US, Canadian oil producers stress supply security after Saudi attack
The North American upstream sector on Monday was cautiously watching the price impact of the weekend’s attacks on key Saudi oil infrastructure, with executives and analysts saying the incident underscores the importance of US and Canadian oil security of supply and access to export markets.
For US producers, a sustained outage at Saudi Arabia’s 7 million b/d Abqaiq processing plant could boost demand for Permian Basin light sweet crude exports and may bring drillers some temporary relief from Wall Street’s cost pressures, analysts said.
Canadian producers may be able to send more heavy barrels to US Gulf Coast and Atlantic Coast refiners if higher global prices lead Alberta to ease its production curtailments.
Continental Resources CEO Harold Hamm, an energy adviser to US President Donald Trump, said “everyone seems to forget” the importance of the health of the US oil and natural gas industry until there is a crisis.
“While the current situation should prove to be temporary, it drives home the need and importance for an energy-independent America, particularly with crude oil production and supply,” Hamm said in an emailed comment to S&P Global Platts.
The Saudi crisis comes as US drillers were confronting projections of weak global demand just as major new Texas pipelines and export terminals relieved bottlenecks for Permian crude supply.
US export grades traded higher Monday, with West Texas Intermediate crude at the Magellan East Houston terminal heard trading as strong as a $4.75/b premium to cash WTI before falling to a $4/b premium. The grade was assessed at a $2.55/b premium Friday.
“We’re basically going to be asked to fill this void in supply in the short term,” said Fernando Valle, an analyst with Bloomberg Intelligence.
FOUR-MONTH DRILLING LAG
With pipeline capacity increasing out of the Permian Basin, the US is in a better position to respond to a crude shortfall than it would have been a year ago. But even if independents decide to throw promises of fiscal discipline out the window and increase production, the lag time between making the decision and actual results could short-circuit the potential benefits, other analysts predicted.
“Although short cycle, this response is likely to take several months however, with a typical lag of four months between drilling and production,” Goldman Sachs said in a note Sunday. “This was visible last year, with the rally to $60/b WTI prices in late 2017 leading to an acceleration in production growth in the following summer.”
While the attack on Abqaiq probably will not spur a major spike in US crude production, it still could have benefits for US independents.
“They could increase their hedging [at higher prices],” Williams Capital Principal Gabriele Sorbara said. “This could also get the equity markets a little more interested in them.”
The Canadian upstream has faced government-imposed production quotas since January in an effort to address record-wide price discounts for Western Canadian Select caused by a lack of sufficient pipeline capacity.
“Alberta is the most secure major source of energy on Earth,” Alberta Premier Jason Kenney said Monday on Twitter. “The strike on Saudi refineries should be a wake-up call. The world needs reliable, stable energy, and Alberta can provide it.”
US TO BE NET OIL EXPORTER IN OCTOBER
Trump bragged Monday that the US has become a net energy exporter, although the US will only reach that milestone for the first time on a monthly basis in October, according to the Energy Information Administration’s latest forecast, which was released last week.
Crude and refined product exports will exceed imports by 20,000 b/d in October, with net exports expanding to 250,000 b/d in November, EIA said.
EIA sees the US continuing to be a net oil importer on an annual basis in 2019, with imports exceeding exports by an average of 57,000 b/d. Then the US will flip to annual net exporter in 2020, with exports exceeding imports by 58,000 b/d.
The growth of the Gulf Coast refining sector made the US a net exporter of refined products in 2011. Rising crude exports since 2015 have made the overall net oil exporter status possible.
Still, US crude imports will continue to exceed crude exports by 4.2 million b/d in 2019 and 4.29 million b/d in 2020, EIA said.