The North America Oil Market Quarterly

Energy Aspects Ltd.
November 1, 2013
113 Pages - SKU: EGAS5155982
Countries covered: North America

The North America Oil Market Quarterly

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The North America Oil Market Quarterly

The North America Quarterly, published by Energy Aspects, covers all important aspects of the oil markets in the region, with a particular focus on the growth of shale oil.

With over 110 pages of data and analysis, the North America Quarterly provides comprehensive tables and charts with up-to-date information on current and planned oil pipelines (including maps), rail capacity, US Midwest balances, Canadian production data, US product demand, US crude imports by grade, shale plays by basin, the latest production data including rig counts and technological and regulatory developments affecting the domestic oil industry.

Each edition also places several specific topics in focus, for the November 2013 edition these are:
In Focus: As Canadian crude production continues to outpace capacity additions, we find Canadian oil producers increasingly turning to rail to clear the glut, but at the risk of creating a structural discount between regional grades and global crude prices.

In Focus: In light of 1 mb/d of US tight oil growth for each of the last three years and Brent prices remaining above $100, we find another strong year for US production will do little to alter that trend, given the plethora of supply outages elsewhere.

Outlook for WTI: With WTI's fortunes now inextricably tied to Gulf Coast balances, we discuss the factors required for WTI prices to pick up in 2014, although the window of opportunity is limited to early Q1 14

Refining: We examine how US refineries in different regions will respond to higher crude prices and falling export margins, and find that despite retaining a comparative advantage over their competitors, US refineries are unlikely to see bonanza returns any time soon.

US production: We take a deep dive into the IRRs of one of the US's most prolific shale plays, the Bakken, and find that sub-$90 WTI, returns fall to single digits
The Quarterly is designed to be the most comprehensive guide to US and Canadian production, shale basins, midstream projects, WTI balances, regional differentials, and the US refining industry.


Additional Information

Executive summary

Following the recent meltdown in North American crude prices, we analyse the US crude and oil products balances that will be decisive as we head into next year. Have we witnessed the start of a complete disconnect between US crudes and the rest of the world or is this merely a function of hefty refinery turnarounds? In our view, the US Gulf Coast should start to clear in the coming weeks, as imports fall and refinery runs pick up. This should provide a boost for WTI prices too in early Q1 14, as the pull from the Gulf Coast recovers. That said, while the market may be overestimating the volume of US crude oil imports under long-term contracts, USGC light crude prices should trade at a structural discount to Brent next year and end-Q1 14 is likely to see another bout of severe weakness due to heavy refinery maintenance. This limits the time frame for WTI to rally, as we discuss in our WTI outlook for 2014.

Herein lies the fundamental problem for US oil producers. The North American market was cleared in mid-2013 through extremely high refinery capacity utilisation. While we see continued high capacity utilisation given the competitive advantages US refineries have, such as cheap feedstock and energy costs, export margins, particularly for gasoline, are shrinking. Moreover, high utilisation means extensive maintenance is needed or the system faces a growing risk of unplanned downtime, as we have seen in recent years. Thus, until US crude exports are expanded, a pronounced seasonality in US oil prices is increasingly likely, as we discuss in the outlook for US refining and margins for 2014, which are considered by PADD.

Another important consideration for WTI is Canadian balances. The problems with Canadian infrastructure persist, resulting in deeply discounted Canadian crude prices, in turn pressurising WTI as the incentive to send crude to Cushing remains elevated. No major pipelines are on the horizon until 2017/2018, and so Canadian producers are reliant on Enbridge to increase capacity on its mainline to the US. For 2014, this is primarily limited to the expansion of the Alberta Clipper by 0.12 mb/d in H2 14. While debottlenecking around Chicago and Flanagan will help light crude prices somewhat later next year, ultimately Canadian production is growing faster than infrastructure. In fact, the capacity constraints, particularly for heavy producers, are forcing an increasing volume of oil sands crude onto rail transport, moving WCS to trade at a structural discount to US crudes due to the high cost of rail transportation. We take a deep dive into Canadian pipeline and rail infrastructure and build up models of potential transport costs in our In Focus: Oh Canada!, finding the forward curve for WCS may well be overpriced currently.

Finally, we also consider the outlook for global oil markets in 2014 as the growth in US shale continues. So far, US tight oil production has not been sufficient to balance the market, as Saudi Arabia had to step in to fill a hole. Given the ongoing problems in Libya and Iraq, and improving demand in Asia, 2014 may well still be the same, with Brent averaging above $100 per barrel, as we discuss in our In Focus: Even with shale, $100 Brent tells the tale. After all, should prices fall too far too fast, US tight oil production in itself will be brought under pressure, as we find in our Outlook for US production, which takes a deep dive into IRRs for Bakken plays to reveal that WTI prices fall much below $90 per barrel, returns quickly fall into the single digit range, the point at which companies begin to question the large investments.

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