Chinese refiners are looking for new opportunities:
Shale oil boom has made it difficult to predict global supplies. Shale oil producers are much more responsive to oil prices movements than classic producers and it’s really difficult to understand how numerous individual drillers decisions will impact global oil supply. Before shale oil it was easier to predict what could be the future supply without taking in consideration outside political events.
Nevertheless, with WTI price around USD 50, it affects shale oil production as well as it is likely to boost the demand.
China is likely to take advantage of the cheap oil and following the recent 90 days trade-war truce agreed between the USA and China, some Chinese refiners are looking for opportunities in the US. However, the long-distance voyage between the US Gulf Coast and China makes it difficult for refiners who buy shale oil until the 1st march, date on which the truce ends. Chinese refiners demand the more assurances from the government, asking that cargo wouldn’t be affected with possible tariffs if shipment arrives after the 1st March.
America’s top oil producing region (Permian basin) has a new problem:
Shale crude oil is trading at 40$ a barrel in the Western Texas region. At this price, the oil is sell for less than the cost of developing new wells. That is a rude prospect for a region where oil production is booming and because Permian has permit to the United States to reach his highs production of barrels per day, making them the world’s top crude oil producer. So it will be better if the US government could find a solution in order to avoid a potential recession in this sector due to a production decrease and falling prices. During this time, we can see that West Texas Intermediate for January delivery fell $1.32 to settle at $49.88 a barrel on the New York Mercantile Exchange. Bears gained steam after the official close, with oil falling to $49.01, the lowest level since September 2017. The WTI February contract fell to $49.47. Brent for February settlement closed down 67 cents to $59.61 on London’s ICE Futures Europe exchange. The global benchmark traded at a premium of $9.41 a barrel to same-month WTI.
Spread between Brent and curve spot price:
This graph shows the spread between the brent spot price and WTI spot price from 2nd January 2007 to 14th December 2018. In grey at the bottom of the graph, there is a glimpse of the variations in the spreads.
From 2007 to the end of 2010, it was not surprising to see the spread in favor of the WTI. Several times the spot price WTI was higher than the Brent.
From January 2011 to today, the trends have reversed. The reason was the oversupply of WTI crude in USA from 2011. The spread value decreases from the begin of the year 2015 to the end of 2017 because Barack Obama try to take some government restrictions on the extraction of shale oil and gas.
A lot of people after the government restriction thought that the problem was solve. But as we can see in the graph it was not the case due to the lobby of US crude company who member/ have link with the US congress. As the Republicans have the congress majority and that some judges invalidated government measures to regulate shale oil’s extraction. The hopping spread trend didn’t follow Obama’s expectation.
One month before his departure, Barack Obama banned the creation of news crude oil’s extraction in the Arctic Ocean. But when Donald Trump became president in 2017, he began to facilitate the extraction of shale oil. It why we can see an increase in the spread during the year 2017.
Currently his team is working on a presidential decree in order to allow the extraction in Arctic. Since Donald Trump arrival, we can see that the crude production increase due to easing regarding the extraction process (reducing or eliminating restriction).
Future WTI curve
For the future curve, we have for the two last contracts (November and December) a contango situation. The future curve from June and September are in a situation of backwardation. The latest decisions from Donald Trump administration creates uncertainties about the price.
Appendix
https://www.erce.energy/graph/wti-futures-curve https://www.erce.energy/graph/brent-and-wti-spot https://www.letemps.ch/monde/barack-obama-bloque-forages-arctique https://www.lemonde.fr/planete/article/2016/06/22/la-justice-americaine-invalide-la-reglementation-de-la-fracturation-hydraulique-edictee-par-obama_4956113_3244.html https://www.theverge.com/2017/4/28/15451652/donald-trump-executive-order-offshore-oil-gas-drilling-climate-change https://www.bloomberg.com/news/articles/2018-12-13/saudi-arabia-is-said-to-target-u-s-with-sharp-oil-export-cut https://www.bloomberg.com/news/articles/2018-12-17/oil-halts-slide-near-51-on-signs-of-u-s-production-slowdown