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Energy Macro Review – October 2015

TDA’s October report of statistics and commentary on the macro environment in the energy industry is available here:

TDA Macro Oct Image

Highlights Include:

Page 2: 4Q 2015 is forecast to be the least oversupplied quarter of 2015 for global crude markets. With a seasonal demand spike and positive demand revisions for missing barrels, the market may be very close to balanced in this period.

Page 3: IEA forecasts for crude oversupply in 2016 have fallen rapidly in the past two months.

Page 4: IEA forecasts global crude oil markets to balance in 3Q2016 and fall into seasonal shortage in 4Q2016.

Page 9: U.S. vehicular miles driven hit an all-time high in July 2015.

Page 15: Chinese crude oil imports continue to remain strong in the summer months despite worries of an economic slowdown.

3rd Quarter 2013 Energy Review

For a presentation that reviews the latest macro trends in the energy industry, please click here.

Front month WTI increased +6.0% during the 3Q of 2013 from $96.56/Bbl to $102.33/Bbl.  The increase raised WTI’s year-to-date performance to +11.5%.

The quarter was similarly strong for international Brent oil prices with were also up +6.0% during 3Q 2013 rising from $102.16/Bbl to $108.37/Bbl.  However, as opposed to WTI’s +11.5% gain on a year to date basis, Brent prices have fallen by -2.5% in 2013.

Natural gas prices were flat for the quarter and are up +6.2% year to date.

Several factors have contributed to this recent rise in oil prices and the divergence between the performance of WTI vs. Brent oil prices since the beginning of the year.

Supply Disruptions in the Middle East

a. Labor strikes in Libya removed an estimated 1 million Bbl/Day of production in 3Q13.  The country’s production has partially recovered and is currently 700,000 Bbl/Day.

b. Iraq’s exports slowed by approximately 500,000 Bbl/Day during the quarter due to maintenance on a major export terminal.

c. Although all of Syria’s exports of 200,000 Bbl/Day have been offline since late 2011, the threat of military action against Assad’s regime have once again stoked fears of a broader conflict in the region.

d. Similarly, although a minor producer of oil, the deposition of Egyptian President Mohamed Morsi in July led to an increase in the political risk premium of oil due to concerns that crude oil shipping through the Suez Canal could be at risk.

Supply DisruptionsSource: Raymond James

Demand Improved Around the World

a. Although January to June 2013 U.S. oil demand figures were essentially flat, July and August showed an average year-over-year increase of 388,000 Bbl/Day.  After several years of falling oil demand, the strength of the U.S. summer driving season is encouraging.

b. Similarly, after concerns about flat Chinese oil import growth from January to June 2013, reports for July and August showed strong year-over-year increases.  July and August showed a large year-over-year average increase in oil imports of nearly 900,000 Bbl/Day.

c. Modest GDP growth from the Eurozone put a technical end to the recession in Europe.  Although we have yet to see data that supports oil demand growth in Europe, flat 2Q13 year-over-year oil demand is encouraging relative to the steady contraction we have witnessed over the past few years.

China ImportsSource: Bloomberg

New Pipelines De-Bottlenecking Cushing, OK Oil Inventories

a. We forecast that pipeline capacity will increase by +235 MBbl/Day by year end 2013 and another +1,068 MBbl/Day by mid year 2014.  A total of +1,303 MBbl/Day of new pipeline capacity should be installed during this time period.

b. After two years of U.S. increases in oil production overwhelming existing infrastructure, major projects in 2013 and 2014 will increase outbound capacity and allow oil volumes to be diverted away from Cushing, OK.

c. We believe that this will allow the U.S. to substitute domestic volumes for nearly all light and medium waterborne imports of crude by 2015.

d. This has supported WTI prices as they have moved up to narrow the discount to international crude prices.  However, with the prospect of forgone U.S. imports adding to global supplies in the near future, international crude prices have been nearly flat in 2013.

TXGC_PipelinesSource: EIA, RBN Energy, Simmons & Co.

Energy Macro Review – July 2013

For a presentation that reviews the latest macro trends in the energy industry, please click here.

This month we’ve dedicated a few slides to discussing the sharp rise in WTI oil prices vs. international crudes.  In late June and early July, there has been a large drop in the open interest of WTI contracts while the front month Brent – WTI spread has fallen to $3.00/Bbl currently. Nevertheless, the Louisiana Light Sweet (“LLS”) – WTI spread continues to sit at $7.00/Bbl.  If there was a true physical de-bottlenecking taking place, we would expect LLS pricing to fall relative to WTI.  We would also expect to see a decline in Cushing inventories, but this has yet to happen on a significant scale.

Brent-WTI Spreads

The likely cause of this narrowing Brent-WTI spread is increasing transparency around pipelines that will de-bottleneck Cushing, OK (delivery point for the WTI contract) over the second half of 2013.  Currently, inventories at Cushing, OK are reported at 46.0 Mil. Bbl, near their record high of 51.9 MMBbl in January.  Permian pipeline additions will divert crude volumes away from Cushing, OK and to the Gulf Coast by an estimated 250,000 Bbl/Day by 4Q 2013.  Additional pipeline takeaway capacity from Cushing, OK from the Seaway pipeline will also also help alleviate the the bottleneck.  Due to these pipeline projects, oil inventories at Cushing, OK should decrease rapidly by the end of the year.

Over the longer term, we expect strong U.S. domestic crude production growth to significantly decrease the amount of light and medium crude imports to the U.S.  This may create a new bottleneck for light and medium crudes on the U.S. Gulf Coast.  With no ability to export crude and no additional refining capacity for light and medium crude, growing crude volumes may have difficulty finding a market.  In this scenario, which the market appears to be anticipating, both WTI and LLS will likely again trade at significant discounts to international crudes.

Brent-WTI Curves