Crude prices are selling off today as gasoline holds up relatively better, as refiners playing 'pass the parcel' of bearishness betwixt the two. As refiners make economic run cuts due to lower profit margins, gasoline inventories are set to drop going forward amid lower supply....while crude inventories are set to continue to swell. Hark, here are five things to consider in oil and energy markets today:
1) A key theme of last month's Clipper View presentations, when the mighty Abudi Zein and myself presented our six-month market outlook, was that product prices would lag crude because of high inventories. Our view was that this would ultimately lead to refinery runs being cut due to unfavorable economics, which would then encourage the de-stocking of product inventories. This scenario is coming to fruition.
While this will help to de-stock product inventories, this turns into a game of whack-a-mole for the crude complex. As product stocks ease due to lower refining activity, this is only going to encourage already-swollen crude inventories higher still. Refinery runs have just dropped below last year's level for the first time this year:
2) While we are seeing record crude exports that could provide a bit of respite for rising US crude inventories, this is being offset somewhat by rising domestic production. As our ClipperData illustrate below, US waterborne crude imports this month are above both last year and February 2015, although lagging 2014's level by nearly 400,000 bpd.
This lag makes sense given that domestic production and pipeline flows from Canada combined were about 10.5mn bpd in February 2014, while they have been around 12.5mn bpd for 2015, 2016, and now 2017 too.
3) Throughout the oil price drop which started in mid-2014, we have had a blueprint to indicate it is possible to get leaner, meaner and more productive in the U.S. shale patch. This has been provided by a predecessor...the U.S. shale gas revolution.
For the best part of a decade, the natural gas forward curve has been overly optimistic on prices - as can be seen in the chart below (h/t @nserota). This was because of the expectation that the low price environment would quell production, or that higher demand would ultimately lift prices higher. Or both.
While demand has indeed continued to rise, domestic production has increased for 10 consecutive years to 2015. And although production may have dipped in 2016, it is set to rise again this year. Higher demand is set to persist, especially as both LNG and Mexican pipeline exports are set to rise further, while natural gas-fired generation capacity continues to grow.
Only now does it appear that the market has come to terms with this situation, with calendar strips out through 2021 holding below $3/MMbtu.
4) All that said, the chart below shows that U.S. shale oil break-even prices are set to rise for the first time in five years, as efficiencies appear to have been maximized, while oil service costs are rebounding along with the rally in oil prices.
5) Finally, even though U.S. capacity additions last year were fairly evenly split betwixt natural gas, wind and solar, solar managed to eke out a victory, clambering onto the winner's podium.
Even though natural gas will continue to see capacity additions over the next two years, wind power - and particularly solar - are set to continue to lead the charge in the coming years. Total installation of solar power last year was up a whopping 95 percent on the year prior, led by the build-out of large solar arrays (as opposed to rooftop panels). While this trend of nearly doubling is not set to persist, total installed solar capacity is set to reach 105 gigawatts by 2021, up from ~38 gigawatts now.