Monday Morning -- November 27, 2017

WTI: there will be a flurry of articles with regard to pricing of WTI/Brent anticipating OPEC's decision. This is probably the best review I've seen (or at least the outlook most aligned with my own thoughts), over at Seeking Alpha:

• this month marks the third anniversary of OPEC's 2014 "shot heard 'round the world" in the oil price war with U.S. shale producers
• the supply response from U.S. shale producers is so fast, increasing demand can easily be met by existing oil and gas inventories and resources
• if current trends persist, we can see U.S. production hitting 10 MMBopd in 2018, driving U.S. oil exports to new highs
• U.S. and OPEC crude oil inventories remain above five-year averages
• in our view, what’s driving the recent run-up in oil prices is a combination of unfounded optimism driven by the decline in oil inventories combined with renewed geopolitical risks. We expect OPEC to extend current production quotas and there will be no bullish surprise

In other words, a "wash."

In other words:

• there's a glut of oil in the US, although some say the global supply-demand situation has already re-balanced
• US shale operators locked in pricing for 2018 when WTI recently (and briefly) hit $59 
• if $50 is the new floor for WTI, the amount of oil brought to the market by US shale operators will increase, putting a damper on the ceiling
• Saudi remains in deep doo-doo

Fear will drive prices in 2018: from Forbes, the same story as that linked in the story above.

OPEC-Russia vs US: Bloomberg has an interesting graph, but I bet it takes you ten minutes to figure it out. LOL. It's a great graph but very different from most graphs. There may be a 3-year tug-of-war between OPEC-Russia and the US but right now, clearly, the US is winning. And by a large margin.

The graph at the link is a "long" vertical graph and somewhat interactive.  Below is a screenshot of the graph for the month of November. At $63 (Brent), OPEC-Russia is producing about 9% more than they did in 2014 (my hunch: most of that increase is Russian, could be wrong); whereas, the US is producing about 15% more in late 2017 than it did on January 1, 2014.

Incredible: US new-home sales unexpectedly rise to highest in a decade. Again, a "word search" reveals no mention of  "Trump." In Bloomberg. Headline at Fortune, new US home sales just reaced a milestone. Headline at Los Angeles Times, US home sales rise at fastest pace in a decade, causing a surge in prices. Ya gotta love it. Folks wouldn't be buying houses if they were negative about the economy. I wonder how Mark Cuban, Andrew Ross Sorkin, Paul Krugman, et al are doing with their prognostications?

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Back To The Bakken

Active rigs:

$58.41↓	11/27/2017	11/27/2016	11/27/2015	11/27/2014	11/27/2013
Active Rigs	55	37	64	183	191

RBN Energy: will US oil markets be roiled by a new FERC order?

Last Wednesday, November 22, the Federal Energy Regulatory Commission acted on a Petition for Declaratory Order by Magellan Midstream Partners in which the midstreamer asked for FERC’s blessing to establish a marketing affiliate to “buy, sell and ship” crude oil on pipelines owned by Magellan as well as pipes owned by other companies.

Today Magellan does not have such an affiliate, although many of its competitors do.

Most of those competitors use their affiliates to generate incremental throughput on their pipelines, sometimes by doing transactions that result in losses for the marketing affiliate, but that are still profitable for the overall company because the marketing arm pays its affiliated pipeline the published tariff transportation rate.

FERC denied Magellan’s request, coming down hard on such transactions as “rebates” specifically prohibited by the law governing interstate oil pipelines. In today’s blog, we take a preliminary look at FERC’s Magellan order and what it could mean for U.S. crude oil markets.

The FERC finding spells out aspects of crude oil pipeline regulation that have been in place for over 100 years, but have been subject to varying degrees of interpretation and enforcement and are very different from the rules that cover natural gas and gas pipelines.

Although crude and gas pipelines that cross state lines are both regulated by FERC, the laws and rules governing crude oil pipelines are based on an entirely different statute — the Interstate Commerce Act instead of the Natural Gas Act  — and the evolution of FERC regulation of oil pipelines has a pretty tortured history ever since FERC took over this area of regulation from the Interstate Commerce Commission.

These oil pipeline regulations have been around since the Hepburn Act of 1906, which made oil pipelines subject to the ICA of 1887. Up until that time, the ICA had applied only to railroads (which turns out to be relevant to the Magellan order).

Under the ICA, crude oil pipelines became “common carriers” subject to all sorts of rules related to who gets access to what services (but not whether or not a pipeline can be built, which remains in the purview of the states for crude pipes).

There are two important aspects of these ICA-based regulations relevant to the Magellan PDO. First, the rules for setting crude oil pipeline tariffs are somewhat ambiguous, to say the least. The tariffs aren’t necessarily based on costs, the approach to setting rates can vary over the life of a pipeline, and the rules have pragmatically mutated from time to time, to the extent that they can change without a lot of warning.

All this provides both opportunities and risks that don’t exist to the same degree for gas pipelines. Second, the rules governing permissible transactions on crude pipes are quite different than those for gas pipelines, and are even more ambiguous than the crude oil pipeline tariff rules. For example, gas pipes are subject to highly structured mechanisms for any transaction that would move gas on a pipeline for a rate lower than the published tariff. Whether the transactions are between the pipeline and a shipper or between two shippers (one “renting” its capacity from another), the gas deals are subject to rules covering what is legal, and how the transactions must be broadcast to the marketplace (via the gas pipeline’s “Electronic Bulletin Board” — or EBB — websites). No such structured mechanisms exist for oil pipelines.