Tag: oil supply

Energy Disruptions Are Causing Metals Production/Price Havoc

Unplanned global oil supply disruptions averaged more than 3.6 million barrels per day in May, the highest monthly level recorded since the U.S. Energy Information Administration started tracking global disruptions in January 2011.

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From April to May, disruptions grew by 0.8 million bpd as increased outages, largely in Canada, Nigeria, Iraq, and Libya, more than offset reduced outages in Kuwait, Brazil, and Ghana. Six months later, the U.S. is joining the energy disruption party. On Saturday, an explosion and fire in Alabama sent futures surging and traders scrambling to supply the East Coast states with fuel.

[caption id="attachment_81729" align="aligncenter" width="550"]EIA Energy Disruptions Oil supply disruptions as measured by the U.S. Energy Information Administration. Source: EIA.[/caption]

Colonial Pipeline Co., which carries gasoline and other refined products from Houston to Linden, N.J., was forced Monday to shut its two main pipelines after a crew working near the site of a prior spill hit the line with construction equipment.

Pipeline Breakdowns

The company, owned by a group that includes Koch Capital Investments Co. and a unit of Royal Dutch Shell Plc, said its projected restart time may change as it gets more access to the site of the blast near Birmingham.

This was the second major supply disruption in as many months. A spill in September shut the line for 12 days, cutting supplies to 50 million Americans in the Southeast. The September spill caused gasoline prices spiked throughout the region, rising more than 20 cents a gallon in the Southeast, particularly around Atlanta.

Regulation of Pipeline Construction

The protests involving the Dakota Access Pipeline and its court-approved construction have caused uncertainty among oil traders, too. Not because of a disruption, per se, since the pipeline has not even opened, but because it has tightened supplies based on future assumptions. Traders and suppliers are anxiously awaiting the 470,000 bpd capacity that it promises. Oil futures bets that predicated on the pipeline opening have to be recalculated and that has caused prices to spike.

Energy Transfer Partners, the developer of the $3.8 billion proposed project recently issued a memo to employees that the pipeline is nearly 75% complete. The Obama administration has requested the company voluntarily halt construction on the project on federal land. The administration has also said it has asked the Army Corps of Engineers to come up with alternatives for rerouting the project.

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The 1,170-mile pipeline is planned to transport crude oil daily from the Bakken production area of North Dakota through South Dakota and Iowa to an existing pipeline in Patoka, Ill. It would travel less than a mile north of the Standing Rock Sioux Indian Reservation near Cannon Ball, N.D., crossing under Lake Oahe, a dammed section of the Missouri River that provides the tribe’s water supply.

The Standing Rock Sioux had previously challenged the pipeline in court but federal judge James Boasberg rejected its argument that the pipeline comes to close to tribal land and endangers the water supply. The Justice Dept., Corps. of Engineers and Dept. of the Interior stepped in and issued a joint statement asking Energy Transfer to stop construction on federal land. The problem with that, though, is that those departments have no power to stop Energy Transfer from continuing work on the parts of the pipeline that are on private land. So that has continued and the pipeline has reached the 75% completion state it’s in today which is pretty close to a point of no return when it comes to construction planning.

New Pipelines Face Opposition

The Wall Street Journal reports that more than 20,000 miles of new crude-oil pipelines have been built in the past decade, and natural-gas pipeline infrastructure has expanded as well, as production from U.S. shale formations increased rapidly, though these projects are also facing opposition.

But the pipes that carry gasoline, diesel and other fuels haven’t experienced the same growth, because fuel demand isn’t rising everywhere and because these lines tend to run through more populated areas than where crude is drilled and, therefore, face more public resistance.

Disruptions and delays cause havoc for energy intensive metals production. Steel mills and aluminum smelters require reliable energy sources as well as cost certainty for production and delivery.

As we recently noted in a post on the quest to fuel and iron ore reducing tower with hydrogen instead of natural gas, the potential for cutting emissions by changing the way we create metals and other industrial processes is far greater than that of fueling cars or homes simply because industrial plants use so much energy.

[caption id="attachment_81747" align="alignleft" width="250"]EIA_Regular_Gasoline_Prices_250_110316 Source: U.S. Energy Information Administration.[/caption]

Although global supply of petroleum products has far exceeded global consumption for the past year and a half, disruptions have plagued metals production and delivery.

There’s significant evidence that the supply/demand gap is narrowing, too. The Energy Information Administration says that gas prices are likely to continue rising in the short term.

Converting natural gas to electricity for energy intensive manufacturing is still far from an ideal system, too.

“Even though we have natural gas that is online and we have massive reserves nationwide, the infrastructure to be able to get the natural gas from those reserves to new electricity plants that are yet to be built,” said Michael Whatley, executive director of the Consumer Energy Alliance, “as well as the pipeline capacity… it’s going to be a challenge for us.

Oil Prices Have Recovered, But It’s No Rally

Oil Prices Have Recovered, But It’s No Rally

As a little taster ahead of our analysis of the annual Energy Review from BP (stay tuned for that next week) we thought a review of recent expectations on the direction of the oil market would make an interesting canapé.

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That the oil price has collapsed is old news and the recovery the last five weeks has everyone second-guessing themselves. Is this the bottom or just a temporary bounce only for further weakness to follow?

[caption id="attachment_76832" align="alignnone" width="300"]Source Financial Times Source: Financial Times[/caption]

The question is not an academic one. Big users of energy are keen to know if they should be hedging forward or buying short term pending further falls. Consumers of metals know energy prices over the medium term have an influence on prices and any company involved in distribution of their products, or as a service, knows oil prices have a direct impact on transportation costs.

Developing Markets

Many developing markets reliant on the export of oil or natural gas are facing dire financial prospects at current prices with default in places such as Venezuela a certainty this year. Much of the blame is put on China’s slowing economy but, in reality, China is importing as much oil as it has ever brought in, albeit the growth in that demand has slowed. The problem is with supply.

OPEC had expected the capitulation of the US shale oil industry long before now. Drillers have proven both resilient and resourceful in maintaining production but new drilling has slowed markedly, a situation that is already slowing production volumes down.

Fewer Rigs Drilling

The FT reported last week news from Baker Hughes, the oilfield services group, who said 31 less rigs were drilling last week compared to the week before, the steepest fall in 10 months. Prior to two weeks ago, the rig count was 467 and even that level was some 71% below its peak in October 2014.

Wood Mackenzie, a consultancy, said they expect the number of rigs drilling the more productive horizontal wells in the U.S. to drop from 372 this week to less than 250 in the first half of 2016. Observing that, until now, the drop-off in drilling has had little effect on US crude production, which peaked last April at 9.7 million barrels per day, and by November had only dropped by 376,000 bpd to 9.3 million, but the decline is set to accelerate this year.

The Financial Times states that about 96.5% of global oil production can cover its operating costs with Brent crude at $35 per barrel, including most of the US shale industry, but that does not include the cost of drilling and completing new wells.

Oil Prices’ Reshalience

Analysts say very few US shale wells can cover their full costs with oil at $30, and as production from existing wells declines, and fewer new wells are brought into production, US oil output is expected to decline.

Nor is the US alone, Wood Mackenzie’s analysis is reported as showing that although about 3.4m bpd of production worldwide was losing money with Brent at $35 per barrel, most of it was not being shut down.

For example, some 2.2 million bpd of Canadian tar sands has considerably higher operating costs but huge sunk investment on debt that needs to be serviced. In addition, once production is closed down it is expensive to restart and damage can occur to the reservoir and the equipment. These producers are hanging on hoping prices will recover but the world’s largest oil trader Vitol is reported in a Telegraph article as saying we may never see $100 per barrel oil again.

In their opinion, oil supply and the inventory that has built up will keep the world so well supplied that for years to come the best producers can expect is an average between $40 and $60 per barrel. Oil majors including BP and Royal Dutch Shell have both said they are looking ahead to a rebalancing of the market in the second half of the year, which could support oil prices at around the $60 a barrel mark by early 2017, but we would expect oil producers to look at things positively. It could be less. How is additional supply from Iran’s return to the market going to do anything other than add to supply?

The Long Road

Of course lower oil prices are having an impact on demand. Global oil demand in 2015 has increased by more than twice its 10-year average according to the FT with continued growth this year expected. As we have seen in the US, low gas prices have stimulated demand for gas-guzzling sport-utility vehicles, and lower natural gas prices — which are linked to the oil price — have had a beneficial impact on the conversion of coal-fired power generation to natural gas.

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The same article moves on to a longer-term view, more of which will no doubt be discussed in next week’s BP review, which looks at not so much the next twenty weeks as the next twenty years. But that, as they say, is for another day. For now, the prospects for an oil price increase do not look strong. If we see $40-50 per barrel in the second half producers will be doing well. Some are looking at a further weakening before that.

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