the only time we have been lower in NG storage was in 2014 and 2018, but it is different this time given the LNG demand staying strong and the inability for gas to coal switching. Coal stockpiles are at dangerously low levels with little to no chance to increase inventory ahead of the winter months. We have also shuttered more coal plants since ’14 & ’18 pushing us to rely more than ever on natural gas power generation. A normal to harsh winter will provide a big boost to natural gas pricing well over $5 and even $6.

The Haynesville remains the best place to capture this near-term momentum given the availability of take away capacity, proximity to the coast, and available DUCs. The Northeast will see growth in activity, but it will be more muted given the takeaway issues and limited availability of horsepower. We do expect to see some increases, but it won’t be at the same rate as the Haynesville. Rigs and spuds are rising quickly helping to stop the decline in the DUC count- especially as drilling activity accelerates in Sept. There have been two companies that are pausing some completion activity for the month of Sept, but they were very active over the last few months and plan on ramping again in Oct. Any type of pause we have seen like this- has only been temporary and typically because there is a backlog or limiting factor for a short period of time.

The smaller basins will gradually see 1 or 2 spreads added to increase production capacity along seasonal lines, while we see several additions in the Permian and Williston. We still have enough available horsepower, and steady rise in activity to see another 10-14 spreads added over the next 4 weeks. We still expect to see rigs get added at a much faster rate, but spreads won’t be left behind as there is a steady push through Sept-beginning of Nov to capitalize on pricing.

The Natural Gas Liquids backdrop is very strong as we called out previously with more support coming as we head into shoulder season. The total NGL frac spread remains very strong with more support when we look at each product separately.

The export market remains strong for LPG and ethane, which is going to provide a floor for pricing as storage remains well below the 5-year average. The plastics market and underlying spreads will keep NGLs moving through the global petrochemical system- even as prices remain at the highs.

The shortage in storage for propane is also supporting the current pricing paradigm, and given the international demand (exports)- the U.S. will see steady movement. As we are now passed summer driving requirements, butane (to make benzene) will see steady flow as refiners shift the blending components for gasoline from summer to winter blends. The composition of gasoline changes between the two allowing for benzene to be utilized in the winter grade.

Between the rise of local demand and international strength, NGLs will find support throughout the shoulder season and with a normal to harsh winter- we will see even more pricing strength. The prices out of Saudi Arabia for LPG also remains elevated, which is providing more support for U.S. flow in the near term. Demand remains well above 2019 in Asia with little to change that given underlying plastics demand.

The physical market continues to tell a different story vs the paper market. Libya has now resumed loadings at Es Sider and Ras Lanuf ports after differences with protesters were resolved. As long as this stands, we will see about 1.2M barrels a day of exports from Libya putting a cap on the appreciation in Ural barrels seen so far this month. The initial protests put about 800k barrels a day of exports at risk, but as we come to the other side- there was only about 1.5 days that operations were impacted directly. While protests continued, operations for the most part on exports were uninterrupted until recently. Urals found a bid following Hurricane Ida and concern over the availability of Libyan barrels. The U.S remains a buyer with another 5M just recently purchased for Sept/Oct loadings. U.S crude exports will also remain under pressure as Dubai discounts remain as steep as they are currently. This is also being reflected in the Brent markets, which will support additional Middle East movements but hinder flows from Europe and the U.S.

Shell bid Urals at highest price in seven months in Platts window, amid soaring prices for similar grades in the U.S. Gulf. A fresh wave of protests at key Libyan oilfields and ports threatens to derail months of stability in the OPEC member’s production and exports.

PLATTS:

• Shell bid 100k tons of Urals at Dated -$1.05/bbl for Sept. 22-26, Sept. 24-28: trader monitoring window • Price was the highest since early February, compared with its previous bid at -$1.25/bbl on Sept. 7 • READ, Sept. 7: Mars, SGC Crudes Jump to Multi-Month Highs Amid Gulf Outages

Eni bid 80k tons of Urals at Dated -$1.15/bbl for Sept. 28-Oct. 2 delivery to Mediterranean

On the West African front, Nigeria is still struggling to move cargoes as Angola defers some more into Sept from Aug. There is still over 90% of Nigerian crude available for Oct as WAF struggles. Angola is selling at their “new normal” reduced rate but at least inline with the last few months.

Angola revised loadings for its Plutonio, Dalia and Saturno crudes for July through September. Spain’s imports of Nigerian crude in July rose to the highest for the time of year in data going back 25 years.

• No bids/offers for WAF on Platts window

ANGOLA DEFERRALS:

• Angola has rescheduled a 1m-bbl cargo of Plutonio crude from August into September • Loadings for Plutonio revised to 32k b/d in August and 67k b/d in September

ANGOLA/DJENO SALES:

Angola has sold almost 90% of its planned crude loadings for next month as the OPEC producer’s sales gain pace compared with September.

• Four to five cargoes of Angolan crude out of 38 scheduled export shipments are still looking for buyers o Drops from seven to eight unsold consignments on Sept. 1 • October’s selling pace has been faster, recovering ground from the previous month, traders said • One to two cargoes of Republic of Congo’s Djeno crude are yet to find a buyer out of seven planned o Drops from four to five unsold shipments on Sept. 1

While Nigeria oil and condensate production slumps to the lowest this year, and still unable to clear resulting in a big pick-up in floating storage in the region. Some of this will clear as Angola picks up, but the Nigerian slow down and deferrals will weigh in the near term. There will also be some additional sales of Nigerian crude into the U.S. following Ida and India throughout Oct. This will provide some uplift soon, but we still expect to see broader discounts in order to move barrels- especially following OSP cuts from KSA and Libya (so far.)

CPC and ESPO loadings have been trading at a broad discount as volumes have increased and demand remains a bit soft.

• Petroineos withdraws bid for 130k tons of CPC at Dated -$1.70/bbl for Sept. 27-Oct. 1 • Mitsui offered 85k tons of CPC Blend for Sept. 20-24 at Dated -$1.95/bbl: trader monitoring Platts windowGrade last traded at -$1.75 on Aug. 31 • A total of 32 cargoes of Russian ESPOcrude totaling 3.2m tons are scheduled to be shipped from the port of Kozmino in October, according to a preliminary loading program seen by Bloomberg. • Equates to 757k b/d, the highest since May 2020; compares with 718k b/d in September • All shipments in October program are 100k tons

The Middle East has more volume coming to market with the end to summer demand for electricity and the OPEC+ increase of 400k. Exports were a bit soft out of the UAE, but the discounts still remain wide comparing Brent and WTI to Dubai- keeping Middle Eastern crude flowing. Broader discounts are appearing in the North Sea based on an increase in volumes and general slow down in Asian demand.

• Iraq boosted oil exports by 4% in August to a five-month high, with shipments from the southern port of Basra jumping along with an increase in central government sales via a pipeline from northern fields to Ceyhan in Turkey. • Exports rose to 3.389m b/d last month, up 132k b/d from a revised 3.26m b/d in July, according to tanker-tracking and port-agent data compiled by Bloomberg • Sales to China, Iraq’s largest customer, retreated from a six-month high in July, settling at 901k b/d in August; that number may increase as tankers carrying the equivalent of about a quarter of a million barrels a day of crude are still to designate a port for delivery; exports to China in July exceeded 1m b/d for the first time since January • Sales to the U.S. surged to 157k b/d from 32k b/d in July • Shipments to India and South Korea also rose • rude and condensate shipments from the UAE slipped slightly m/m in August to a three-month low, even as exports to China surged to a 13-month high, while flows to most other nations dropped. • North Sea benchmark crude prices dropped sharply in recent days following a big increase in loadings planned for October. • The differential for Forties, the grade which is usually used to set the global benchmark Dated Brent, dropped to a discount of six cents a barrel to that marker on Tuesday, according to assessments by S&P Global Platts. That was the first time the grade had flipped to a discount since mid-June. Just a week ago, it was still at a premium of about 80 cents. • The weakness in North Sea grades comes as loadings of the region’s 13 main crudes are set to surge to 2.1 million barrels a day in October, the most in more than four years. Forties will see a jump of about 90,000 barrels a day, the biggest increase of any grade. Norway’s giant Johan Sverdrup field will pump a record 568,000 barrels a day next month.

China released 22M barrels from the SPR as the country struggles to manage commodity prices and underlying inflation. This release comes at a time with elevated storage (onshore and offshore) as well as more cargoes slated to head to Asia. Refiners are trying to manage flow by increasing exports, but even as imports increased- we had a bigger export of products offsetting some of these benefits. We also got a glimpse of some new import quotas opening up for some teapots:

• NDRC approved 2 Mt Shenghong import quota for Q4 21, 16 Mt from 2022. • We expect 15 Mt of fresh quotas to be awarded imminently for Q4 21, including allowance for Rongsheng Phase 2. o Teapot interest in Oman, ESPO, Johan Sverdrup picking up. o Majors scramble for Mars alternatives amid low inventories. o SPR headlines may be referencing July/August release; majors need to refill later.

We expect there to be additional releases from China’s SPR to manage internal costs as gasoline and diesel prices were increased again- but not enough to cover the recent run in crude.

China: crude imports were at 10.53mbpd in August vs 9.75mbpd in July and 11.23mbpd in August20 - custom data. China’s gasoline exports so far this month have been at 422k b/d, the highest level since May, according to data from Vortexa.

• That compares with 240k b/d in Aug. and ~100k b/d in July • Diesel exports so far this month are at 360k b/d, also the highest since May; compares with 224k b/d in Aug. and 160k b/d in July

China crude demand will remain fairly stable over the next 2 months or so with some acceleration in Oct along seasonal norms. The biggest issue in China remains the underlying slowdown in their economy- especially as the local consumer struggles.

China is struggling across many facets of their economy with a developing problem as Typhoon Chanthu is set to hit close to two main ports. So far there looks to be a near perfect hit in Taiwan, which will complicate global supply chains further- especially on the semiconductor front.

China is facing a corporate debt problem as Evergrande bonds remain under pressure, which is causing a much bigger headache for the CCP and PBoC. The collapse came as the company planned to suspend interest payments on loans from two banks due Sept 21 st putting them in technical or rather “selective” default. The concern has spread across the real estate sector as more pressure is coming from investors and regulatory agencies. The CCP has been laser focused on bringing down the cost of living, which has been a clear path to pick up local consumption under the Dual Circulation Strategy and expanded under the Common Prosperity. The CCP has targeted home prices and private tutors/schooling as early steps to address the elevated cost of living in the country.

I will be sure to update the Asian economic backdrop next week, and do a deeper dive on inflation across the supply chain- especially in the U.S. The PPI numbers today came in well ahead of estimates, which will pull CPI even higher. PPI is a great way to gauge the underlying cost for businesses, and what kind of pressure will try to be passed on to the consumer. Another surprise to the upside keeps the inflation metrics moving in the wrong direction…