Market Currents: US oil reliance on South America

As President Trump signs executive orders which pave the way for the Dakota Access and Keystone pipelines to move forwad, prices are running higher once again. Hark, here are five things to consider in energy markets today:

1) Yesterday we looked at how Arab Gulf crude imports to the U.S. totaled nearly 2 million barrels per day last year; today we take a peek at flows from South America. Venezuela leads the charge, accounting for nearly half of the 1.58mn bpd that arrived on U.S. shores from South America last year.

Colombia is the second largest source, accounting for over a quarter of the barrels, sending primarily heavy sour Castilla and medium sour Vasconia. Ecuador accounts for 228,000 bpd, sending heavy sour Napo and medium sour Oriente. Virtually all crude flows from South America to the U.S. are medium or heavy, with heavy crude accounting for 60 percent of total barrels.

Given that U.S. refineries are geared towards heavier crude from Latin America and the Arab Gulf, rising U.S. production (aka light crude) could not be directly substituted for these heavier barrels…at least not without some extensive refinery retooling. As we said yesterday, imports are here to stay.

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2) File under random but interesting: the Chinese Ministry of Industry and Information Technology (MIIT) has issued an updated list of recommended green vehicles, which will be able to receive government subsidies this year. The government is spending billions of dollars to promote electric and plug-in hybrids – to be both competitive globally, and to also reduce pollution. Given China has the largest – and growing – auto market in the world, these are key developments to keep an eye on.

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3) With talk of the new President easing regulations on drilling on federal land, there is a timely piece from the EIA on how much revenue the government currently collects from energy production activities on federal land. For the last fiscal year, the government collected $6 billion in revenues from royalties, rental costs, and other fees; royalties made up for the lion’s share, accounting for 86 percent of the total.

Crude oil royalties account for ~55 percent of the energy-related revenues, hence the drop in oil prices in recent years (as well as lower natural gas prices) have caused revenue to drop from over $14 billion in fiscal year 2013 to $6 billion in fiscal year 2016.

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4) As a deep freeze hits Europe, day-ahead power prices in the region have spiked, climbing above 100 euros per MWh in some countries such as Germany (where it is usually 30 – 40 Eur/MWh…and warmer). Russia supplies Europe with approximately a third of its natural gas, and Russian flows are up 25 percent through the first half of the month compared to last year.

Despite strong natural gas flows from Russia – and Norway too – European natural gas stockpiles are less than half full, and spot LNG prices have risen to incentivize cargoes to head to Europe. As a consequence, European spot LNG prices have risen above Asian prices for the first time in two years.

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Inclement weather is broad-based in Europe, with French peak electricity demand being pushed up to close to its historic peak in 2012 (hark, below). France relies on nuclear power to meet the vast majority of its electricity, but given a series of shutdowns for maintenance, the country has been caught short, so to speak.

Accordingly, the U.K. is generating a record level of electricity, and exporting it via a cable link to France at the highest level since at least 2010.

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5) Finally, I am now a regular contributor to the Texas Standard, discussing current energy issues and whatever else is pertinent. Yesterday we discussed why Exxon has doubled its acreage in the Permian Basin. The interview can be accessed here.

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