Extract from crude oil:
Notwithstanding the higher-than-seasonal weekly crude stockbuild of 7.2 mb, the North American crude outlook is looking increasingly supportive, particularly as refineries exit maintenance. As we’ve said repeatedly in the last month, Permian output may not be as strong as some agencies predict over the next 18 months. Indeed, even our forecast of 0.75 mb/d y/y may be threatened by ‘child’ wells underperforming their ‘parents’ and reducing output potential in some Permian acreages (see our E-mail alert: Parent-child well interference imperils Permian crude oil production forecasts, 2 April 2019). Even when production targets are achieved, the quality of that production continues to grow increasingly light, prompting midstream companies and pricing agencies to segregate those streams from the benchmark grades, and those light parcels are trading $1.50 per barrel or more under benchmark grades. This segregation likely played at least some part on the strong cash rally in April WTI, when deliverable material swung into short supply amid pump-over issues. While DUC wells remain as a reserve for production companies to draw on, it is worth remembering that a large portion of the final completion is related to fracking, and we believe that as many as 30% of these wells have integrity problems and/or other issues that make their completion unlikely, especially given that many are over four years old. The Permian needs to see a sustained rise in frac spread counts to supply necessary labour to sustain current drilling as well as swing over to complete DUC wells. Without higher frac spread counts, it becomes difficult to grow output consistently. Breakevens in the Permian are getting trickier as well, especially with Waha natural gas trading at -$1.15/mmbtu, a level at which a seller must, at least theoretically, pay a buyer to take the supply. Breakeven costs could also be pushed higher by weak natural gas prices, higher infrastructure commitments in certain regions, water disposal and other costs. And finally, while a higher flat price recently is certainly helpful, it is important to recognise the lag between price performance and higher drilling, especially in a world with much higher capital discipline across the producer community. Any mis-step from spending too early will be punished by Wall Street and investors.
Extract from oil products:
US gasoline inventories fell by 1.8 mb w/w to 236.8 mb, some 3.6 mb above the five-year average. Refining malfunctions in PADD 3 were reported at ExxonMobil Beaumont and Citgo Corpus Christi, along with the FCC unit at the Pasadena refinery. These malfunctions, coupled with delays in the Houston Ship Channel, provided tailwinds to USGC gasoline, despite an inventory uptick of 0.6 mb w/w to 81.4 mb. USGC gasoline prices have increased for three consecutive days after the roll to Cycle 21, keeping gasoline line space along the Colonial Pipeline firmly in negative territory. The arb from the USGC to the USEC has been slammed shut since 17 January. PADD 2 stocks fell by 1.1 mb w/w to 53.8 mb, falling 4 mb below levels at the same time last year. Gasoline prices in the Chicago region climbed to a six-month high, as cash prices for Chicago regular CBOB rose by 1.89 c/gal. Group 3 prices also witnessed significant increases with 8.5 RVP V grade at a premium to Colonial A2 grade, well above the cost of shipping on the Magellan pipeline and approaching the cost of shipping on Explorer. Additionally, there have been some indications that off-summer spec 13.5 RVP V grade will be blended to summer specs as prompt prices for 13.5 RVP grew ahead of the Magellan Central System’s final spring RVP transition in May. PADD 5 stocks slid by 0.2 mb w/w to 31 mb, some 1.1 mb lower than levels reported last year. Gasoline differentials on the US west coast have increased to a five-month high on the news of refinery outages, including Marathon’s 0.26 mb/d Carson refinery.