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According to the EIA’s monthly Short Term Energy Outlook (STEO), U.S. total crude oil production should average 6.4 MMb/d in 2012, an increase of 0.8 MMb/d from 2011. Projected domestic crude oil production continues to increase to 7.3 MMb/d in 2013 and 7.9 MMb/d in 2014.
U.S. crude oil production has not topped 7.9 MMb/d since January 1989.
The two primary basins behind this growth are:
• Williston (Bakken), from 0.84 MMb/d today to 1.19 MMb/d by December 2014
• Western Gulf (Eagle Ford), from 1.07 MMb/d today to 1.75 MMb/d by December 2014
The Permian Basin is also expected to show solid growth; from 1.23 MMb/d today, to 1.40 MMb/d by the end of 2014.
Thus, as U.S. crude oil production surges, outlets are being created for the offtake… to the benefit of U.S. railroads. As we first noted last month, the oil industry is filling the void created by coal’s death. Whereas year-on-year coal movement’s in November 2012 were down 10½%, shipments of oil were up by 45% and shipments of crushed stone, gravel, sand (as in, fracking sand) were up by 7.8%.
To this effect, per a news release on its website, yesterday Phillips 66 announced that it signed a five-year contract with Global Partners LP under which Global will supply (via rail) Phillips 66’s Bayway refinery (New Jersey) with 91 MMbs (≈50 Mb/d) of Bakken crude oil.
What’s more, according to various media accounts, by the end of this year Burlington Northern Santa Fe railroad plans to boost crude oil shipments by 40 per cent to 700 Mb/d.
Thus, with each passing month JP Morgan’s decision to let Delta Airlines buy the bank a refinery (Trainer, PA) makes more and more sense.
More to the point, as illustrated in today’s issue of the The Schork Report, since summer Bakken crude oil has fallen sharply against Brent… for a very good reason. Since then supplies at the NYMEX terminal complex in PADD 2 Cushing have surged by 16% to a record 49.8 MMbs. Overall supplies in PADD 2 have ballooned by 9.9 MMbs since summer to a record 113.4 MMbs. In that time, the year-on-year surplus has trebled from 6.6% to 20.1% which equates to more than a year’s worth of Phillips 66 newly minted supply agreement with Global.
As we look ahead to the first half of 2013, we know the flow on Seaway is ramping up and we know that railroads are tripping over themselves to secure offtake agreements. In other words, the market is working its way to de-bottleneck the glut of oil in the U.S. midcontinent. Therefore, we think it reasonable that in the months ahead, the blue diamond in the chart on page 1 of the The Schork Report, either moves left along the x-axis or (and) up along the y-axis towards the trendline.
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The Schork Report is a specialized research note providing technical and fundamental views of the energy markets. The daily report details specific trading strategies based on proprietary research and analysis. Our global client base represents all aspects of the energy trading market, including financial institutions, hedge funds, producers, marketers and end-users.
*Disclaimer: The information in the Market Commentaries was obtained from sources believed to be reliable, but we do not guarantee its accuracy. Neither the information nor any opinion expressed therein constitutes a solicitation of the purchase or sale of any futures or options contracts.