Constrained

Published at 12:10 12 Mar 2018 by . Last edited 15:12 5 Nov 2018.

Physical crudes remain weak seasonally. Just as it seemed Med grades may have found a bottom, Urals took another step down, despite falling to levels that would incentivise European refiners to switch to Urals, as the steep cuts in Middle Eastern OSPs now make those sour grades more competitive in Europe. Meanwhile, Dubai is in contango, although this is driven mostly by trading agendas of Chinese majors, teapot run cuts are dampening overall sentiment. Together with a small overhang in WAF barrels, concerns are rising that prompt Brent may slip into contango.

This is not our view and was not a huge focus at industry gatherings in Houston and New Orleans last week. Trump’s tariffs on steel imports raised significant concerns about stoking trade wars and costs for the oil industry, but people seemed more sanguine about the prospects for global growth, unlike in London in February. The window of opportunity for the bears is narrowing fast.

The main talking point was about US production, with growth estimates varying wildly between physical players (upstream, midstream and downstream) compared to financials and analysts. The divergence was driven by Permian infrastructure constraints, both oil and gas. Indeed, this informs our US crude output projections of 1.1 mb/d as well. With only 0.14 mb/d of new pipes starting between now and year-end and production set to rise by 0.57 mb/d, we see Permian takeaway constrained from August. For gas, New Mexico has more stringent flaring rules than Texas, and this year most of the expected Permian growth is set to come from Delaware.

This not only means US production growth will have to slow but also that incremental output (including from Rockies and Midcon) will not find its way to the export market, supporting Brent.

Permian oil takeaway capacity, mb/d Permian gas takeaway capacity, bcf/d
Permian oil takeaway capacity Permian gas takeaway capacity
Source: Company reports. Energy Aspects Source: Company reports. Energy Aspects

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