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The FreightWaves Oil Report: A Tumbling Market Pushes Prices Down to Levels of Mid-2017

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The FreightWaves Oil Report: A Tumbling Market Pushes Prices Down to Levels of Mid-2017

--Oil prices fell. They fell by a lot. The price of West Texas Intermediate crude oil, the U.S. benchmark, settled Thursday, December 13 at $52.58/barrel on the CME (formerly the Chicago Mercantile Exchange). The price of ultra low sulfur diesel on the CME settled that day at $1.8765/gallon. By the time markets had settled for the week on Friday, the respective prices were $45.59/b for WTI and $1.7327/g for diesel. The CME crude contract had not a settlement less than $46 since July 2017. Those prices did mark the lowest settlements of the week. It's rare to have a market selloff that strong on the back of essentially no news in the oil market. But the oil market has been gripped now with fears that its fairly conservative estimate that global oil demand will grow 1.5 million barrels per day (b/d) next year won't be realized. Projections of the growth of oil supply next year from non-OPEC nations is well above that 1.5 million b/d number. That was the main driving force December 7 when OPEC and several non-OPEC countries agreed to a cut of 1.2 million b/d in output, 800,000 b/d out of OPEC and the remainder from a few non-OPEC countries led by Russia. If the growth rate sinks to something like 1.3 million b/d, and supply remains the same, those 200,000 b/d might not sound like much in a global market that's close to 100 million b/d. But oil, like all commodity markets, gets priced on the marginal barrel bought and sold, marginal being the last price recorded. If the market is a few hundred thousand barrels a day out of whack, that has a huge impact on price; the fact that as a percentage of the total market it's tiny is irrelevant. That's what is spooking traders and helping to push markets down to levels not seen since the middle of 2017.

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--The one key report that came out this week was fairly bullish in the face of declining prices. The weekly report from the Energy Information Administration (EIA), reflecting production and consumption for the prior week, showed strong demand for distillates, a slice of the oil barrel that includes diesel. The report showed distillate inventories dropping more than 4.2 million barrels, more than 10 percent off the five-year average inventories for this time of the year. Comparison against the five-year average is considered a key indicator that the market looks to as guidance regarding the adequacy of stocks. In addition, an EIA category called "product supplied," which the trading community refers to as "implied demand," was 4.886 million b/d, the highest weekly number since 2003. The weekly numbers are often subject to revision, and the number reported was so much higher than recent reports that it's reasonable to assume it may have been an outlier. But in a market gripped with fears that growth is slowing rapidly, it was a reminder that for now, the market looks fairly strong.

--U.S. diesel consumers got a break this past week. According to a report in Petroleum Argus, Mexico's energy industry will be delaying a requirement that automotive diesel use be switched to ultra low sulfur diesel (ULSD) consumption on January 1. In its latest monthly report, the EIA  reported that U.S. exports of ULSD in September to Mexico were 294,000 b/d, a significant amount. With the rule in place, Mexico would have been scrambling to find a replacement for the high sulfur diesel it now uses in its automobile sector. As Argus reported, "If the rule was to take effect on 1 January, Pemex's 96,000 b/d, 500ppm diesel production would have to be exported and substituted with imports, which already reached 269,000 b/d in mid-December (from all countries). The ruling would increase import demand by about 35 percent based on those figures." The U.S. presumably would have been the source for much of that, and even if it wasn't, that shift in demand to ULSD from higher-sulfur material would have tightened the market. But that change now has been delayed a year.

--The U.S. production juggernaut rolls on. The North Dakota Pipeline Authority reported that the state's production average was more than 1.39 million b/d in October, a jump of more than 32,000 b/d from the prior month. It's a one-month record.

--To illustrate one of the reasons U.S. production keeps rising, the increased efficiency in drilling is producing more product from fewer rigs. For example, Parsley Energy announced this past week that it expects to deploy 12 to 14 development rigs, and 3-4 frac spreads "on average" next year. That's down from 16 rigs this year and five frac spreads. But at the same time, it expects that its output is going to rise about 20 percent. That sort of shift is one of the reasons why the rig count released by Baker Hughes has become a less reliable soothsayer on what production will be. Technological developments are pushing out far more product per well and per drilling platform. There will almost certainly be more capital expenditure cuts in coming weeks as companies grapple with a suddenly lower price environment. But that doesn't mean the impact on output is a 1:1 correlation.

--The price is not the only thing falling in the oil patch. The value of properties is too. Bloomberg reported that Royal Dutch Shell is likely to be the winning bidder for Endeavor Energy Resources at a price of approximately $8 billion. When the bidding on the company began earlier this year, the company was expected to fetch $15 billion.

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