The Crude Report: 2022 to be more of the same, but different…

Author Argus

Many major trends affecting crude oil markets like energy transition, the balancing act between Opec+ and SPRs and Covid-19 continue, but all have evolved in its own way.

In this episode of The Crude Report, vice president Jeff Kralowetz highlights the big topics on everyone's mind, many of which will covered at next week's Argus Americas Crude Summit.

Transcript

Jess: Hello and welcome to The Crude Report, Argus' podcast series on global crude oil markets. After taking a short holiday, we're back to releasing episodes each week and the first of 2022 is with Jeff Kralowetz, our VP of business development here to set the stage on what can we expect for the upcoming year - for now, at least.

Hi, Jeff, and happy new year.

Jeff: Happy new year to you and to everybody who's listening. And thanks a lot. As you said, this is the beginning of the year, but it's kinda doubly significant for the business development and strategic guys at Argus because we have our Americas crude conference, or Americas Crude Summit, in Houston on the 24th and 25th of January. So you know, expect me to shamelessly plug that conference throughout this podcast, but it does give us a chance to kind of focus on what the big themes are. And in thinking about that this week, I think there are four that we're gonna focus on in the conference and we could talk about here for a bit.

The first one is the energy transition, and kind of what I call restive shareholders - shareholders who have been investing in energy companies for a long time and kind of deferring their payback as these companies grow volume of production, but not so much returns on investment to shareholders. So those two things are happening where you just have a lot of more ESG, carbon reduction kind of initiatives that are being required of oil companies and at the same time, the shareholders want more money back.

Then I think the second big theme is that after 18 months or almost 2 years really of Covid-19 which destroyed global demand and saw the stockpiles of oil rise, you know, just chock-a-block full, those inventories are about back down below pre-Covid-19 levels and the market is actually pretty tight. And a tight market is susceptible to price shocks when there are big interruptions in supply for geopolitical reasons or operational reasons.

So tight supplies and volatility is the second big theme, and then the last two I think are just North American crude exports have been a lot more robust than anybody expected them to remain throughout the Covid-19.

And finally, the benchmarks, the pricing benchmarks around the world are all kind of influx right now from Brent to Dubai, to WTI. All of these things that we've used for more than a generation to price oil around the world are in flux and so we could talk about that a little bit.

Jess: Okay. So let's dive deeper into some of these. How do we see the energy transition playing out in the US crude sector?

Jeff: Yeah. I think, you know, without doubt, the world wants to shift from fossil fuels to renewables where possible and governments are getting involved in this with regulations. But banks, lenders have net zero goals and shareholders have expectations about what energy companies are gonna do to reduce carbon emissions. And so that really changes how oil companies are structured, how they get managed, and what kinds of very non-oil productive kind of things they get involved in doing.

And at the conference, which of course is coming at the end of the month, Vicki Hollub, the CEO of Occidental Petroleum, and Ryan Lance, the CEO of ConocoPhillips, are gonna be two of our highlight speakers, and I'm sure that a lot of what they talk about is gonna be this. For example, Oxy has what they call the low carbon ventures business unit. Most big oil companies now have some kind of carbon reducing business venture where they have projects designed to address the CO2 issues. One of the things that I know that Oxy is doing and several other companies are is looking at how do you commodify and track CO2, make it into kind of a commodity that you can manage, and how do you use it to achieve your goals. One of the things that has been done is discussion of and I think Oxy did one, a carbon zero cargo where all of the carbon that would have been emitted as a result of producing the oil and moving the oil was otherwise accounted for with offsets.

Companies are doing stuff like trying to get lithium out of sea brine using chemical processes. They're looking at ways to turn carbon or CO2 into elements of energy products like ethylene and others. I know that ConocoPhillips has been looking at how do you set up a system where you prioritize your ESG projects in a way that you get the biggest bang for your buck, the biggest CO2 reduction for what you spend.

And then Michael Dunn, who is at Williams, is gonna join us and talk a lot about first of all as a gas company, they're very focused on capturing methane emissions, but they talk a lot about, you know, how do you treat the emissions out of oil sands projects, the off-gases there and capture CO2, how are you transparent to your shareholders so you get credit for these cool things that you're doing. So all of that is part of the picture. And of course, there's the government side, you know, the Biden administration famously cancelled Keystone XL on the first day of the administration. They've said they want to limit oil drilling on federal lands. To what degree is that happening, that's part of what we'll look at at the conference. So I think that's what I have to say about ESG, Jess.

Jess: So it looks like if the ESG requirements will rein in the kinds of about 1mn b/d growth, we saw in the US shale crude output in the 2018, 2019 timeframe, that seems to feed into your second theme, which is that tight crude supply will make the crude markets volatile and susceptible to price spikes caused by geopolitics.

Jeff: Yeah. Exactly. Tight supply means that you are susceptible to any kinda little blip that's gonna cut off supply. Now, you know, there have been some surprisingly strong increases in supply in the US, particularly in the Permian, but we'll talk about that in a second.

^{Source: Opec+, Argus Consulting}

What's interesting to watch is Opec+, which had done the drastic cuts in production to match the Covid-inspired falling demand, are now adding back 400,000 b/d of production each month and they've held onto those returns. But some of their members are having a hard time meeting their increasing quotas and, you know, some of the names that we hear about a lot are Malaysia, Angola, Nigeria, even Russia, may be very close to the max of what it can produce already. And these increases are supposed to continue through September of this year. So anybody's guess about whether Opec can continue to provide enough oil to prevent a seriously tight market from developing. And of course, Iran is essentially sanctioned to the point where it's producing or exporting very little crude oil, Venezuela is exporting zero to the US, and very little elsewhere.

So there are some constraints on supply. The other thing that's going on is that you have shareholders that we said up front, no longer willing to just keep investing and not seeing any dollar returns for their portfolios. So they're putting pressure on the companies to increase distributions, do share buybacks, doing other things, and then the banks have goals for 2030, 2040, 2050 about reducing emissions or what they call, you know, financial emissions in their portfolio. They want to be seen as increasingly green and, you know, if not, abandoning fossil fuels entirely, certainly making sure that the lending they do to energy producers is increasingly green. So the result of all of this is that you have a tight market that can be kind of on a hair trigger for geopolitical stuff. So we are gonna address the geopolitical stuff in the conference and of course, the headliner for that is Mike Pompeo, who is a former Secretary of State for former President Trump. He's gonna come and be a headliner for us. Helima Croft, who is the Middle East and Africa research director at RBC Bank, she's going to come, our own chief economist, David Fyfe. So you're gonna have a lot of voices talking about what are the geopolitical potholes that may lie in front of us.

Jess: There's a long list that I'm going to hold you to. What about the experts from the US and Canada?

Jeff: Yeah. I think that was kind of a surprise in the last year, and half and that is that the US exports, and by extension Canadian exports as well, were pretty strong even as a lot of the arbitrages to Asia and Europe got very narrow and not very inviting. US exports have held around 3mn b/d. They were 3.1mn b/d in November. And we could see them kinda tick up in the first quarter of this year as you have SPR releases in the Gulf coast, which could kind of make more medium sour Mars available for export, but the other thing is just the Permian. Sometime this month, the Permian production is gonna surpass 5mn b/d, and as I said, it's been rising about 70,000 b/d every month. So if you extrapolate that, if that growth rate continues, you would add 840,000 b/d just in the Permian by the end of the year. And the old rule of thumb has been, you know, for every new light sweet barrel of crude produced in the US, you have a light sweet barrel of crude exported from the US because US domestic refiners really don't want that additional light crude. They've got all they need.

So you know, we expect...I mean, we could legitimately see 3.8mn to 4mn b/d of crude exports out of the US by the end of the year early or 2024. And as we know, we've built a lot of infrastructure to support that, but there are proposals to build offshore buoys where you run an undersea line offshore, so you can directly load VLCCs, the 2mn bl largest tankers, and kind of cut your shipping costs. Anyway, we're gonna have Energy Transfer, TC Energy, Epic, Kpler, some other folks coming in to talk about the infrastructure, which of these projects will get built, which ones won't, what kind of rationalization we're gonna see in the pipeline business, all of those issues that kind of circle around exports.

Jess: So obviously, I think there are a lot of things we could talk about when we are discussing global crude oil markets, but I guess let's just go to a final point about the pricing benchmarks, and how it seems to be shifting a little bit outside of what's traditionally been happening.

Jeff: Yeah. So you could... This one might be a little self-serving. You can't blame a price reporting agency for wanting to direct the conversation to pricing benchmarks, but it really is objectively true that for the first time in a generation, these benchmarks from Brent, to Dubai, to WTI that we used to essentially price all of the crude in the world, these benchmarks are in flux.

In the case of Brent, you have reduced production of physical crude in the Brent basket in the North Sea. That makes people question how robust the Brent benchmark is, how appropriate it is to price barrels going into the coast of China on a Brent number that is...you know, represents only about a hundred trades of physical crude every year, whereas WTI has kind of morphed into not just WTI Cushing, but really related markets for WTI at Midland and at the the MEH terminal on the Gulf coast.

And Midland and MEH, you put those volumes together, they're more than the Dubai benchmark in terms of underlying volume of trade. And so what we've seen in the last couple years is these, the Midland and the Gulf Coast benchmark have become very important in defining the arbitrages from the Gulf coast to Asia, Gulf coast to Europe, and that WTI is taking a kind of heightened role in setting the price of oil around the world. And that's an important trend. And then of course, the Dubai number is being challenged by a new contract introduced last year by Ice for Murban, the IFAD Murban contract. But of course, as I said, being a price reporting agency, our conference is gonna bring Ice and Adnoc, and CME in for a panel to talk about benchmarks and how the pricing of crude around the world is morphing.

Jess: Okay. Well, let's end it here for today because there's much more to come at the crude summit and we don't wanna ruin any surprises. But I will actually see you in person there. So thank you Jeff.

Jeff: Sounds great.

Jess: And as we've shamelessly mentioned several times, Argus Americas Crude Summit is next week from January 24 to 25. It'll be a hybrid event so you can join in person or virtually. So if you're looking for more information on this conference or on just Argus' crude services in general, please visit us at www.argusmedia.com.

Happy new year to all of our listeners out there and we hope you'll come back for next week's episode.