We are marking to market our 4Q18 EPS estimates for the IOC space, broadly bringing forecasts lower to account for the continual commodity price pressure throughout the period all the way to Christmas. 4Q also tends to be higher in capital spend, operating expense, and downstream maintenance, and so those factors are included as well.
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This Wednesday (1/9/2019) at 11am we’re launching our bi-weekly Energy webcast series and we’re kicking it off with our 2019 conviction ideas and drivers for why we see a return to $80/bbl Brent in 2020. Within, we outline our high level Energy views and portfolio construct. Register here to have access to every webcast.
We expect the EIA to report a crude inventory build of 4.0MM bbl for the week ended Jan 4, 2019. Imports should be lower w/w, but exports could be materially lower as well, likely a one-off phenomenon. The EIA’s “adjustment” factor - meant to represent unaccounted for volumes to reflect the difference between reported production, imports, exports, refinery runs, and inventory changes – has been unusually high recently, over 0.9MM bpd for the past two weeks. Our theory is that this excess volume is incremental NGL production that’s not getting appropriately marked as “Other Inventory”, where it belongs. Nevertheless, we must account for it in our crude model until the “adjustment” anomaly is resolved. On exports last week, we note there were several VLCCs loaded by lightering last week, which could result in a reported export figure higher than our assumption. Generally, VLCCs loaded by lightering have correlated to an error factor in our export model.
We expect the EIA to report a crude inventory draw of 2.1MM bbl for the week ended Dec 28. Year-end tax incentives should keep overall supply/demand balance in PADD 3 short, with low net imports and high refinery utilization driving the regional draw. We see relatively unchanged imports in PADDs 1 and 5 (East and West coasts) and are modeling flat w/w Canadian imports, which were higher than our model last week. L48 production + the adjustment factor has been higher than our forecast for several weeks, and therein lies the risk to our modeled draw.
We expect the EIA to report a crude inventory build of 1.3MM bbl for the week ended Dec 21st. Note that this week’s EIA report will be released on Friday, as opposed to the usual Wednesday. Last week, our forecast of a 4.1MM bbl build was high compared to the actual 0.9MM bbl draw due to understated exports in our model, as we missed several lightering vessels mistaken for Jones Act ships. However, the high-level theme of oil balance unsupportive of prices near term held up, and this week we see a continuation. Imports should be up w/w, offset by a modest uplift in refinery utilization. Exports should be lower w/w, but the error factor in our export tracker this week could be elevated as ship-to-ship transfers were higher, which throws off the timing of when exports are officially recognized.
OPEC published a detailed production quota table delineating country-level responsibility for the 1.2MM bpd cut announced at the Dec 6th meeting, including from non-OPEC participants. History suggests granularity around cut requirements probably will not be supportive of the oil price, since the issue is not a lack of detail, but skepticism around adhering to cuts, evidenced by the post-2016 cut period, when oil prices fell in each of the first 6 months of 2017. This occurred because the cuts were not actually visible in data until 2H17, and so the task now is to implement cuts on time, not simply preview them more thoroughly.
Each Monday at noon we’ll publish our EIA preview and seaborne oil monitors. We’re at a critical juncture in the oil market in the early days of an OPEC cut, but regular intervals of real time oil trade data are always valuable, in our opinion, and this is intended to be easily digestible ahead of market moving releases. It should complement our Monthly Product Pulse – which is intended to measure oil demand trends – as an oil supply/demand reader. We will publish four key oil supply datapoints, which could be subject to change depending on our view of fundamental drivers: 1) EIA crude preview; 2) Arabian Gulf East/West export splits; 3) total Arabian Gulf crude exports; and 4) “Other Swing Supply” (Russia/LatAM including Brazil/North Africa).
We believe there are some potential signals of trade negotiation progress between the US and China in recent oil trade data. Specifically, we observe as of last week US crude exports to China re-emerging, and Iranian crude exports to China falling.
OPEC is cutting, but the path to get there was like a John Le Carre novel, and our observation marketing is that generalist investors are not interested in political intrigue impacting performance. Despite the headlines, we believe fundamentals for both IOC and Refining earnings in 2020 are firm and are issuing a 2020 Brent forecast of $80/bbl and strong refining margins from crude differentials, especially light/heavy spreads. A 2019 recession bogey is clearly the most important risk near-term, but our view is that a macro-driven pullback creates a better entry point for the 2020 and beyond fundamental thesis, assuming a broader recovery is taking hold by then.
Over the past two weeks, our constructive crude oil view seemed to cross over from “at risk” to “the opposite of correct” due to a wholly one-sided combination of negative factors. Combing through the physical data, we think we missed the following: 1) Pent up (although probably overstated) US supply growth; 2) refined product export growth from the Arabian Gulf region on top of what appeared to be more balanced crude supply/demand; 3) a demand picture deteriorating more rapidly than acknowledged; 4) US inventory seasonality and export congestion. Our view that Brent should remain generally tighter than WTI (which is a support factor for the IOC group over other Energy sub-sectors) has generally held up (link HERE), but in the context of near-term oversupply in physical markets and overbought conditions on the index, it was directionally irrelevant.
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