Thursday, December 17, 2015

Miscalculation. It certainly appears Saudi Arabia completely miscalculated a year ago when they elected to maximize production in an attempt to increase market share. They made the decision when their analysis showed that prices would rebound within the year. Saudi Arabia's national budget is based on $100 oil. See story below.

US crude oil exports. Over the next few weeks we should start seeing stories about what it means for the US oil and gas industry once the repeal of the ban on crude oil exports goes into effect. A reader sent me a story last night suggesting there is "no" market for US light oil overseas -- or if there is, it is minimal. I did not link the article for various reasons, but mostly waiting to see what The Wall Street Journal has to say. Having said that, I have to agree that based on what I see, there is no overseas market for US crude oil in the short term. Remember, compared to Brent, WTI is landlocked, and there is a cost of getting WTI to ocean-going tankers. Then, there is the additional expense of shipping the oil across the Atlantic and Pacific oceans. Some analysts suggest WTI has to have a $4 premium to Brent to make WTI competitive; right now, WTI is selling about $1.10 less than Brent. The WTI-Brent spread will take on huge importance.

Batteries. The other day a reader sent me a short note suggesting the stories being posted by the solar industry touting improved batteries is a bunch of malarkey. I have to agree. Despite decades of research and billions of dollars and yen spent on better batteries, there is little to show for it, and there does not seem to be much on the horizon. The industry with the deepest pockets and the most interest in better batteries is the automotive industry. A scan of the headlines over the past year suggest that the automotive industry has switched its attention from better batteries to driverless cars. If you doubt me, just search the major business internet networks and scan through the past few months of headlines. You will see very few stories on better batteries and a whole lot more stories on driverless cars. With the price of gasoline as low as it is and tea leaves suggesting low prices could be here for quite some time, EVs and hybrids are getting less press. [Shortly after writing that, about an hour later, this story was posted: Google will make its driverless cars a stand-alone unit. Case made.]

Fed-fueled Santa rally. It's a strange world when global stock markets -- including US markets -- surge when the Fed raises interest rates. My hunch is that with a quarter-percent increase -- which had been baked into the market months ago -- the rally is simply the typical "Santa" rally and has nothing to do with what the Fed did. If the surge is related to the Fed rate, it's because there's a general feeling that it's "one and done." If nothing else, it should spur high-expense purchases (automobiles and houses) due to the fear of further rate increases.  

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UK to allow fracking under national parks. Reuters is reporting:

British lawmakers on Wednesday voted in favour of the use of fracking to extract shale gas under national parks, weakening a decision against fracking in national parks made earlier this year and giving shale gas explorers access to more resources.

Britain is estimated to have substantial amounts of gas trapped in underground shale rocks and Prime Minister Cameron has pledged to go all-out to extract these reserves, to help offset declining North Sea oil and gas output.

But the use of fracking, a process whereby water, sand and chemicals are injected to open up the shale rocks and release the trapped gas is opposed by environmental campaigners. Britain imposed a ban on fracking inside national parks in January under the Conservative-Liberal Democrat coalition government, in a concession to the opposition Labour Party which had called for tighter controls to be written into law.

Policymakers, who supported the rule change with a slim 37-vote margin, decided to loosen this rule on Wednesday by allowing shale gas explorers to undertake fracking at least 1,200 metres below the surface in national parks. The vote, which was held without a parliamentary debate, did not change a policy that bans fracking inside national parks. 

OPEC thought prices would have recovered by December, 2015. Wrong. Reuters is reporting:

OPEC producers see little chance of significantly higher oil prices in 2016 as extra Iranian production could add to surplus supplies and the prospect of voluntary output restraint remains remote.

OPEC delegates, including those from Gulf OPEC members, say higher oil prices are not around the corner yet, despite further growth in global demand and as a rise in non-OPEC supply is tempered by prices that have more than halved in 18 months.

Some see a more balanced market by 2017 even though they expect further pressure on oil which could send prices to test the mid-$30 a barrel range on market sentiment rather than fundamentals, before slowly rebounding by the second half of next year.

The comments, days after OPEC failed to agree a production ceiling for the first time in decades, show delegates in the producer group are pushing back their expectations of a stronger market. In August, Gulf delegates were hoping for oil at $60 a barrel by this month.

Active rigs:

	12/17/2015	12/17/2014	12/17/2013	12/17/2012	12/17/2011
Active Rigs	64	182	186	183	200

RBN Energy: update on ONEOK -- a new feature.

ONEOK Partners own and operate one of the largest natural gas liquid (NGL) networks in the U.S. Like most midstream Master Limited Partnerships (MLPs), OKS’ stock price has dropped by more than 50% since mid-2014.  This despite the fact that most of ONEOK’s revenues are not directly impacted by lower crude and natural gas prices. Today we introduce the first of our new Spotlight reports (a joint venture between RBN and East Daley) available exclusively to Backstage Pass subscribers- that feature deep-dive fundamental analysis of select energy players’ operating assets.

The first report features ONEOK and indicates that the company has a strong portfolio of fee based business fed by some of the most attractive producing basins in the U.S., particularly the Bakken which has the potential to amplify the company’s performance both to the upside and downside.

Before we get to our first report on ONEOK - please note that Spotlight analysis is provided for reference only, and should not be viewed as investment advice.  Neither RBN Energy nor East Daley Capital is an investment advisor.  Neither company provides investment, financial, tax, or other advice, nor does either company operate as a broker-dealer.  Neither company endorses the purchase or sale of any particular security or makes any other market recommendation.

Based in Tulsa, OK, ONEOK was founded as Oklahoma Natural Gas Company in 1906, one of the oldest corporations in Oklahoma. Today ONEOK, Inc. (OKE) is a major U.S. midstream company and together with its MLP OKS (see Masters of The Midstream for more on energy company partnership structures), owns and operates one of the largest natural gas liquids (NGL) networks in the U.S, including gathering and long-haul pipelines, natural gas processing plants, fractionators, storage and pipeline distribution systems.  The company also operates natural gas transmission pipelines, natural gas storage facilities and provides a range of services to energy markets.  ONEOK’s activities are focused on three regions - the Rocky Mountains (including a strong position in the Bakken), West Texas and the Mid-Continent.

ONEOK’s core assets are its NGL pipeline and gas processing/fractionation facilities. At the link, figure #1 is an overview map of OKS’ NGL pipeline assets. Regular RBN readers will recall that NGLs are extracted from “wet” gas at processing plants that are usually close by to production. These processing plants output dry gas for pipeline distribution to natural gas consumers and a mixture of NGLs known as “raw-mix” or Y-grade. The raw-mix is then typically shipped by pipeline to a fractionation facility closer to market that separates the 5 purity NGL products – propane, normal butane, iso-butane, ethane and natural gasoline. 

Geographically the OKS NGL system can be divided into northern and southern halves with the Bushton, KS fractionator as the demarcation point between the two. 

The northern half includes the 135 Mb/d Bakken NGL pipeline (aqua line on the map) - which is linked to the 255 Mb/d Overland Pass pipeline (50% owned by a JV with Williams) in northern Colorado. Both these systems transport raw-mix NGLs to the Bushton/Conway, KS market hub from production basins in the Rockies (Colorado and Wyoming) and the Bakken in North Dakota. The 134 Mb/d North System  transports NGLs (including purity propane) and petroleum products to Midwestern markets in Kansas, Iowa, Missouri, Indiana, and Illinois.

The southern half of the OKS NGL network consists of four main pipeline systems. First is the 240 Mb/d Arbuckle pipeline that transports raw-mix from production in Oklahoma and the North Texas Barnett shale to Gulf Coast fractionators (mainly located at Mont Belvieu, TX – where OKS own nearly 300 Mb/d of fractionation capacity).

Second is the ONEOK NGL system that can be divided into regional gathering pipelines which collect raw-mix from the SCOOP, Woodford, Mississippi Lime, Cana-Woodford and Granite Wash plays and deliver into OKS’ five Mid-Continent fractionation facilities (640 Mb/d capacity) and the Sterling system (yellow lines) that delivers raw-mix to Mid-Continent fractionation (600 Mb/d) and to Mont Belvieu (400 Mb/d).

The third and fourth NGL pipeline systems – the Mesquite and West Texas LPG were both acquired by OKS in late 2014. The West Texas pipe delivers raw-mix from the Permian to Mont Belvieu and the Mesquite delivers raw-mix from the Barnett Shale to Mont Belvieu.

Jobs. Bloomberg is reporting:

Jobless claims fell by 11,000 to 271,000 in the week ended Dec. 12, a report from the Labor Department showed Thursday. The median forecast in a Bloomberg survey called for 275,000. Last week coincided with the period that the government surveys businesses and households to calculate payrolls and the jobless rate for December.

The four-week moving average, a less volatile measure than the weekly claims numbers, was little changed at 270,500 last week after 270,750.