The rise of U.S. oil and gas production continues to reshape the globe, driving new energy alliances to try to compete in this radically different energy world. A report by the Wall Street Journal that OPEC is considering formalizing its relationship with Russia, creating a much more formidable foe to stand up against the U.S., who is going to be the world’s largest oil producer. This comes to the dismay of some of the more marginal producers in the OPEC cartel that now feel like they are only pawns in a cartel that will mainly be run by Saudi Arabia and Russia. That new Russia-Saudi collusion relationship is one reason that Qatar left the OPEC cartel this year, not to mention their focus on natural gas production. Still, that does not mean that Qatar won’t be working with someone. They will be working with U.S. energy and shale oil and gas powerhouse Exxon Mobil to work together on natural gas as Exxon Mobil gets ready to build new capacity to grow its valuable U.S. shale oil and gas assets.

Not only is the U.S. a major exporter of natural gas and oil products but also ethane. The EIA reports that U.S. exports of ethane have increased from nearly nothing in 2013 to an average of 260,000 barrels per day (b/d) through the first 10 months of 2018, accounting for about one-sixth of U.S. hydrocarbon gas liquids exports. Ethane is a key feedstock for petrochemical manufacturing. The United States became the world’s top exporter of ethane in 2015, surpassing Norway, the only other country to ship ethane internationally. In 2014 and 2015, all U.S. ethane shipments went to Canada, but in 2018 the United States sent ethane to 10 countries.

U.S. production of ethane, which is separated from raw natural gas at processing plants, increased along with the development of U.S. natural gas shale resources. U.S. ethane production grew 74%, from an average of 1.0 million b/d in 2012 to 1.7 million b/d in the 10-month period from January to October 2018. During the same period, ethane consumed in the United States increased from 0.9 million to 1.5 million b/d, primarily because of new sources of demand and new infrastructure that allows ethane to reach consumers. The U.S. petrochemical industry, responding to greater feedstock availability and consequently lower prices of ethane on the domestic market, added capacity at existing plants and built new petrochemical steam crackers, resulting in an estimated $200 billion dollars of new investment across the country.

U.S. sanctions on Venezuela are supporting prices but not getting us a real bounce on hopes that the Maduro regime will fall quickly. Still, the loss of 500,000 barrels of heavy crude, if extending over a long period of time, could create a major upside price risk for oil products. This comes as the world is going to face growing tightness of distillate fuel due to new regulations that the Energy Information Administration warns will affect global oil markets.

The EIA writes that International regulations limiting sulfur in fuels for ocean-going vessels, set to take effect in January 2020, have implications for vessel operators, refiners, and global oil markets. Stakeholders will respond to these regulations in different ways, increasing uncertainty for crude oil and petroleum product price formation in both the short and long term.

The reason for the rules is because that when burned, the sulfur in marine fuel produces sulfur dioxide, a precursor to acid rain. The sulfur content of transportation fuels has been declining for many years because of increasingly stringent regulations implemented by individual countries or groups of countries. In the United States, federal and state regulations limit the amount of sulfur present in motor gasoline, diesel fuel, and heating oil. The upcoming 2020 rules apply across multiple countries’ jurisdictions to fuels used in the open ocean, representing the largest portion of the approximately 3.9 million barrel per day global marine fuel market, according to the International Energy Agency.

The International Maritime Organization (IMO), the 171-member state United Nations agency that sets standards for shipping, is set to reduce the maximum amount of sulfur content (by percent weight) in marine fuels used on the open seas from 3.5% to 0.5% by 2020. These regulations are intended to reduce sulfur dioxide, nitrogen oxides, and other pollutants from global ship exhaust. The 2020 reduction in sulfur limits follows a series of similar reductions in marine fuel sulfur limits, such as those that reduced sulfur content of marine fuels in IMO-designated Emission Control Areas from 1.0% to 0.1% in 2015. Other areas around ports in Europe and parts of China have adopted similar sulfur restrictions.

The EIA says that Vessel operators have several choices for compliance with the new IMO sulfur limits. One option is to switch to a lower-sulfur fuel compliant with the new IMO rules. However, the cost, widespread availability, and specifications of new fuel for use in marine engines is still uncertain. Another option is to use scrubbers to remove pollutants from ships’ exhaust, allowing them to continue to use higher-sulfur fuels. However, the process of installing scrubbers can be costly and can increase a ship’s operating costs. A small portion of existing marine vessels has already installed scrubbers, and that portion is not expected to increase greatly before 2020 because of time constraints and limited installation capacity. Even if scrubbers become widely adopted, which would allow the continued use of fuels with higher-sulfur content, the price and availability of higher-sulfur fuels after 2020 remains uncertain. Ships also have the option to switch to nonpetroleum-based fuels. Some newer ships and some currently being built have dual-fuel engines that would allow them to use nonpetroleum-based fuels such as liquefied natural gas (LNG) after minimal modifications. However, the infrastructure to support the use of LNG as a shipping fuel is currently limited in both scale and availability.

This situation will be made worse if sanctions on Venezuela continues to remove heavy diesel. Check out Pricelinks for a video on this.

Overnight oil prices have been choppy and weak as we saw a somewhat bearish American Petroleum Institute. The API reported the U.S. crude supply increased by 2.51 million barrels last week. The build was larger than expected and it was enhanced by an 889,000-barrel increase in Cushing Oklahoma supply that roughly confirmed numbers that we heard out of private forecaster Genscape earlier in the week. Gasoline supplies also came in much higher than expected, posting an increase of 1.731 million barrels and distillates with an increase of 1.141 million barrels. The EIA should give us some direction as the market needs a little help to follow through on what could be a significant upside breakout. Seasonally we might be a bit early for major bullish action but breaks in the market will be supported.