Back to the future

Published at 12:33 8 Aug 2016 by . Last edited 11:17 22 Aug 2019.

As Atlantic Basin gasoline has stabilised, so has crude, aided by a bout of short covering. With a huge increase in machine-led momentum trading in recent years, such volatility is to be expected until the supply declines translate into visible stockdraws. Still, run cuts will continue to weigh as more European and US refiners get added to the list of those trimming utilisation rates.

So, in the near term, with refinery turnaround season upon us, the pressure on the crude structure will remain, even though cheap freight can help provide a floor on timespreads. Asian crude buying is also picking up slowly, although mainly of medium sour grades. With Asian light grades still dire, the pull on light sweet crude from the Atlantic Basin remains somewhat tepid.

Yet, supplies continue to decline, as is evident from the latest earnings season. In Q2 16, after six quarters in which production rose y/y by an average of 0.6 mb/d, the oil majors’ liquids output fell y/y to the lowest since Q3 14. Shallow water production is collapsing, while deepwater declines have also stepped up, despite being somewhat masked by growing deepwater output from Brazil.

In this scenario, many believe the US will come to the rescue, especially given many companies exceeded production guidance in the latest earnings season. These companies are almost all operating either in the Permian or the STACK/SCOOP, while other basins have disappointed.

While these basins will continue to deliver barrels competitively, increasingly their growth would first have to offset flat to declining output in other regions in the US, and then all the declines elsewhere, a Herculean task indeed. GoM output declines, in particular, have stepped up sharply.

Fig 1: Gulf of Mexico output by depth, mb/d Fig 2: Oil majors’ liquids production, mb/d
Gulf of Mexico output by depth chart Oil majors’ liquids production chart
Source: BOEMRE, Energy Aspects Source: Company reports, Energy Aspects

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