Monday, August 27, 2018


Bloomberg's Electric Vehicle Outlook of 2018 came out. Bloomberg keeps revising the displaced crude oil by the adoption of EVs. In 2016, Bloomberg said 13 million barrels per day (mbpd) of crude oil would be displaced by the adoption of EVs by 2040. In 2017, Bloomberg revised that number down to 8 mbpd. Finally, it was revised down further, to 7.3 mbpd at its 2018 outlook. There are a few reasons behind those downward revisions:

*As you see in the chart below from IEA's Global EV Outlook, the number of the private charging outlets have been growing at a fast pace. However, the growth of the number of the publicly available charging outlets has been nothing close.

*More infrastructure upgrades need to take place to increase the number of publicly available fast chargers.

*Companies that go for mass-production of the EVs and try to market them for more reasonable prices, need to prove their profitability.

It's interesting that Tesla and the shale companies are in the same basket when it comes to that. Both Tesla and shale companies have been trying to ramp up their production and claimed low break-evens. However, both of them have been criticized that they cannot generate free cash flow.

*Tax incentives have played a major role in the growth of the EVs market so far. The approach of the local and federal governments will play a huge role in the growth projections until the EV manufacturers bring their production costs to lower levels.

China has been replacing its diesel buses with E-buses at a rapid pace. Every five weeks, China is adding about 9.500 e-buses to its fleet. In the last 5 years, 275.000 bpd of fuel demand has been displaced by e-buses. It is expected that the growth of the share of EVs in public transportation will outpace the growth of the share of EVs in the passenger vehicles segment. 

*Lastly, the oil price will maintain as a major factor in the investments regarding EV sector. Spikes in oil sector would motivate consumers to make a transition to an EV from a vehicle with an internal combustion engine.

Tuesday, March 13, 2018

Changes in Flow Maps of Saudi and Iraqi Crude

First of all, I want to thank Matt Smith from Clipperdata for the data and great analysis he constantly provides. I learn a lot from him and utilize the data he shares. Let's begin with the track record of the OPEC countries to agreed cuts. Iraq has been the black sheep of the group with its low compliance rates. If Venezuela had not gone through the political turmoil and Saudi Arabia had not taken the burden with higher compliance rates, the oil price outlook nowadays would be totally different. Saudi Arabia and Iraq have worked together to improve those measures. In February, Iraq's compliance rate reached 85%. In 2017, the flow map of imports has changed dearly. Saudi Arabia cut its imports to the U.S. to a great extent to make an impact in the U.S. inventory levels and to eventually boost the oil prices. We see below the imports of Port Arthur refinery, the largest refinery in the U.S. By the way, it is owned by Motiva, a wholly owned affiliate of Saudi Aramco. We see in the first nine months of 2017 all the declining imports from Saudi was replaced by the imports from Iraq.

We see the updated data on crude imports of the same refinery. We see the imports from Saudi Arabia have been rising again since November and those increasing numbers replaced the Iraqi imports. The imports from Iraq totally disappeared in the first two months of 2018. 

When we look at the data on the crude imports of another major refinery, Garyville, we see the Iraqi imports have taken the place of Saudi imports within the same timeline. As Saudi imports started increasing in the last quarter of 2017 at Motiva refinery, it totally disappeared at Garyville refinery in the last six months. It has been known that Saudi Arabia has cut its exports to the U.S. and shifts more of its flow to the Asian markets. We see a correlation with other OPEC members too.

Last year, we have seen a lot of changes in the flow map of the crude oil. This year is open to even more changes. The increasing output of the U.S. producers, which seems to hit 10.9 mbpd in the light of the capital expenditures of the shale producers. Over 80% of the supply growth of tight oil is over 40 API. That means the U.S. will end up much more ultra-light oil than what its refineries demand at the moment. We see ExxonMobil making some moves recently, announcing big investments in the infrastructures of their refineries to enable them to process lighter oil. However, these have minor effects in today's demand structure as those upgrades take time and we do not know if other major oil companies will follow similar paths. So, that means the U.S. needs to export more oil to the Asian markets throughout the year, and that will also make an impact on the flow map of crude oil. It is interesting how the U.S. oil demand growth was the main driver of the oil sector for many years, and OPEC countries were trying to take a cut from that market. Nowadays, Asian demand growth is the main driver, and the U.S. is trying to steal some market share from OPEC members. I will talk more about the increasing ultra-light oil supply of the U.S. and its potential outcomes for the oil market at another article.

Wednesday, January 24, 2018


Let's start with basics. You will see the different benchmark crudes lined up according to their API gravities. Canada is a major heavy oil producer and WCS pricing has been recently hit by the pipeline constraints. In November, Transcanada shut down Keystone Pipeline due to an oil spill which transports 590,000 barrels per day from Alberta to Cushing. They couldn't restore the full capacity rates even after the restart due to pressure restrictions. It was mid December when its average flow rate was restored. 
The apportionment rates for the lines 4 and 67 which transport WCS spiked from 21% in December to 36% in January. That increase indicates the demand for shipping oil by pipeline has been higher than the pipeline capacity. When that major pipeline disruption bundled with transportation bottlenecks, WCS pricing has been extremely pressured. Canadian heavy oil producers could not take advantage of the recent rally of oil prices as WCS has been trading at an enormous discount due to those factors as you see at the chart below.
Canadian oil producers are actually lucky that Venezuela, another major heavy oil producer, has been struggling at maintaining its crude oil output due to economic and political turmoil that it has been going through. Mexico and Colombia's heavy oil outputs have been declining too. Otherwise, that discount might have reached even higher levels. 
There is a major rule in economics. You set a good foundation which is infrastructure in this case, and start the growth according a plan. At that phase, controlling the pace of the growth is a major task. Canadian energy sector has been quite lucky in one way. The US almost doubled its crude oil imports from Canada in the last 8 years. The US has increased its energy partnership with Canada, and it gained the biggest proportion from the increasing demand. 
Canada is quite lucky as it is located right next to the second largest crude oil importer, and it demands a lot of heavy crude as the Gulf has some of the most complex refineries that can handle heavier crude. Everything is not so bright though. First of all, many Canadian producers loaded up huge debt during oil downturn, and it takes a while to convince the creditors and investors back again. Second of all, their exposure is not only to oil prices. Currency exposure plays a huge role. For instance, during the last summer USD lost 13% value against CAD. That trend damaged Canadian oil producers which didn't hedge as they sell their products in USD and cover their costs in CAD. Another exposure they need to face is the WCS-WTI spread. If the forecasts come out right, the pipeline capacity will not be able to handle the Canadian supply growth in 2018 which is not in favor of WCS. The producers are trying to cover the gap via railways. However, that spike in demand for railways brings inflationary movement which ramps up transportation costs.
In the short run, further declines in Venezuelan output can help WCS dearly. However, we need to see one of the proposed pipelines completed in the long run to give Canadian energy sector a breather. Otherwise, supply growth will much less likely to turn into profits. One of the proposed pipelines is TransMountain extension which will increase the capacity of the flow from 300kbpd to 890kbpd from Alberta to West Coast. That extension can give Canadian producers a huge arbitrage opportunity as transportation cost will be minimal and their heavy crude is demanded in Asian market too. Second one is Keystone XL which will make it possible to supply much more Canadian heavy crude to the Gulf refiners. Both proposed pipeline projects have been waiting for permits from the local governments but they are definitely closer to solutions. Now, it seems TransMountain extension seems more likely to be completed first. Put completion of those pipelines aside, even getting all the permits and starting the construction would give a huge relief to Canadian energy.

Friday, October 27, 2017


At the global oil market outlook I posted in August, I stated that the upcoming referendum was about to bring risk premium back to oil markets and it was totally ignored. Despite all the warnings of Bagdad, KRG still pushed ahead with the referendum. During the pre-referendum period, Israel and Russia have been the biggest supporters of Independent Kurdistan. We need to look at the motives of these countries to better understand their stand-points. Israel has been the long-time supporter of Kurdistan movement. Why? First of all, Israel's biggest rival in the area has been Iran which is nothing new. Especially, the nuclear deal that is a hot topic now in the US, has Iran and Israel at the heart of it. As we see at the map below, the areas where Kurds are highly populated are within Iraqi, Iranian and Turkish borders. Any political movement that brings independence to KRG might trigger similar political movements in Iran and Turkey which is the main reason for Iran and Turkey to oppose the referendum.

Iran has kept its position constant for the idea of Independent Kurdistan for a long time. Iranian officials kept emphasizing that it would bring the conflict to the region, and their actions were aligned with their words. Erdogan kept using tough speeches about the referendum the whole time and warned that they could turn off the tap of Kirkuk-Ceyhan pipeline and they could make a military operation if KRG went ahead with the referendum. However, neither of them happened as they were populist speeches to keep his core voters happy.

To clarify, Erdogan isn't at the side of the

Independent Kurdistan but the pipeline fees are generating a significant revenue which he
cannot put aside. The flow of those pipelines has become even more important recently as the status of the Turkish economy isn't at its best. Before the referendum, the US kept the same distance to both sides (Bagdad and KRG). Right before the referendum, the US released a declaration that suggested the postponement of the referendum and stated that the peace of the area was essential at that point.

The main conflict between Bagdad and
Erbil was about Kirkuk. In 2014, KRG's army, Peshmerga took over Kirkuk from ISIS, and KRG wanted to keep those oil-rich areas within its borders after the referendum. Oil revenues account for 95% of KRG's economy which explains clearly why they wanted to maintain those areas. However, the demographics of Mosul and Kirkuk were totally different than of cities of KRG. Both cities were quite diverse, populated with Kurds, Turkmen, Arabs. Most of the roughly 600,000 barrels of oil that flowed from Kirkuk-Ceyhan pipeline came from that area which was hard to control due to its complicated nature.

Bagdad warned KRG numerous times about the referendum and mentioned the renegotiation of the revenue structure was possible. Basically, KRG had been receiving 17% of the Iraqi Government budget. Until clashes started in Kirkuk, Erbil followed isolation role, not willing to sit at the table and went ahead with the referendum results. Anyways referendum results were as expected and Erbil announced that it would pursue its independence plan keeping Mosul and Kirkuk within its borders. That's when the tension peaked in the area which resulted in Turkey, Bagdad and Iran's closing their borders with KRG. During the first days, there were no changes in the flow of the Kirkuk-Ceyhan pipeline.

That gave everyone the impression that things will go back to normal somehow as
Russia too was involved in KRG now. Between all the craziness going on in the area, Rosneft loaned $1.2 billion as part of cash-for-oil loan before the referendum and signed another deal after the referendum that involved in working at five blocks in Kurdistan. These moves were more politically involved rather than economically like Rosneft's previous loans to PDVSA. Russia has been trying to establish a stronger presence in the area, and infusing cash flow to the parties that needed it has always been effective. So, KRG was not willing to negotiate any terms as it had the support Israel and Russia. Actually, the first couple of tankers that loaded from the Kurdistan oil storage in Ceyhan headed straight to Israel which was quite symbolic.
Later in October, Iraqi forces and Iranian backed militia started operations to gain back the control of Kirkuk area. They have not faced almost any opposition and received the control of the area. However, the flow from Kirkuk has been quite low since then. There were claims that Kurds made damage to the infrastructure before they left. The flow of Kirkuk-Ceyhan pipeline has been below 50% of the average flow since the clashes began. Bagdad increased its oil exports from Basrah by almost 200,000 barrels to make up for the loss that came from Kirkuk-Ceyhan pipeline flow disruption. Since Bagdad took back the control of Mosul and Kirkuk, an unexpected move took place and Iraqi forces kept moving up north to gain the full control of Kirkuk-Ceyhan pipeline and create a
a buffer zone between Iraqi Kurdistan and US-backed forces in Syria. Since the clashes started to become really intense, KRG has made numerous announcement renegotiate but this time Bagdad started playing deaf. Another big issue that is waiting for KRG is the huge debt to oil traders. In recent years, Vitol, Trafigura, Glencore and Petraco has given KRG $2.5 billion as cash-for-oil loan and very recently Rosneft $1.2 billion. The amount is huge for Kurdistan right now as it lost almost 75% of its oil production as Mosul and Kirkuk went back to Bagdad's  control. At this moment, cash-strapped and highly leveraged KRG is looking for a feasible way out but Bagdad hasn't shown any attention to negotiate yet. Another important event was the surprise visit of Rex Tillerson to Bagdad. Originally, he flew to the Middle East to visit Saudi Arabia and Qatar but he added a visit to Iraqi PM Al-Abadi to his calendar. He emphasized two main points:
*Finding a peaceful way between the allies of the US.
*Iranian-backed militias have to leave Iraq.
Since then, Iraqi forces moved all the way up to Fish Khabur which is highly important strategically as it lies right at Turkish and Syrian borders. The most intense clashes have been there so far. Iraqi forces' taking over Fish Kabur means taking the whole control of Kirkuk-Ceyhan pipeline and also isolating KRG from Syria, US-backed forces in that area. There are some news that involves a ceasefire between the two sides. However, there hasn't been any official release there yet. KRG is ready to freeze the referendum results but Kurdish officials haven't been lucky at finding anyone from Iraqi Government to renegotiate. Bagdad knows it has been winning and wants to take the most out of this. We will see what upcoming news will bring in the future about the region but it seems like KRG has gone a little bit ahead of itself convinced by the financial backup by Israel and Russia. However, in its case, as it is an absolute interlocked region, it highly depends on at least some support from one of its neighbors which was obviously not there this time. Sometimes, you take risks to double down but at the end of the road you end up with less than what you had before. In this case, even after renegotiations, KRG seems to end up with a lower portion of Iraqi budget which will affect the future of its economy and future investments deeply.

Thursday, September 21, 2017


There is Kurdistan Independence Referendum this weekend. At the crude oil outlook that I posted on 30th of August, I mentioned this could cause major conflicts in the area and the tension has climbed rapidly since then. It is a major event that can change the politics of the area deeply. I will try to explain how we have come to this point without getting into too much detail. Actually, that area has been problematic for a long time. Especially, during Saddam administration, Kurds in the area suffered deeply. After the US invasion, things have changed in favor of Kurds. They agreed to stay as a semi-autonomous region and have received 17% from Iraqi Government budget. Also, a  lot of foreign investment has been made since then which has changed the economic outline of the area.

 Let's start with talking about the countries that are against the Independent Kurdistan. Iran, Turkey, Syria, and Bagdad regime are all against this. If we look at the map above, we can see the main reason for the rejection. All three countries have some highly Kurdish populated areas and this referendum might trigger another movement which leads to their losing part of those lands. Recently, Turkish and Iranian diplomats met and announced that this referendum was a threat to the stability of the area.

Iraqi Prime Minister already stated that they would reject the referendum's results and called the establishment "Second Israel". Another big issue between Bagdad regime and Kurdish state is the control of Kirkuk. As you see at the map below, Kirkuk has been controlled by Kurdish forces since June 2014 when Iraqi army fled from Islamic State militants. Bagdad regime warned Kurdish State if it includes Kirkuk in the referendum, it will face harsh consequences. Bagdad regime claims that Kirkuk area has Arab, Turkmen, and Kurdish population and it cannot be included in the map of the Independent Kurdistan. Oil-rich Kirkuk area has always been crucial for decades and under Kurdish State, the area has been producing roughly 400,000 barrels oil per day which is a big proportion of its total production about 600,000 barrels per day. Without Kirkuk area, Kurdistan has 3% of Iraqi oil reserves. This proportion goes up to 15% after adding Kirkuk area. As you see at the map above, Kurdish State is land-locked and need to cut a deal with one of these regimes. I believe Bagdad regime is trying to use that factor to make a new deal with the semi-autonomous state.

Let's talk a little bit about the countries that want to see the Independent Kurdistan. We can put Israel to the top of the list. Israel has been asking for this for quite a while, a state that it can rely on next to its biggest enemy in the region, Iran. The U.S. armed the Kurdish soldiers fighting against the Islamic State in Northern Iraq and Syria. U.S. announced that it asked for Kurdish State to postpone the referendum but its action seems like nothing more than keeping Bagdad regime also on the horizon. The approach of the U.S. has been mixed about the Independent Kurdistan. In 2014, more than $100 million worth of crude oil cargo was seized in Texas coast after the rapid approval of the request from Bagdad regime. KRG was supposed to send a portion of its oil production to the Iraqi state-owned oil company, SOMO and Bagdad claimed such sales are equivalent to smuggling. However, we should not forget that U.S. rarely went opposite ways with Israel about major decisions over the Middle East. Also, Russia is a key player that has been trying to increase its presence in the area. Rosneft made a deal with the Kurdistani Government that involves $1 billion for prepayments in return for oil supply in the next 3 years. At this point, foreign investments are essential for Kurdish State and this can give them a breather but we all know Russia does not invest $1 billion in the infrastructure of the area. There will be some major expectations. In case of a major conflict over Kirkuk with Bagdad regime, there are 2 possible outlets for Kurdistani oil: Iran or Turkey. Iran's approach will not change. That leaves Turkey as the only option. We have seen Erdogan giving aggressive speeches on the Independent Kurdistan recently. However, we have seen various times that he made extreme changes in his political decisions. We still recall him getting so close to war with Russia when Turkish forces shut down the Russian plane and the ties between the two countries are closer than ever at this moment. Erdogan has to give those aggressive speeches to keep his voters happy but time will tell if his actions will align with his promises. Especially, after seeing the big Russian investment in the area, I highly doubt they do not have a plan. We have a very mixed puzzle here between the U.S., Russia, and Israel.
We have talked enough about politics. Finally, let's look into numbers. Iraq produced 4.32 mbpd in August, standing at the 2nd biggest producer of OPEC. Its low compliance rate to agreed cuts has been an issue for OPEC this year. Iraqi officials stated few times that they needed more oil revenues to fund their fight against the Islamic State. The production that comes from the area controlled by the Kurdish State accounts for about 15% of the total production. The proportion is not much but the main concern is that a possible conflict in the area might spread around rapidly. We have seen attacks made to pipelines that disrupted the supply before. I think the possible conflict in the area is highly ignored by the market as everyone has been focused on North Korea's missile tests and Iran Nuclear Deal. Finally, all the leaders that have dominance in the area: Erdogan, Assad, Netanyahu, Rouhani. They are all quite aggressive and populist which fuels the fire. The current world leaders Trump and Putin have not helped the issue either. We will see how it will play out but the least troubled scenario seems like Kurdish State's agreeing with Bagdad on revising the term which is quite unlikely.

Sunday, September 10, 2017


Hurricane Harvey is predicted to be the costliest natural disaster in the history of the U.S. (while we are facing Hurricane Irma). It caused major flooding in Corpus Christi and Houston areas. However, Hurricane Harvey's impact did not increase oil prices, unlike Hurricane Katrina and Gustav. What were the main reasons behind it?
First of all, let's see the impacts of hurricane Katrina and Gustav at the chart below.

Both hurricane Katrina and Gustav caused major disruptions. As you see at the chart below, in 2005, 120 million barrels of crude production was shut in due to hurricane Katrina and Rita and oil prices went up about 10% rapidly. In 2008, almost 60 million barrels of crude production was shut in due to Hurricane Gustav.

The amounts of production that were shut in the Gulf of Mexico were enormous in both 2005 and 2008 but the more crucial point lies at the chart below. In 2003, 27% of the U.S. crude production came from the Gulf of Mexico which made crude oil prices more vulnerable to the disruptions of the hurricanes and that proportion has been decreasing since then. 

Lower oil prices made the U.S. producers focus on their investments in the shale rather than offshore in the recent years. As you see at the table below, crude oil production in the Gulf of Mexico accounts for 17% of the U.S. total production this year. Hurricane Harvey caused production disruptions in the Gulf and the Eagle Ford Basin. However, those disruptions were not major and main damage was done to the refining industry which accounts for a quarter of the U.S. refining capacity. In addition to these facts, Harvey hit a very highly populated area which caused a bigger demand destruction. 

Finally, let's look into crude oil inventories when these hurricanes happened. We see that the crude oil inventories were roughly at half of today's levels which made the impacts of hurricane Katrina and Gustav's disruptions on oil prices much more intense. Harvey's disruptions were like a drop in the water and market didn't see them offsetting the demand destruction. Also, let's not forget that U.S. was not exporting crude oil back then.

To wrap things up, Harvey's geographical destruction wasn't very different than Katrina, Rita or Gustav but the direction U.S. producers took (the shale) in the recent years and the high crude inventory levels made its impact quite different than the other recent major hurricanes that hit the Gulf. As I am writing this, Florida is facing Hurricane Irma. Hopefully, its damage will be less than forecasted and we will not see such a busy hurricane season for a while. 

Sunday, September 3, 2017


      At this part, I will talk about some countries with big swings at their production rates and how it effects oil prices. Libya and Nigeria were the two countries that were exempt from the agreed cuts as both were producing at levels that were quite below the previous year’s rates. Before Arab Spring started, Libya was producing 1.6 mbpd and it could never come close to those rates because of the persisting conflicts in the country.  Libya’s crude-oil output has surged to over one million barrels a day, up from 400,000 in October, while Nigeria’s output has risen to 1.6 million barrels a day, up 200,000 barrels a day since October. So, since the OPEC cut agreements, these two countries added 800.000 barrels per day supply which accounts for the 2/3 of OPEC cuts. This has been a headache for OPEC in the recent months but this situation might reverse very fast too. When it comes to these countries, we should not forget that it is hard to ramp up the production but the harder part is actually to maintain those levels. 

It is very sad to watch what Venezuela has been going through. I hope everything goes back to normal soon and its people have the peace they very well deserve. Seeing what is happening in Venezuela should be a lesson for any world leader. We are talking about the country that has the biggest proven oil reserves. Venezuela is producing almost half a million barrels a day less than its average in 2016. As you see at the chart below, their production has been declining due to lack of capital and it seems very unlikely to see production rate increase there. 

Most oil companies already got their employees leave the country as unrest escalates. Maduro stays afloat with the help received from Russia. Rosneft invested $6 billion in Venezuela in prepayments of the supply of oil from Venezuela. Country directs more oil to China and India to pay back debts. You can see at the chart below how fast US oil imports from Venezuela have declined since the beginning of the year. Citgo USA, a unit of state-owned PDVSA, has been the biggest importer of Venezuelan oil and it has been importing more Canadian oil to make up for the declining Venezuelan imports. 

During the last 20 years, Venezuela has been running a lot of cash-for-oil deals with China, India, Japan and Russia very recently. Venezuela would receive the loan amount for future oil delivery promises. The very minimal proportion of those loans has been used for capital investments which caused the unstoppable declines at production. Now, PDVSA cannot even run some refineries because some minor repairs cannot be funded. When you deduct all those supplies directed to China, India and Russia from already decreasing production, there is not much cash flow left. It seems like Maduro is buying some time but the foreign currency reserves point that its default will be unavoidable. Especially, the very last executive order was devastating and it will most likely choke off funding to Maduro’s government, which is already running out of money as you see at the chart below. Market already sees this possible disruption from Venezuela but Libya and Nigeria’s increasing outputs made the market ignore this fact. That is why the market is more sensitive to disruptions coming from Libya and Nigeria. We will see correction on oil prices with future disruptions from these areas.

The last country that I will go through is Iraq, the 2nd biggest producer of OPEC. Iraq has almost doubled its oil production since the war ended. In my opinion, the probability of an upcoming conflict there is highly undermined by the market. Next month, there will take place the referendum for Kurdistan’s independence. Bagdad announced that it rejected the referendum. Turkey and Iran warned that the referendum would cause conflict in Iraq. Middle east is strange and things go south very fast. “Kurdistan” state lies between Turkey, Iran, Iraq and Syria. Maybe this is the first time we see Turkey, Iran, Syria and Bagdad regime at the same side of the table. Why? Because their opposition is mutual. I like talking about fundamentals and do not really care for emphasizing geopolitics but it will be tough for Iraq to maintain its current outputs because of possible tension in the upcoming years. 


Bloomberg's Electric Vehicle Outlook of 2018 came out. Bloomberg keeps revising the displaced crude oil by the adoption of EVs. In 2016,...