A Precarious Balance: The Oil Market in 2019

EnerCom Dallas 2019February 28, 2019

Federal Reserve Bank of Dallas

Michael PlanteFederal Reserve Bank of DallasSenior Research Economist

The views expressed in this presentation are strictly those of the presenter and do not necessarily reflect the positions of the Federal Reserve Bank of Dallas or the Federal Reserve System.

• Global oil market overview• Demand-side stories• Supply-side stories

• U.S. oil update• Outlook• Crude oil quality: What’s it got to do with me?

Outline for Today’s TalkOutline for Today’s Talk

• Global oil market overview• Demand-side stories• Supply-side stories

• U.S. oil update• Outlook• Crude oil quality: What’s it got to do with me?-----Executive summary: I expect 2019 to be as exciting and unpredictable as 2018.

Outline for Today’s TalkOutline for Today’s Talk

Global Oil Market Overview

Global Oil Market Overview

NOTE: Latest prices are averages for the week ending 2/15/19. SOURCE: Energy Information Administration (EIA)

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A Summary of Recent Events

• WTI prices between $45 - $55 in 2017, up towards end of year

• Wild ride for prices in 2018• US oil production hit a record high• Global growth fears surged late 2018• Saudi Arabia adjusting production to

stabilize prices

$/Barrel

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1995 2001 2007 2013 2019

Global ConsumptionMB/D

Demand Side: Often Boring

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1995 2001 2007 2013 2019

Annual ChangeMB/

SOURCE: International Energy Agency (IEA)

Growth Forecasts Revised Down

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IMF’s Forecast for World Growth in 2019

SOURCE: International Monetary Fund (IMF)

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Spike in “Recession” Searches

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Index

Important to keep in mind where we are:

Forecasts Still Point to Growth

World GDP(change)

World oil consumption(change)

Forecast for 2019 growth +3.5 percent +1.4 mb/d

Average from 2012-2018 +3.5 percent +1.5 mb/d

Data for Great Recession (2009) -0.1 percent -1.0 mb/d

SOURCE: IEA;IMF

Supply-side: Usually not Boring

Record U.S. Production Growth

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SOURCE: EIA

MB/D

Iran Sanctions Back

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MB/D Iranian Crude Production

2014-2015 average

SOURCE: IEA

Venezuela Down the Tubes

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Venezuelan Crude ProductionMB/D

SOURCE: IEA

Decline of 1.2 MB/D(Jan. 2014 to Jan. 2019)

Saudi Managing Market

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Saudi Arabian Crude ProductionMB/D

SOURCE: IEA

Announced 9.8 mb/d for March 2019

• Call on OPEC for 2019: 30.7 million barrels per day• Revised down from 31.0 million barrels per day in January

• January OPEC production: 30.8 million barrels per day• The potential good, bad and ugly for 2019:

• Good: Production in Iran + VZ declines, shale underperforms, global economy beats

• Bad: Iran waivers extended, VZ declines, shale and global economy as expected

• Ugly: Waivers extended, VZ stabilizes, shale surprises to upside and economy to the downside

Outlook Murky for Saudi Arabia

U.S. Oil Update

U.S. Oil Update

SOURCES: Baker Hughes; EIA.

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MB/D Rig count

U.S. crude oil production

U.S. oil rig count

12.0 mb/d(Feb 15)

853(Feb 22)

U.S. Production Up Big time

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NOTES: Shale production estimate is from the EIA, based on Drillinginfo data. Lower 48 excludes Alaska and federal offshore areas. Alaska excludes federal offshore production. SOURCES: Energy Information Administration; Drillinginfo.

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Shale Leads the Way

SOURCE: EIA.

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Permian Basin

Eagle Ford

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Niobrara

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Permian is Most Prolific Basin

Texas is Biggest Oil Producer in U.S.

SOURCE: EIA.

Outlook for 2019

Outlook for 2019

Survey Says…

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BusinessActivity

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Q1 2018 Q2 2018 Q3 2018 Q4 2018Index

SOURCE: Federal Reserve Bank of Dallas.

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SOURCE: Federal Reserve Bank of Dallas.

Survey Also Says…

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SOURCE: Federal Reserve Bank of Dallas.

But It Also Says…

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Midland minus WTI Cushing

Midland minus LLS Crude

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Growing Pains in Permian

Note: Each series is composed of the difference of end of the period weekly closing prices. SOURCE: Bloomberg.

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If You Build it, Will They Come?

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MB/D Permian Pipeline Takeaway Capacity

Local Refineries Existing Pipelines Midland to Sealy Sunrise Extension

Seminole NGL EPIC Cactus II Gray Oak

ETP Permian-Nederland Jupiter Production Forecast

SOURCE: Federal Reserve Bank of Dallas.

Forecasts All Over Map

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EIA IEA OPEC Analyst A Analyst BMB/D

• 2019 should be as exciting and unpredictable as 2018.

• As always, various risks exist to the outlook:• Global economy (currently looks weighted to downside)• Shale growth (either way)• OPEC production levels (either way)

• Many companies planning for a $50 - $60 WTI world.

Putting It All Together

Questions?

Extra Slides

Extra Slides

• Many sources used to analyze the oil market• Data and news• Information from industry contacts• Dallas Fed Energy Survey

• We tend to focus on big picture:• Global supply and demand• Economic impacts on U.S. and regional economies

Oil Analysis at the Dallas Fed

Crude Oil (mb/d) Natural Gas (bcf/d)• World 82.45 • World 415.43• U.S. 11.89 • U.S. 94.84• Russia 11.38 • Russia 75.34• Saudi Arabia 10.24 • Iran 33.00• Texas * 5.17 • Qatar 22.33• Iraq 4.39 • Texas 22.57• China 3.68 • Pennsylvania 18.21• U.A.E. 3.07 • China 16.80• Canada 3.13 • Canada 16.67• Iran 2.72 • Norway 12.01• Kuwait 2.72 • Saudi Arabia 8.67

Global O&G Production

SOURCES: EIA; IEA; Oil and Gas Journal.bcf/d: billion cubic feet per dayCrude oil data for Jan 2019; Natural gas data for Nov 2019;* Based on preliminary weekly estimates for Jan 2019.

Texas Rivals Most Countries

Market-based Uncertainty

SOURCE:EIA

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Historical spot priceSTEO price forecastNYMEX futures price95% NYMEX futures confidence interval

WTI crude oil, dollars per barrel

Crude oil quality: What’s it got to do with me?

Crude Oil Quality

SOURCE: Energy Information Administration.

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West Texas Sour

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Maya

Saudi Arabia Heavy

Algerian Saharan

Bonny Light

Brent

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Alaska North Slope

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Western Canadian Select

Bakken Crude

Eagle Ford Crude

Duri Minas

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Chart 1: Crude Oil Physical PropertiesSulfur Content, %Sour

SweetDensity,API Gravity

LightHeavy

SOURCE: Bloomberg; Platts.

The Wide World of Crude Oil

Lots of Residual in Heavy Crude

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Chart 2: Heavy Crude Oils Typicaly Contain Greater Volumes of Residual

Atmospheric residue

NOTES: Figure plots the amount by volume of atmospheric residue and vacuum residue present as a function of API graity for 54 crude oils.SOURCE: Exxon's library of crude oil assays.

Denisity,API Gravity

Percent by volume

LightHeavy

Usually a Quality Premium

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LLS-Mars LLS-MayaPercent difference

SOURCE: Bloomberg; Authors’ calculations.

Premium Shrank After 2008

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Average percent difference

Data from 1997 - 2008

Data from 2009 - 2018

Difference in API GravitySOURCE: Bloomberg; Authors’ calculations.

All about transforming the bottom of the barrel:

• Simple refineries have no ability to do so• Moderately complex refineries reduce residual

• Further distill residual into gas oil and residual fuel oil

• Extremely complex refineries go a step further• Use a coker to break down residual fuel oil

• Trend is towards more complex refiners:• Upgrading capacity additions: +12 mb/d since 2006

Complex Refiners are Arbitrageurs

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Lower 48 Shale Lower 48 nonshaleGulf of Mexico Alaska

NOTES: Shale production estimate is from the EIA, based on Drillinginfo data. Lower 48 excludes Alaska and federal offshore areas. Alaska excludes federal offshore production. SOURCES: Energy Information Administration; Drillinginfo.

MB/D

Shale Oil is Light Oil

• U.S. Gulf Coast home to major refining complex:• More than 9.7 mb/d of distillation capacity (52.5% of U.S.)• 2.9 mb/d of catalytic cracking capacity (51% of U.S.)• 1.5 mb/d of coking capacity (55% of U.S.)

• Area has facilities that process light crude• But the complex is heavily “overweight” towards

processing low grade crude• Major implications for trade flows, export ban policy,

VZ outages

Limits to Arbitrage in USGC

Few USGC Light, Sweet Imports

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API above 50 and Sulfur below 1API between 45 and 50 and Sulfur below 1API between 40 and 45 and Sulfur below 1API between 35 and 40 and Sulfur below 1API between 30 and 35 and Sulfur below 1

U.S. Exports Up Significantly

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US Crude Oil Exports

MB/D

SOURCE:EIA

• Major producers of medium & heavy, sour crude:• Canada, Mexico, Venezuela, Saudi Arabia, other GCC

countries, others

• Refiners have typically imported a lot of VZ crude• Substitution has been occurring in recent years

• Saudi cuts often show in low grade crude supplies• Shrinks differentials

Sanctions and Cuts Affect GC

• Quality differentials exist for crude oil• Driven by API gravity, sulfur content, other factors• Quality differentials down after 2008

• Shale oil is light but nearby refining capacity likes heavy• Implications for trade flows and policy, sanctions, etc.

• IMO 2020 should create some interesting dynamics

Putting It All Together