All eyes remain on Texas and the state’s energy grid operator in the aftermath of a devastating winter storm, oil prices responded positively to the U.S. House passing a new COVID-19 relief bill, and Canadian crude-by-rail exports are rebounding after a rough 2020.
Biweekly, we round up news and analysis about three things going on in the energy industry that we think you should know about. Here’s the latest.
Winter storm hamstrings Texas grid operator
Winter storm Uri brought the coldest temperatures Texas has seen in over 21 years. It also brought a wave of disruption to Texas’ power supply, leaving more than 4 million homes and businesses without power for varying periods of time. The resulting economic losses could be up to $129 billion, according to Bloomberg. The storm posed serious challenges for the oil and gas industry, which was in a nascent recovery period after the volatility of 2020.
The Electric Reliability Council of Texas (ERCOT), which operates the state’s electric grid, was unprepared for this black swan event. ERCOT’s scenario planning considered an extreme peak load to be 67.2 gigawatts, according to Bloomberg. During the storm, demand exceeded that by 8 gigawatts, with a load of 75.1 gigawatts. The extreme peak load scenario was designed to cover 95% of all potential events, and winter storm Uri fell outside of this range. Although the full extent and details of the shortcomings of the plan are still being uncovered, one factor was that ERCOT didn’t consider a lack of fuel supplies in its planning, according to Bloomberg.
The spotlight remains on ERCOT as recovery efforts are in full swing. Six members of ERCOT’s board resigned last week, NBC News reported. Additionally, ERCOT is still short $1.3 billion in energy payments to generators who sold the organization electricity during the crisis. This financial obligation, along with the need to create a more resilient state power grid, creates a complicated and difficult path forward for the Texas power producer.
Oil prices rise as House passes COVID-19 relief bill
Market participants generally anticipate that the COVID-19 relief bill passed by the U.S. House of Representatives on Saturday will result in increased oil and gas demand as the average consumer will have additional cash flow to spend. Though the Senate still needs to vote on the $1.9 trillion package, lawmakers there are expected to approve it.
Following Saturday’s vote, markets began to price in the stimulus package and oil was up Monday morning over Friday’s close. Higher prices and a positively trending demand scenario will give OPEC+ a lot to discuss in its meeting on Thursday. OPEC+ participants like Russia that are seeking supply increases are expected to push for lifting production cuts, while Saudi Arabia will likely hold a more cautious view.
We expect there will be news of production increases coming out of Thursday’s meeting, though the scale of such increases will be key to pricing responses. A modest production increase could be taken in stride by markets with prices that have been on the upswing. However, a robust production increase will likely result in falling prices given the very delicate global supply and demand balance.
Transporting oil by railcar to increase through 2021
The Canada Energy Regulator said on Friday that Canadian crude-by-rail exports are rebounding after a nearly 40% drop in 2020. Monthly rail volumes increased by approximately 10% in December 2020 to 190,454 barrels per day, but remained well short of December 2019, when volumes shipped reached 347,136 barrels per day. Overall, Canada crude-by-rail exports averaged 172,013 barrels per day last year compared to 280,272 in 2019, but looking at these two averages alone fails to paint an accurate picture of the state of the industry in 2020.
Prior to the COVID-19 pandemic, export pipeline congestion in Canada had led to steep price discounts for Western Canada Select crude. As a result, regulators instated curtailments on oil production, with exemptions made for oil that would be exported by rail. This led to record high crude-by-rail export volumes of 411,991 barrels per day in February 2020, according to the CER. That figure then subsequently dropped to an eight-year low of 38,867 barrels per day in July 2020 when production corrections caught up with the demand destruction inflicted by COVID-19 measures.
We expect crude-by-rail exports for 2021 to continue rebounding as crude production increases and export pipeline capacity remains limited. Continued COVID-19 vaccine distribution and signs of a recovering economy have stabilized oil prices, and production has increased. However, recent decisions to rescind TC Energy’s Keystone XL pipeline permit and orders to shut down Enbridge’s Line 5 pipeline through Michigan’s Straits of Mackinac waterways limit the capacity for crude transport by pipeline.
With more than 97% of Canadian crude oil exports going to the United States and U.S. heavy crude refiners on the Gulf Coast currently unable to rely on production from Venezuela and Mexico (due to dwindling crude production in both countries and U.S. sanctions on Venezuela), we expect crude-by-rail export volumes from Canada to the United States to increase through 2021. Whether this is the most efficient crude transport method, however, remains a subject of debate.