Extract from crude oil:
In recent weeks it has been hard to look beyond Cushing stocks, although the hub managed to register a small -0.12 mb draw last week, the first in nine weeks, after building by over 13 mb over the prior eight weeks. The builds have led to weakness in WTI, with prompt timespreads falling by around 30 cents since mid-October. But with flat price collapsing in recent days, dragged lower by fears of OPEC’s inability to cut output thanks to the complicated US-Saudi relationship, higher-than-expected Iranian waivers and surging US production, exacerbated by negative gamma from producer hedging, the focus has shifted to US production and whether rampant growth can continue at these price levels, especially if they are sustained. Lower prices will be compounded by takeaway constraints in several areas: the Permian, Bakken and Canada. For us, Canada and the Bakken are the two immediate areas of concern. Bakken production has soared in August and September (see E-mail alert: Bakken production soars in September, sharp fall in Bakken diffs may slow growth if prolonged, 16 November 2018), exceeding our well-level model forecasts, which have generally been very accurate at tracking output. Following Q3 18 updates from key independent Bakken producers, there was little to suggest that a material slowdown is in the offing, although we do note the flat price collapse that has occurred since. Continental reported record Bakken output of 0.17 mboe/d (+23% y/y) in Q3 18, with oil output in the basin higher y/y by 21%. Whiting raised oil output by 5 thousand boe/d to 0.11 mboe/d (+5% y/y), supported by new completion designs, while Hess raised output by 15% y/y to 0.12 mboe/d, with a crude share of 64%. Finally, Marathon reported a 44% y/y rise in supply. But the optimism from the Q3 18 calls may have been slightly premature. The Bakken-WTI differentials at Johnson’s Corner and Beaver Lodge have been seen trading between -$15 and -$20 vs WTI. At these levels, Bakken flat price at the wellhead is below shut-in economics in many places. If differentials stay this wide, or weaken even further, producers may begin to change their tune on their Q4 18 and 2019 production outlook. In the near term, we expect Bakken differentials to continue to remain weak, barring any winter shut-in related to freeze-offs. We have not yet reduced our production forecast, but if prices stay here we will reassess future growth numbers (which may essentially flatten out from here), especially given the aforementioned difficulty facing a market-balancing production cut deal at the 6 December OPEC meeting.
Extract from oil products:
US gasoline stocks fell by 1.3 mb w/w to 225.3 mb, with PADD 1 posting the largest w/w draw (3.0 mb) to finish the week at 61.7 mb. Despite the draw, US gasoline stocks are 14.8 mb higher y/y, with PADD 1 closing the week 8.2 mb higher y/y. After a steep decline last week, USGC differentials clawed back losses as the spread to New York Harbor narrowed. As a result, Colonial Pipeline line space values fell by 36% w/w, after reaching a two-year high on 16 November. Although significantly weaker than last week, the arbitrage from the USGC to the USEC remains open for RBOB, CBOB and conventional 87-octane gasoline. US Midcon markets remain firm, with a workable arbitrage to move CBOB from the USGC to Group Three and Chicago. Factors driving current market conditions include reduced product flows along Explorer Pipeline and a brief FCC outage at Husky’s Lima refinery. As the current PADD 2 maintenance programme winds down, with gasoline inventories near seasonal lows, PADD 2 inventories should build through February. US regular gasoline prices were 4 cents higher y/y at $2.61 per gallon for the week to 19 November.