Crude Oil Demand and Frac Spread Count (Down)

The Frac Spread down is down by 14! from 175 to 161. And it is all due to one thing: weather. Concerns about snow and freezing weather is affecting everything including spread activity. Natural gas has water in it. When it starts to freeze down you have to shut down to prevent equipment. You have to do what is called a “freeze off”. We are expecting a quick snap back in the coming weeks, of course whether dependent. By the end of February we are expecting it to be close to 185 and from there it will take it up to 200. The production will then hit about 11.2 mbpd.

 

 

We had a big draw of 6.64 mbpd last week, 6.81 after we add the SPR. We had a drop in imports and exports, the later dropping more than the former.

 

 

In terms of WTI crude curve – most of the US E&P’s talked about building their balance sheet on 40 till 45, but right now given the recent rally, we are looking at 50s in terms of hedging till 2023 June – July. E&P, therefore, are hedging, completing, drilling. At this point they are trying to backstop the decline curve and build some momentum. We think we can get to 11.3 with 230 spreads but at that point we will face a horse-power problem to which we alluded to in our last show and blog.

 

 

Gasoline, still above YoY 5 years average, in distillate small increase of 13,000 barrels per day, jet fuel had a big decline, exports were down 866K, imports were down 650K. WE are on a net build on the product side but a net draw on the oil. It is imperative, as always, to also have a look at what’s happening in China.

 

The following graph shows 11 city Metro Passenger Volume, Oil refinery run rate, steel rebar inventory. The first one is already down and second is taking a dip. This is going to be problem as we think about Chinese activity. AS we look at Shandong, with teapot refiners sitting flat on crude and storage. Fuel oil stock side is also headed in the wrong direction due to lack of demand in the market.

 

On the economic front, smaller firms in the U.S. continue to struggle, revenues declined. Whereas the large firms are gaining the market share, going online, doing e-commerce sales. But the smaller firms account for a huge share of the US economy. The small business optimism index is pointing towards a lower trend too. Activity in the advanced economies have improved only slightly in February with overall the trend becoming flatlined. We are still not back to the January levels. The recovery has been mainly driven by gains in North America, Asia – with adjustments, some normalization in India and Malaysia. However, China is facing some headwinds.

Lastly, some interesting news in terms of global oil inventory levels. The IEA sees a bigger year end (2021) stockpile, after some adjustments,  as compared to the last month – 820 m above and 2018 levels, up from 420 m surplus seen a month ago. Whereas OPEC sees the opposite – surplus at 380 m barrel, down from 690 m, assuming that the group stick to their production cuts.  This diverging views are mainly due to difference between demand outlook. biggest buyer of crude still remain well below seasonal norms.

 

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