Wow, What A Treat -- The Myths Of Shale -- Richard Zeits -- March 22, 2018

One of the reasons I went into such depth on two Slawson wells was to eventually get to Part III: observations and comments regarding the myths of shale. So, what a treat to see Richard Zeits continue his series on the myths of shale oil.

Today, over at SeekingAlpha, the shale oil myth, "it is too light and no good." [The blog has talked about his often.]

Summary by Zeits:

• shale oil skeptics claim that the global crude supply is turning alarmingly light due to the growth of shale production
• the world is facing acute shortages of heavy and medium grades, the argument goes, and shale oil is of little help in meeting that demand
• market data indicate that the claim is without merit
• shale growth has been perfectly well accommodated by the global refining system
• shale oil is fully "sold out" and trades at premiums to heavy grades

Hubbert and Peak Oil folks never saw this graphic coming:

Observations from Richard Zeits:

Is the shortage of heavier crude grades acute? We would argue, not more so than the shortage of all other grades. While global demand for distillates has been on the rise, demand growth for lighter products - gasoline and naphtha - has also been quite strong. Light crudes have been sold out just as much as heavier crudes.

The global refining industry has proven very capable of using all available crude grades to meet demand for products and we do not see this changing anytime soon.

Amazingly, and coincidentally, Zeits has a great graph on the very day that John Kemp noted over on twitter that the delta between WTI and Brent was narrowing, almost nil.

I'll post that graph elsewhere.

More from Zeits:

On a per degree of gravity basis, the narrowing is ~$1/barrel per 10 degrees API for the Middle East and West Africa baskets. For the Gulf of Mexico example, the narrowing was more pronounced, roughly twice as great.

In percentage terms, the differentials narrowed by ~20% for the Middle East basket and ~30% for the Gulf of Mexico basket.

This is the measure of Mr. Market's reaction to what one might think of as a "perfect storm" for the global light/heavy supply mix. In other words, the impact of the lighter global supply slate on prices has been minimal.

In our interpretation, this market data disprove the claim that the global supply mix is significantly out of balance and the world is facing acute shortages of heavier crudes.

Much, much more at the link.

If there is a shortcoming in his essay today (and far be it for me to come up with anything negative with regard to Zeits, a "shale demi-god") it would have to be that he did not mention the reason behind and the importance of the Keystone XL. Although not treasonous to have stopped it, but ... I consider "killing" the Keystone XL right up there with the Continental Congress refusing to fund George Washington's troops so they afford parkas and water-proof boots.

Flashback: WTI And The Changing Dynamics Of Global Crude Oil -- CME Group, January, 2017 -- Posted December 18, 2017

This is a must-read; too much to excerpt.

The article begins:

The new storage and pipeline infrastructure in the United States is so significant that it is likely to have a transformational impact on the crude oil market for years to come. These changes are likely to spur more trading in US domestic grades and will magnify the role of WTI has global benchmark.

The catalyst for this transformation has been the sharp rise in US oil production, and more recently, the lifting of the export ban on US crude that occurred at the end of 2015. In order for the US to turn itself from a net importer to exporter, several key pipelines had to be reversed. At the same time, oil refiners and storage operators along the Gulf Coast set about increasing the amount of available storage capacity. A number of new terminals are in the process of being built along the US Gulf Coast to handle the rising number of ships arriving to load cruse destined for the international markets. These infrastructure changes will transform the US into the marginal supplier of the world than a regional supplier. This will allow producers to take advantage of arbitrage opportunities that pre sent themselves beyond the US shores.

There are several subsections:

• US crude oil production proves resilient
• US exports are increasing
• expansion of crude oil infrastructure in the US Gulf Coast
• NYMEX WTI futures volumes outpace Brent futures
• Brent production in decline
• dated Brent-related derivatives remain a focus

For future reference:

• light oil, US; oilprice.com, November 28, 2017
• detailed guide on the many different types of crude oil: oilprice.com, December 2, 2009
• effective January, 2019, it sounds like the CME Group my designate one "standard" US light sweet grade oil

"They" Must Be Reading The Blog -- October 29, 2015

Just a couple of days ago I suggested that we are witnessing a new phenomenon in the United States: the "establishment" of non-government strategic petroleum reserves.

Now, CNBC has brought up the same issue, asking whether we need the SPR any more. There is so much craziness in the article.

The lede suggests that the government plans to sell a lot of oil out of the SPR. In fact, they will sell on an annual basis, 5 million bbls, starting in 2018. North Dakota has choked back oil production and is producing 5 million bbls every five days; unfettered, in a national emergency, North Dakota could easily produce 5 million bbls every two days. And that's just the Bakken. The Permian is bigger and the Eagle Ford is probably bigger.

Then, the article suggests that the SPR oil sale will raise huge amounts of money to fund the government. In fact, we are talking maybe $2 billion. (5 million bbls x $50 = $250 million annually).

Whether it's $2 billion or a fraction of that, both are rounding errors when it comes to the US budget, deficit, and debt.

Then this from an analyst who apparently has never heard of the Bakken:

McNally says that in addition to the sales already planned, the government has been eyeing the SPR to fund another government project — highway funding and transportation.

"If this turns into a feeding frenzy and we sell down our entire reserve, that's where it could become a market issue," McNally said. "We better be sure we'll be at peace, and I wouldn't make that bet." 

According to the article, the SPR stands at slightly less than 500 million bbls. North Dakota produces over 400 million bbls as it is right now, and unfettered could easily double that. 

Another analyst has it partly right:

The barrels set to be sold are "hardly even a blip on the screen," he said. "Down the road it will have an impact [on oil prices], but not as much as other macro elements." 

But this is where he is wrong: bringing 14,000 additional bbls to market each day -- in a market that uses 9 million bbls daily -- will have no effect on price whatsoever. 

The article completely missed the opportunity to talk about the amount of oil being held back in North Dakota and why it is being held back.

By the way, there have now been two stories in the past week that suggests there is a relative shortage of light crude oil for refiners, particularly for refiners on the East Coast. One story was in the Wall Street Journal; the other story was posted by RBN Energy.