Canada To the Rescue. The Energy Report 03/07/19

Bring us your heavy oil! U.S. Oil imports surged last week by over 1 million barrels a day. Almost half of that was from Canada. It seems our friends in Canada that had cut back production are now trying to fill the void of that lack of heavy oil from Venezuela. This is critical because based off U.S. demand expectations, we will be short of product unless U.S. refiners produces a record amount of gas and diesel. That will be difficult without the heavy oil that many U.S. refiners are geared up to deal with. While the oil market was shocked by the 7.1-million-barrel increase in crude supply reported by the Energy Information Administration (EIA), a big drop in oil products gave us support. The EIA reported a much bigger than expected 4.2 million barrels drop in gas supply and a 2.4 million barrels drop in distillate supply leaving those inventories 3% below the five-year average. This came as demand for gasoline and distillates rose last week with gas consumption back over 9 million barrels a day approaching summer like numbers even as most of the country is in a deep freeze. Distillates also fell and it is great that Canadian heavy oil imports are up because we will need it ahead of the planting season where farmers will be buying a lot of diesel to run their planting equipment.

Overall demand on the four-week moving average is still impressive. The EIA reported that total products demand was 20.4 million barrels per day, up by 0.9% from the same period last year. Gasoline demand averaged 8.9 million barrels per day, down by 2.0% from the same period last year due to bad weather but jumping back this week. Distillate fuel demand averaged 4.1 million barrels per day over by 0.3% from the same period last year. Refineries ran higher than expected at 87.5% of their operable capacity last week. Still deep in maintenance season, gasoline production increased last week, averaging 9.9 million barrels per day. Distillate fuel production increased last week, averaging 4.9 million barrels per day. U.S. crude production held steady at a record 12.1 million barrels a day.

The oil market was less than impressed with Exxon and Chevron’s plans to go big in shale as their stocks worry about their long-term ability to increase their go to reserves. John Hess, CEO of Hess Corporation is warning that shale oil moderating as long-cycle output in fast decline. The long-cycle oil production remains on “life support,” while shale output’s future climb will likely be more moderate than many analysts expect. “Shale is not the next Saudi Arabia,” Hess said during a Center for Strategic and International Studies event.

Hess said the resource base of shale is not as strong as that of Saudi Arabia, and the U.S. cannot sustain its current growth rate. Still, shale will make up as much as 11% of the world’s oil supply by the middle of next decade, up from 6% now, Hess said.  U.S. oil production averaged nearly 10.95 million b/d in 2018, a new record and up from about 6.5 million b/d of oil output averaged throughout 2012, the U.S. Energy Information Administration reported Thursday. EIA expects that U.S. oil output crossed the 12 million b/d threshold in January. Nearly all that growth has been fueled by shale, particularly in the Permian recently, EIA said. But Hess said Friday that investors, who have pumped $50 billion in public equity and $20 billion in private equity into production projects, are now pushing producers to slash costs, likely preventing a surge in output according to Platt’s.

For oil that is the biggest debate. Can shale offset OPEC cuts? In the short-term, probably not. Oil quality issues will keep the mix leaning us towards the tight market side. We need oil now as we get closer to the summer driving season. Supply is going to be very tight and oil should breakout higher soon.

The EIA reports also that U.S. net electricity generation increased by 4% in 2018, reaching a record high of 4,178 million megawatt hours (MWh), according to EIA’s Electric Power Monthly. Last year was the first time total utility-scale generation surpassed the pre-recession peak of 4,157 million MWh set in 2007. Weather is the primary driver of year-to-year fluctuations in electricity demand. The increased demand for electricity in 2018—including record demand in the commercial and residential sectors—is largely attributable to cold winters and a hot summer.

Population-weighted cooling degree days, an indicator of warm weather and air conditioning demand, reached a record high in 2018. Heating degree days, the corresponding indicator of cold weather and space heating demand, were also higher in 2018 than in recent years. Electricity is the primary fuel used for air conditioning, but a variety of fuels are used to meet demand for space heating. Consequently, cooling degree days have a greater influence on overall electricity generation than heating degree days.

Thank goodness for record gas production or our economy might be at risk without record nat gas production.
Phil Flynn


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