Oil prices were flat in early trading on Friday.

Friday, May 10th, 2019

Oil prices were flat in early trading on Friday, sandwiched between supply outages and the escalating U.S.-China trade war.

Trump doubles tariffs on China, markets wait. The U.S. hiked tariffs on $200 billion of Chinese goods from 10 to 25 percent on Friday, while leaving open the possibility that trade talks could continue. Trump also began the process of new tariffs on another $325 billion in Chinese imports. China vowed to implement retaliatory measures. “The opportunity window for avoiding a trade war is closing fast,” Citigroup wrote in a note to clients. Global financial markets were largely stable on Friday, suggesting that major investors still think that a resolution can be reached. “Our base case remains that the U.S. and China will eventually reach some kind of accord,” said Mark Haefele, global chief investment officer for the Swiss bank UBS, in a note.

U.S. shale running into trouble. As the sweet spots in the U.S. shale patch become crowded, it may be more costly and difficult to keep production elevated, according to a new report. While drilling techniques have succeeded in growing output, the industry may simply be front-loading production.

Oil prices firm up on bullish EIA report. Crude inventories fell and oil production also dipped in the most recent report from the EIA. That ended a string of inventory increases and offers some evidence that the market is not oversupplied.

Oil fundamentals diverge from prices. Brent crude futures have opened up a steep backwardation, evidence that the physical market for crude is tightening. Yet, spot prices have fallen in the last two weeks, and analysts are puzzled at the discrepancy. “There is no true sign of weakness in the physical market,” Olivier Jakob, managing director of consultant Petromatrix GmbH, told Bloomberg. “You have lower exports from Venezuela, you’ve got sanctions for Iran, Libya which is still a risk.”

Iran oil exports falling amid escalating tension. The U.S.-Iran conflict escalated this week, with rhetoric on both sides growing more heated. Iran said it would withdraw from parts of the nuclear deal, and top U.S. officials hinted at a military response. Washington also imposed sanctions on metals exports from Iran. Iran warned the EU to step up incentives or else it will fully withdraw from the 2015 accord. Meanwhile, Iran’s oil exports are plunging.

Saudi Arabia to keep oil exports below 7 mb/d in June. Saudi Arabia is holding firm on oil exports despite the tightening market. Saudi oil exports are expected to remain below 7 mb/d in June, with production also below the OPEC+ ceiling.

Venezuelan opposition VP detained. The Vice President of Venezuela’s opposition, Edgar Zambrano, was detained by the government this week, a sign that the failed coup attempt is now leading to a crackdown.

Turkey to drill near Cyprus. Turkey said that it was going to drill in disputed waters off the coast of Cyprus, raising tensions between the two sides. The series of gas discoveries in the Eastern Mediterranean appear to be exacerbating tensions, not resolving them, as many analysts had once hoped.

Texas air quality deteriorates. Air quality in and around Odessa, Texas – in the heart of the Permian basin – continues to deteriorate as oil production grows. “Controlling air pollution in West Texas has not been a priority for the state, as evidenced by the scarcity of air pollution monitoring stations in the Permian Basin,” a report from the Environmental Integrity Project said. “And yet, the type of air pollution in the Permian Basin — dominated by excessive emissions of sulfur dioxide and hydrogen sulfide — is known to have serious environmental and public health consequences.”

New Colorado oil and gas law deters investment. The overhaul to oil and gas regulation in Colorado, which was recently signed into law, could slow investment into the sector. The new law gives local communities greater authority over zoning and regulation. According to Reuters, there were only five land transactions of negligible value in the Denver-Julesburg Basin in the nine-month period through March, down sharply from the nine deals worth $2 billion in the same period between 2016 and 2017. ConocoPhillips (NYSE: COP) tried to sell its acreage for more than $1 billion last year but found no willing buyer. Reuters reports that more recently some companies have begun to scale back operations.

U.S. solar panels surpass 2 million. The U.S. now has 2 million solar installations, only three years after hitting 1 million. It will only take until 2023 to hit 4 million.

Iraq close to $53 billion oil deal. Iraq is close to signing a long-term, $53 billion oil deal with ExxonMobil (NYSE: XOM) and PetroChina. Iraq said the deal could bring in $400 billion in revenue over its 30-year lifetime.

Chevron threw in the towel on Anadarko deal. After Occidental (NYSE: OXY) raised its offer for Anadarko Petroleum (NYSE: APC), Chevron (NYSE: CVX) said it would not up the ante. “Winning in any environment doesn’t mean winning at any cost. Cost and capital discipline always matter, and we will not dilute our returns or erode value for our shareholders for the sake of doing a deal,” said Chevron’s Chairman and CEO Michael Wirth. Anadarko has to pay Chevron a $1 billion termination fee.

Saudi Aramco weighs U.S. shale investment. Saudi Aramco is considering a potential investment in Equinor’s (NYSE: EQNR) U.S. shale operations. Equinor has operations in the Marcellus shale.

Pioneer slashes jobs. Pioneer Natural Resources (NYSE: PXD) said on Tuesday that it would ask nearly a third of its executives to leave their jobs, a cost-saving measure on the order of $100 million per year. “The big change is to treat capital just as important as production,” CEO Scott Sheffield said.

UK coal-free for a week. For the first time since the 1880s, the UK went an entire week with zero electricity generation from coal. The UK plans to entirely phase out coal by 2025.
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The Energy Implications Of Additive Manufacturing
Additive Manufacturing (AM) is a three-step process involving Computer Aided Design (CAD), creation of a digital computer file and then manufacture of a product from the computer file using 3D printing.

According to the latest Wohlers Report, the AM industry grew by 33.5% last year to $9.975 billion. The number of producers of larger AM systems – priced at over $5,000 – grew to 177, up from 135 in 2017 and 97 in 2016, with a clear shift away from desktop 3D printing systems to industrial system manufacturers.

But perhaps most significant amongst the report’s findings is that end-use applications have become the largest single use of AM technology, overtaking functional prototyping. In other words, the use of AM in mass manufacturing is growing, which is where it will start to have an impact on energy demand, both in terms of transport and industrial energy use.

Forecasting uncertainty

Forecasts of exactly what impact AM might have on energy demand and how soon vary widely, not least between disciplines.

Market intelligence company IDC forecast in 2016 that worldwide spending on 3D printing would reach $26.7 billion in 2019. IDC’s forecast in January predicted spending this year of $13.8 billion, half of the forecast made just three years earlier.

In its publication ‘2015 commercial transportation trends’, consultants PwC forecast that up to 37% of global ocean container business was at risk from AM.

ING bank, in 2017, using a scenario approach, estimated that AM could reduce world trade by almost 25% by 2060, or by as much as 40% by 2040, as a result primarily of the localisation of manufacturing. This outcome, or even direction of travel, would have huge implications for energy demand for transport.

However, other studies of supply chain development are much more cautious, and as IDC’s forecasts show, AM proliferation is proving slower than expected.

Moreover, energy demand analyses see light-weighting and transport efficiency rather than changed supply chains and reduced transport volumes as the primary factors behind AM’s impact on energy demand.

Energy impacts

AM certainly has disruptive qualities. Unlike conventional subtractive techniques, it only uses material where it is required, so it uses less. In addition, surplus material – usually metal and polymer powders – can be recycled and re-used, meaning no or very little waste. Greater control over the micro structure of the component material can also result in the discovery of new material properties.

For single components reduced materials impact can be dramatic. For example, a 2018 study, Energy Consumption in Additive Manufacturing of Metal Parts, found that the buy-to-fly ratio (the ratio of material bought to produce a component to the material in the component when finished) for conventional machining of an aircraft bracket was reduced by AM from 8:1 to 1.5:1. It also found that as a result of reduced materials use the energy consumed in manufacturing the product by AM was lower than the conventional process.

The creation of a component in one step also means reduced assembly, cutting the need for multiple parts, joining parts, additional machinery, labour and transport of semi-finished goods.

However, the biggest energy saving from AM was from end-use efficiency. Light-weighting in the aerospace and auto industries means long-term energy use savings throughout product life as a result of better fuel efficiency, a factor that applies both to internal combustion engines and electric battery performance.

A 2016 study conducted by Germany’s Fraunhofer Institute, Quantifying the overall impact of additive manufacturing on energy demand concluded that while the energy consumption of both processes for pre-product production were similar, energy savings resulted from AM in both the production and utilisation phases.

Scaling these savings up to national level for cars resulted in non-negligible gains for a single AM produced component, owing to light-weighting.

Researchers at the Netherlands’ Delft University of Technology in 2018 published a study, The effect of additive manufacturing on global energy demand, which outlined four scenarios with different rates of AM adoption. This estimated potential energy savings of 5%-27% of global energy demand in 2050.

The study suggested savings of 5-25% in the aerospace sector and 4-21% in construction. For aerospace, the largest component of the projected energy savings again came from the impact of light weighting in end-use applications. In the construction sector, the benefits were more evenly spread across lower material use and thus less transportation requirements, as well as greater end use efficiency.

Manufacturing uncertainties

Certain types of product are clearly more applicable to AM, which is another way of saying that AM remains limited to niche production processes. It is also limited in materials, using predominantly metals and polymers but not natural materials, even if the digital capabilities of CAD suggest more and more metal/polymer applications will be found.

AM’s advantages in prototype design are well established, but when it comes to manufacturing its advantages are largest when the product has a complex geometry; when a relatively short production run is required; and when light-weighting has a direct impact on both the production and operating costs of the end product. An additional advantage is the potential for ‘mass customisation’.

For these reasons, both aerospace and auto manufacturers have been early AM adopters, moving in some cases to industrial AM production of components. Medical applications are another strong area for AM. The technology has, for example, revolutionised the production of hearing aids, which need individual customisation and have complex geometry.

Supply chains

However, it is less clear that AM will have the radical impact on manufacturing supply chains that forms the basis of some of the technology’s more disruptive forecasts. The idea is that manufacturing moves closer to demand and is produced on demand, allowing retailers to order on the basis of sales, rather than what they think they will sell, thereby cutting inventory, wastage and transport demand.

However, while mass customisation appears an attractive concept in terms of meeting customer demand, it can be achieved at the end of a longer, slower supply chain that still reflects the multiple factors determining the siting of manufacturing and assembly plants.

Moreover, successful AM products will be those with a high sensitivity to transport costs, which puts AM processes in competition with containerisation. Containerisation has been a huge factor in reducing transportation costs, allowing the development of global supply chains and trade between countries and regions more generally. The cheaper transport is the more other factors – such as labour costs and cheap energy supplies – will remain the decisive factors for siting manufacturing plant.

AM is clearly a technology with disruption potential, but despite being invented more than 30 years ago, it is still developing relatively slowly, albeit increasingly aided by the wider digitalisation of manufacturing production processes and supply chains. For the moment, its design capabilities look likely to have more impact on energy demand than its ability to reshape supply chains and global trade flows.