Winter, big oil, and diesel

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First things first: the recent spate of nasty winter weather is not expected to generate any long-term impact on fuel prices, though in the short-term there may be a spike. That at least is some good news for trucking despite all the snow, ice and subzero wind chill of late.

“If there is any impact on prices and supplies it will definitely be short-term,” Denton Cinquegrana, chief oil analyst for the Oil Price Information Service (OPIS) told me by email late yesterday.

“During the height of that cold snap on Tuesday, as many as 13 refineries east of the Rockies  were having some sort of issue, [though]not all of them cold weather related,” he added. “Yet distillate production according to the EIA [Energy Information Administration] was over 5 million b/d [barrels per day] last week and it has been consistently above that 5 million b/d mark. That is a big production level.”

In fact, EIA estimated in its latest Short Term Energy Outlook that U.S. total crude oil production averaged 7.5 million b/d in 2013, an increase of one million b/d from 2012, with domestic crude oil production expected to keep right in increasing for the next two years – rising to 8.5 million b/d in 2014 and 9.3 million b/d in 2015, with that 2015 forecast marking the highest annual average level of production since 1972.

OPIS’s Cinquegrana also stressed that the best refining margins right now are for distillate – that is diesel, jet fuel, heating oil, etc. – and have been for some time so refiners are most likely in "max distillate" production mode for such petroleum products. That’s why he thinks any cold-weather related supply shortages and/or fuel price spikes will be mostly a short-term phenomenon.

“However, heating oil specifications are certainly trending toward ultra-low sulfur diesel,” he said. “And another thing to keep an eye on is with the shale revolution/boom whatever you want to call it. Most of the crude oil coming to the market now [from there] is a light/sweet [grade] and will produce more gasoline.”

Indeed, the growing domestic production of oil decidedly favorable to the making of gasoline may be one reason the EIA believes average retail pump prices will decline over the next two years. In its short term outlook, the agency said that the annual average regular gasoline retail price, which was $3.51 per gallon in 2013, is expected to fall to $3.46/gal this year and to $3.39/gal in 2015.

In terms of U.S. domestic energy production and how that squares with the world’s energy markets, things are also looking pretty bright.

According to BDO USA LLP’s annual survey of 100 U.S. oil and gas chief financial officers (CFOs), 63% feel more confident about the U.S. economy and its impact on demand for energy in 2014, which is a 54% increase from the firm’s study in 2013.

Underlying this positivity is the continuing profitability of shale exploration and production, with a plurality (32%) of energy CFOs believed increased oil and gas prices to be the most important factor driving overall growth for the energy industry in 2014 as the U.S. continues to sell its inexpensively-produced resources at high international prices.

Supply and demand dynamics also continue to favor the U.S. energy industry as well, BDO’s poll found, and 73% and 76% of CFOs expect the domestic supply of natural gas and oil, respectively, to increase in 2014. Accompanying this growth in supply is an attendant growth in demand, BDO said, with 62% of CFOs expect domestic demand for natural gas to increase in 2014, and two-thirds (66%) projecting that domestic demand for oil will grow, as well.

Meanwhile, demand overseas continues to swell, with 65% and 64% of CFOs anticipating growth in global demand for oil and natural gas, respectively.

Yet while energy CFOs are confident that opportunities for growth will continue in 2014, BDO also found they remain conscious of challenges facing the industry as a majority (53%) believe legislative changes will be the top factor inhibiting overall industry growth in 2014, a modest (6%) increase from the firm’s 2013 study.

Additionally, CFOs worry about the impact of international events on oil prices as a plurality (46%) of those participating in BDO’s poll cite ongoing turmoil in the Middle East as having the greatest impact on oil price volatility in the coming year and Iran plans to ramp up its oil production once sanctions ease. CFOs also express concern that economic growth in Asian countries will cause price fluctuations, with one-quarter of CFOs citing it as a top factor—more than a three-fold increase over last year’s study.

“Non-conventional resources remain lucrative and continue to expand the U.S. share of the international energy market,” noted Charles Dewhurst, partner and leader of the natural resources practice at BDO. “But energy executives also know that this highly volatile industry is vulnerable to global events, and are therefore thinking carefully about their contingency plans should the price environment take a turn for the worse.”

Some 36% of CFOs also pointed to regulatory changes as a top political concern for 2014, followed closely by energy industry-targeted tax proposals (26%). U.S. energy CFOs are particularly concerned about the potential loss of the tax deduction for intangible drilling costs (IDC): more than half (53%) cite it as their leading tax concern in the new year, down six percentage points from last year.

“The regulatory uncertainty the energy industry experienced in the run-up to the 2012 election has only slightly abated,” noted Clark Sackschewsky, another partner within BDO’s natural resources practice. “The IDC deduction is one of the largest tax breaks available to these companies, and as budget debates continue on the Hill, energy executives are concerned that it might end up on the chopping block.”

Environmental concerns are also high on the list of U.S. energy company challenges, too, as more than half (54%) of CFOs in BDO’s poll said they will focus their risk management activities on environmental regulation in 2014, suggesting that they recognize and accept the need to address the environmental effects of ramped-up energy production.

In fact, many major producers, such as ExxonMobil and BP, are now incorporating the cost of a potential carbon emissions tax in their long-term financial plans, BDO noted.

Fracking is also a top environmental concern now as BDO nearly one-in-three (30%) of U.S. energy CFOs cite the impact of hydraulic fracturing as their primary environmental concern for 2014.

With new shale plays gearing up for drilling, including the Tuscaloosa Marine Shale, energy companies are seeking ways to maximize production while securing buy-in from the government—state, local and Federal—as well as local communities, according to the firm’s survey.

By contrast, carbon emissions are a lesser concern for CFOs at this time, with only 17% citing it as a top environmental challenge. Though concerns about climate change are unlikely to dissipate any time soon, it is clear that energy CFOs prioritize the more immediate issue of fracking, BDO said.

Trends and issues to keep in mind as truckers warily eye the price of diesel fuel at the pump as 2014 rolls along.

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