North America Logistics Review Report – February 2016 Overview Section
Crude Oil Inventories – Creative Means to Avoid “Tank Tops”
During the month of February, EIA published its Short-Term Energy Outlook (STEO) and Genscape released its US Crude Oil Production Forecast Report, both with price projections for the next two years:
|West Texas Intermediate Oil Price ($/bbl)||2016||2017|
|EIA Short-term Energy Outlook||$38||$50|
Both outlooks reflect the notion that prices are not likely to quickly rebound to pre-2015 levels. One of the key reasons that prices are expected to remain low over the next two years is that the world is currently awash in oil. In the U.S. alone, crude inventories totaled 518 million barrels for the week ending February 26, 2016 according to the EIA – “historically high levels for this time of year” and a 10.4 million barrel increase from the week prior.
As crude oil inventory levels continue to rise, traders are turning to a new type of storage in the US: empty (and idle) rail cars. Traders are getting creative with storage because of the high utilization in conventional storage and the current surplus of crude railcars. Some people have referred to this new type of storage-in-railcars as “rolling storage”—a spin on “floating storage” which refers to crude stored in tankers. Not surprisingly, floating storage of crude has increased since the sharp decline in oil prices started in summer 2014. According to Bloomberg data, the volume of oil in short-term storage at sea has risen 33 percent since summer 2014 and, just recently, shipping analyst with JPMorgan Chase & Co. Noah Parquette commented that, “The utilization of tankers for floating storage is back in the limelight.” Certainly though, speculation that prices will rise significantly enough to justify holding oil in tankers comes at a significant cost: approximately $1.10 a month per barrel in floating storage, according to Omar Nokta of Clarkson Capital Markets.
While crude oil prices remain at decade-low levels, OPEC secretary-general Salem El-Badri’s comments at the annual IHS CERAWeek shed some light on the Saudi rationale to retain market share rather than cut production. “Any increase in price, shale will come immediately and cover any reduction,” he said. This assertion closely mirrors that found in the IEA Medium-Term Oil Market Report (MTOMR) 2016 which was published this past month. The IEA predicted that while US production will fall by 600,000 bpd and 200,000 bpd respectively in 2016 and 2017, US supply reduction will be temporary and, from 2015 to 2021, US production will actually grow by a net total of 1.3 million bpd, i.e. the IEA predicts a US production rebound in the 2018-2021 period driven by an implied rising crude oil price. Altogether, US production growth is expected to account for more than two thirds of the net non-OPEC increase to 2021. With respect to OPEC production growth, Iran is expected to lead, adding over a million barrels per day by 2021 (from 2.8 million bpd in 2015 to 3.95 million bpd in 2021).
There were several logistics developments in the month of February regarding oil pipelines: Medallion announced a binding open season for a proposed expansion of Medallion’s existing crude oil pipeline system in Texas, Magellan Midstream and Plains All American announced an extension to the open season for a new origin on their BridgeTex pipeline in Texas, Enbridge announced that its Sandpiper and Line 3 Replacement projects will not enter service till 2019 because of regulatory hold-ups with the Minnesota Public Utilities Commission (MPUC), and Quebec filed an injunction against TransCanada with regard to the proposed Energy East pipeline.
With regard to natural gas pipelines, Laclede Group announced that it intends to build a 60 mile natural gas pipeline from the St. Louis, Missouri area to a connection point in southern Illinois in order to tap into the Rockies Express and Panhandle Eastern Pipeline. Additionally, American Midstream Partners announced a non-binding open season on its proposed Magnolia Pipeline Extension (a 45 mile extension of the Magnolia Intrastate pipeline which runs through a portion of Alabama) and ONEOK Bakken Pipeline applied for a permit to build an 8 inch diameter line NGL pipeline—dubbed the Bear Creek NGL Pipeline—near Watford City, North Dakota.
Valero’s plan for a crude-by-rail offloading terminal at its Benicia, CA refinery continues to languish in the regulatory approval process. This past month, the Benicia Planning Commission voted unanimously to deny Valero a permit to construct a rail spur at the company’s Benicia refinery. Valero is expected to appeal this decision to the Benicia City Council, which could meet to decide on the issue as early as mid-March 2016. The proposed project would enable Valero to bring up to 70,000 bpd (100 rail cars per day) of North American crude oil into the refinery via rail and was originally expected to start operations in 2015.
Imperial Oil also announced that it plans to build a diluent recovery unit at its Edmonton, Alberta crude-by-rail terminal. Imperial spokeswoman Killeen Kelly said that if the project receives approval from regulators and it remains economic to move forward with the project, construction could begin in early 2018 and the unit could enter service by 2020.