Friday, October 21, 2016

Great sign for the oil markets, floating oil storage has plummeted

In a clear sign that the glut is abating, oil in floating storage has plummeted in the past few months. 

Although the oil stored in ships is a relatively tiny portion of world oil inventory, it is a good early indicator of what is transpiring in the murky physical oil market. 

A rise in floating storage is driven by a confluence of cheap shipping and oil prices that are depressed near-term but higher long-term (known as a contango market), thus rewarding arbitragers who hang on to the oil rather than sell it on to end-user refineries. 

"The contango market is no longer working and Dubai is in backwardation," said the Energy Aspects chief oil analyst Amrita Sen, referring to a market with higher prices for prompt versus future delivery.

A floating production, storage and offloading ship owned by Petroleos Mexicans
Susana Gonzalez | Bloomberg | Getty
A floating production, storage and offloading ship owned by Petroleos Mexicans
Floating oil storage – defined as a full tanker docked for at least a week – "is a broad indicator to the extent there is a rebalancing and the crude overhang is being run down slowly", said Ms Sen, who added: "by no means is the crude overhang gone". 

Tracking the physical oil market, including floating storage, is a highly imprecise science. It involves various competing analysts using methods ranging from satellite tracking and algorithms to individuals standing on the shore with binoculars. 

Read more from The National:

One of the big mysteries in the market is Iranian oil stored in offshore tankers, which is excluded from Energy Aspects' data. 

Ellen Wald, an independent energy and geopolitics analyst, pointed out that there is dispute among analysts about how much Iranian oil is stored. 

The estimates range from 30 million barrels to 47 million barrels, with the difference giving very different signals about how much oil Iran is capable of producing at present. It was a key question during tense negotiations within Opec about whether and to what extent Iran might be required to contribute to production constraint if they can agree a deal by the end of November. 

"If Iran actually has had more oil in offshore storage than [some analysts] report, it could mean that Iran's production levels are less than otherwise believed and that its exports over the last few months have come from stored oil," Ms Wald said. 

Still, the virtual disappearance of non-Iranian floating oil storage – from an estimated 75 million to 80 million barrels to about 10 million barrels – is supported by data from the largest consuming countries. Commercial inventories in the wealthy OECD countries fell in August for the first time since March, and early September data for Japan and the US showed the trend continuing, according to last week's report from the OECD energy think tank, the International Energy Agency.

Bahri to be the largest VLCC operator in the world

 Image Courtesy: Bahri

The company, 20 per cent owned by Saudi Aramco has placed orders for ten new supertankers

Abu Dhabi: The National Shipping Company of Saudi Arabia (Bahri) is to be the largest VLCC (very large crude carrier) operator in the world after it acquires ten more super tankers in the coming years, a senior executive of the company told Gulf News in Abu Dhabi on Sunday.

“We placed orders for ten more VLCCs to be delivered in the next two years with an investment of $1 billion. We will be the largest VLCC operator once we have them,” said Matthew Luckhurst, line manager at Bahri general cargo.

The company has signed a contract with Hyundai Samho Heavy Industries last year to build the giant ships that are capable of carrying huge amount of crude oil in a single trip.

Currently, the company operates 36 VLCCs transporting crude from Saudi Arabia to the rest of the world. “There is growth in the market and we are committed to crude oil industry,” said Luckhurst without giving further details.

Bahri is the second largest owner of VLCCs in the world and the largest owner of chemical tankers in the Middle East.

The company owns 83 vessels including 36 VLCCs, 36 chemical, six multipurpose vessels and five dry-bulk carriers. It is 20 per cent owned by Saudi Aramco.

Matthews was speaking to Gulf News on the sidelines of a press conference to announce details Breakbulk Middle East conference that will be held in Abu Dhabi from October 23 to 26.

The conference will bring together the region’s leading shippers, carriers, freight forwarders, transport specialists and related service providers to discuss current trends in the market.

Thursday, October 20, 2016

Oil Traders Increase Risky Lending Even as Some Deals Go Bad

Trading houses’ lending to distressed producers and refiners is booming and cheaper than ever even though many are owed hundreds of millions of dollars after the collapse of some risky pre-financing deals.

The suspension of production at Morocco’s oil refinery Samir last year cost a string of trading firms and oil majors a total estimated at close to $1 billion (£0.82 billion), and similar arrangements this year have come under stress in Nigeria.
But executives from trading houses speaking at the Reuters Commodities Summit this week said appetite for such deals was rising as the levels of distress in the industry from a more than two-year price rout intensifies.

“That’s maybe the sweet spot for us,” BB Energy Chief Executive Mohamed Bassatne said. “Where we are willing to take the risk, get a foothold and develop that business.”

BB Energy had roughly $120 million tied up in Samir when it collapsed, and it is unclear whether it will recoup that.

Pre-financing is an arrangement under which those with money or access to it – such as oil trading houses – can give cash in advance to companies and countries who need it in exchange for oil, refined products or another form of payment.

When they go well, companies can get exclusive access to crude or oil products to trade on international markets.

But the deals are dicey. Those seeking money enter into such deals often because more traditional finance deals are unavailable for them or are more expensive due to higher risk.

“Every time these things happen, we look at ourselves and say we have to price risk more aggressively…correctly. And then we turn around and somebody else has cut the risk premium dramatically in terms of some other trade,” Vitol Chief Executive Ian Taylor said. “The market is very competitive.”

Vitol, the world’s largest trading house, also has dozens of millions of dollars trapped in Samir.


Part of the drive for risk is the cost of finance – with interest rates at multi-year lows, banks and others with capital are hungry for any investments that could bring a better return.

“Our view is…the risks are higher now, rather than lower, compared to a year and a half ago,” Gunvor Chief Executive Torbjorn Tornqvist said.

But financing costs, even on what would fall into the higher risk category, had not increased. “Generally we are living in a world where capital is less of a problem than it has ever been,” Tornqvist said.

Trafigura Chief Financial Officer Christophe Salmon said even though more banks are asking questions about commodity exposure before lending money to trading houses, the cost of borrowing has fallen over the past year. Global interest rates remain exceptionally low.

All trading executives said they had beefed up their compliance teams and examined deals more closely to ensure they are not caught out, although mistakes would still be made.

“We have seen defaults before and we will see more in the future,” said Glencore’s head of oil Alex Beard, whose company is one of Samir’s large creditors.

“That (pre-financing) has been a core part of the business, it’s been a good part of the business,” Beard said.

Wednesday, October 19, 2016

80% Of U.S. Oil Reserves Are Unaccounted-For


U.S. crude oil storage is filling up with unaccounted-for oil. There is a lot more oil in storage than the amount that can be accounted for by domestic production and imports.

That’s a big problem since oil prices move up or down based on the U.S. crude oil storage report. Oil stocks in inventory represent surplus supply. Increasing or decreasing inventory levels generally push prices lower or higher because they indicate trends toward longer term over-supply or under-supply.

Why Inventories Matter
Inventory levels have reached record highs since the oil-price collapse in 2014. This surplus supply is a major factor keeping oil prices low.

Current inventories are 45 million barrels higher than 2015 levels, which were more than 100 million barrels higher than the average from 2010 through 2014 (Figure 1). Until the present surplus is reduced by almost 150 million barrels down to the 2010-2014 average, there is little technical possibility of a sustained oil-price recovery.

Figure 1. U.S. Crude Inventories Are ~150 Million Barrels Above Average Levels. Source: EIA, Crude Oil Peak and Labyrinth Consulting Services, Inc.

U.S. inventories are critical because stock levels are published every week by the U.S. EIA (Energy Information Administration). The IEA (International Energy Agency) publishes OECD inventories, but that data is only published monthly and it measures liquids but not crude oil. It also largely parallels U.S. stock levels that account for almost half of its volume. Inventories for the rest of the world are more speculative.

Understanding U.S. Stock Levels

Understanding U.S. stock levels should be straight-forward. Every Wednesday, EIA publishes the Weekly Petroleum Status Report which includes a table similar to Figure 2.

Figure 2. EIA publishes adjustments and defines them as “Unaccounted-for Oil.” Source: EIA U.S. Petroleum Status Weekly (Week Ending September 16, 2016), Crude Oil Peak and Labyrinth Consulting Services, Inc.

The calculation to determine the expected weekly stock change is fairly simple:

Stock Change = Domestic Production + Net Imports – Crude Oil Input to Refineries

Domestic production and net imports account for crude oil supply, and refinery inputs account for the volume of oil that is refined into petroleum products. If there is a surplus, it should show up as an addition to inventory and a deficit, as a withdrawal from inventory.

But that’s not how it works because EIA uses an adjustment in order to balance the books (Table 1).

Table 1. Calculation of Crude Oil Stock Change. Source: EIA Petroleum Status Weekly, Crude Oil Peak and Labyrinth Consulting Services, Inc.

The logic is that estimated stock levels in tank farms and underground storage are relatively dependable and that any imbalance must be from less reliable production, net import or refinery intake data.

There is nothing wrong with adjustment factors if they are small in comparison to what is to be balanced. In the Table 1 example from September 2016, however, the adjustment is 60 percent of the stock change–a bit too much.

A one-off perhaps? No, it’s a permanent problem that has gotten worse during the last several years.

Figure 3 shows that crude oil supply and refinery intake of oil vary considerably on a weekly basis. The balance is cumulatively negative over time beginning with a zero balance in January 1983. That suggests that crude oil stocks should be falling over time but instead, they have been rising.

Figure 3. Difference between U.S. crude oil supply and refinery intake. Source: EIA Petroleum Status Weekly.

The vertical bars show the weekly crude supply from production and net imports either exceeding the refinery input requirements (positive, green) or not reaching these requirements (negative, red). The solid red line is the cumulative.

Between 1991 and 2002, the deficit increased to a whopping 1.3 billion barrels.

Looking at only recent history, an additional gap of nearly 200 million barrels developed as refinery intake exceeded crude oil supply for most of 2010 through 2014 (Figure 4).

Figure 4. Difference between U.S. crude oil supply and refinery intake 2002-2016 (12-month moving average values). Source: EIA Petroleum Status Weekly, Crude Oil Peak and Labyrinth Consulting Services, Inc.

Adjustments were introduced in late 2001 so let’s look at the period starting January 2002 (Figure 5).

Figure 5. EIA adjustments to supply to reconcile stock changes. Source: EIA Petroleum Status Weekly, Crude Oil Peak and Labyrinth Consulting Services, Inc.

There are both upward (blue) and downward (red) adjustments. Upward adjustments resulted in a 420-million-barrel stock increase over the period January 2002 through September 2016.

All together now

Expected or implied stock changes calculated from weekly crude oil balance indicate falling inventories from May 2009 through the present. Yet, EIA makes adjustments to that balance in order to match observed inventory levels. Rising inventories result after those adjustments are added to the physical balance or implied stock changes (Figure 6).

Figure 6. Unaccounted-for oil in U.S. storage: the result of adjustments to the supply balance. Source: EIA Petroleum Status Weekly, Crude Oil Peak and Labyrinth Consulting Services, Inc.

The green area represents the physical balance (crude production plus net crude imports minus crude refinery intake). The gray area shows the unaccounted-for (adjusted) stocks.

The adjustment for unaccounted-for oil averaged about 15 percent from 2002 through 2010. In 2016, almost 80 percent of reported stocks are from unaccounted-for oil.

When You Have Eliminated The Impossible
There is no obvious solution for the mystery of unaccounted-for oil in U.S. inventories. Possible explanations, however, include:

1. Crude field production is underestimated
2. Net crude oil imports are underestimated
3. Refinery inputs are over-reported
4. Crude oil stocks are over-reported
or any combination of those possibilities.

Production, imports and refinery inputs are taxable transactions. It is likely that reporting errors are largely self-correcting over time because of the financial incentive for government to collect its due.
State regulatory agencies are the source of production data. Their principal objective is to assess production taxes. It is unlikely that states would consistently under-estimate production and forego substantial tax revenue.

Also, producers must state crude oil production in their SEC (U.S. Securities and Exchange Commission) filings and pay federal income tax on revenues from oil sales. It seems improbable that the SEC and U.S. Treasury would consistently accept under-reported production and associated lower tax payments.

Crude oil imports are subject to both tariffs and excise taxes so it seems unlikely that the U.S. government would consistently fail to identify under-payment of those revenues.

Similarly, taxes are involved when refiners buy crude oil and sell refined products. It seems improbable that they would over-state those transactions and consistently over-pay associated taxes.

The principal components of supply balance—production, imports and refinery intake—are shown in Figure 7. In a general way, increased production and decreased imports tend to cancel each other out. Refinery intake has increased since about 2010.

Those trends determine the physical balance or implied stocks. The inescapable conclusion is that implied stocks (in light blue) are substantially less than reported stocks (in gray).

Adjustments for unaccounted-for oil are unreasonable and out of proportion to the underlying factors that determine crude oil stock levels.

Figure 7. Components of unaccounted-for oil in U.S. storage. Source: EIA Petroleum Status Weekly, Crude Oil Peak and Labyrinth Consulting Services, Inc.

It would be speculation to blame anyone for this apparent statistical disaster. Nevertheless, there is a problem that has major implications for oil price and the reliability of reported data.

In several of his Sherlock Holmes mystery stories, Arthur Conan-Doyle wrote, “When you have eliminated the impossible, whatever remains, however improbable, must be the truth.”

We have not eliminated any impossible explanations. We have, however, eliminated the three most improbable explanations for unaccounted-for oil.

The truth—however improbable—is that inventories are probably much lower than what is reported. Source.

Chevron’s $6B Expansion Near the Finish Line

Image result for Chevron Phillips Chemical baytown 
 Chevron Phillips Chemical Co. Baytown, TX

The army of cranes that can be viewed easily from I-10 in Baytown will be gone after a few short months as Chevron Phillips Chemical’s $6 billion expansion inches nearer to a close.

The pricy “U.S. Gulf Coast Petrochemicals Project” is over 80 percent finished. The project is estimated to be operating within a year’s time. The project consists of constructing a huge ethane cracker on a plot of land the size of 44 football fields at Chevron’s Cedar Bayou plant located in Baytown. The cracker will convert natural gas into ethylene at the rate of 1.5 million metric tons each year. Ethylene is the most commonly used building block in the production of plastics.
In addition to the petrochemicals project, Chevron will also build two brand new polyethylene plastics facilities just southwest of Houston in Old Ocean. The facilities, located near Phillips 66’s Sweeny complex, will take converted ethylene to create plastic resin that will be domestically and internationally shipped.

Ron Corn, Chevron’s senior VP of projects and supply chain, said that the idea for project started in 2010 following the company’s shift in focus to their growing presence in the Middle East. Chevron had massive projects in both Qatar and Saudi Arabia.

“It was quite radical at the time,” said Corn of constructing major petrochemical projects on Texas soil, “These are big, big projects — very complex.”

The endeavor is an attempt to continue the petrochemical boom along the Gulf Coast and to cash in on the abundant, inexpensive ethane created from natural gas through the current shale revolution.

The American Chemistry Council, an industry trade group, predicts that over 250 petrochemical projects are either currently under construction or planned all over the nation through 2023 and that the projects will produce around 70,000 new jobs. The total cost is nearly $160 billion with $50 billion of that cost in Texas alone.

The mounting demand for plastics is coming primarily from Asia, particularly China. However, India and Indonesia account for some of the demand as well. “They’re basically entering the consumer class,” said Corn of these countries which are pushing for products such as single-serve packets of shampoo for the very first time.

Other crackers that are being built in Texas and Louisiana have become competitors for Chevron and their new project. The Chevron Phillips cracker has eight huge furnaces that heat the ethane until it becomes ethylene. So far, the project has produced 10,000 temporary construction jobs in Baytown and Old Ocean and will produce 400 permanent position when it is finished.

Exxon Mobil is another company building a cracker in Baytown that will also hold a capacity of 1.5 million metric tons. The company’s new plastics plants are being constructed in Mont Belvieu. Exxon is also in the middle of selecting a site in either Texas or Louisiana to make the world’s largest cracker in a joint deal with the Saudi Arabia Basic Industries Corp or SABIC.

Corn stated that he is sure that the demand for global plastics is growing rapidly enough to consume the imminent explosion in supply. “The spotlight is on the U.S., and the world needs the U.S. production,” he said.

ISIS' Last Stand: The terror group's fighters have begun setting fire to oil wells as they carry out scorched earth tactics

ISIS thugs have resorted to using human shields as they attempt to defend Mosul as it emerged the terror group's leader Abu Bakr al-Baghdadi is thought to be trapped in the city. Aerial pictures show how ISIS fanatics are torching oil in the city

Chevron Working to Meet $2B Asset Sales Target in 2016


U.S. oil giant Chevron is looking to divest its assets in Bangladesh, aiming to fulfill its assets sales program set at between $5 and $10 billion in 2016 and 2017.

Earlier this year, as part of its previously announced divestment plans, Chevron sold 19 fields in the U.S. Gulf of Mexico to Cox Oil for an undisclosed price.
Based on the company’s latest earnings report, the asset sales, aimed at making the company cash balanced in 2017, stood at around $1.4 billion at the end of July, 2016.

The news of the company looking to shed it Bangladesh assets has been confirmed to Offshore Energy Today by a Chevron spokesperson who said that Chevron has been “in commercial discussions about our interests in Bangladesh.”

In Bangladesh, Chevron produces natural gas and condensate from three fields in the northeast of the country.

“At this stage, no decision has been made to sell our interests. We will only proceed if we can realize attractive value for Chevron,” the Chevron spokesperson said.

Most of the Chevron’s planned asset divestments is expected to occur in 2017, with the company expecting to get around $2 billion in 2016 – according to the second quarter earnings report from July.

As for the strategy on selecting the assets to be divested, the California-based oil company has said that they all have these things in common: the assets are not essential to delivering on its strategy, their valuations are not particularly oil price-sensitive, and there are multiple interested buyers.

The $1.4 billion in sold assets until the end of July came from several transactions: New Zealand marketing, Canadian gas storage assets, pipeline assets in California, and upstream assets in the Gulf of Mexico.