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The Real Reason Behind The Next Oil Squeeze

The Real Reason Behind The Next Oil Squeeze

Rig

The last quarter has seen increased volatility in oil prices, an increase that I attribute to the growing tensions in international markets as fears of a global trade war intensify. The headlines seem to get starker by the day, and markets loathe this type of uncertainty.

(Click to enlarge)

Source

The intent of this article is to provide some guidance as to where oil prices may be headed in the near term. I think there are some key drivers at play here and will discuss them in some detail in the rest of this article.

Supply and Demand

One of the reasons for the big energy depression that hit in mid-2014 was an oversupply caused by Saudi Arabia ramping up production to drive prices down. They had several goals in doing this as has been discussed in countless articles, but chief among them was the desire to take high cost barrels off the market. Their primary targets were the American frac machine in North America, and deepwater production that was grabbing an increasing share of big IOC dollars.

This worked fairly well over the short run, as energy producers outside Saudi were unprepared. For most of 2016, the frackers in America retooled their portfolios and improved practices, cutting average well costs down to where they were economic with $40-50-dollar oil. U.S. shale was back in business.

The deepwater business is still struggling to regain its momentum.

(Click to enlarge)

Figure-1

Demand is likely to increase for the foreseeable future though, with an average annual increase of about 1.6mm BOPD for the years covered in the Global Supply and Demand Chart above (2013-2018). The upward slope continues through 2019 at about the same rate of increase.

…click on the above link to read the rest of the article…

Canada’s Biggest Producer Cuts Drilling As Heavy Oil Price Tumbles

Canada’s Biggest Producer Cuts Drilling As Heavy Oil Price Tumbles

Roughnecks at work

Canada Natural Resources, the largest producer, is allocating capital to lighter oil drilling and is curtailing heavy oil production as the price of Canadian heavy oil tumbled to a nearly five-year-low relative to the U.S. benchmark price.

Due to the transportation bottlenecks, the discount at which Western Canadian Select (WCS)—the benchmark price of oil from Canada’s oil sands delivered at Hardisty, Alberta—trades relative to WTI has been more than US$20 this year.

On Thursday, that discount blew out to US$30.80 a barrel—the largest WCS-WTI differential since December 2013, according to data compiled by Bloomberg.

Canada Natural Resources said on Thursday in its Q2 results release that its North America crude oil and natural gas liquids (NGLs) production in the second quarter dropped by 3 percent from the first quarter of 2018, primarily as a result of production curtailments and shut-in volumes of around 10,350 bpd as well as reduced drilling activity and delayed completion and ramp up of certain primary heavy crude oil wells drilled in Q1 and Q2.

“Due to current market conditions the Company has exercised its capital flexibility by shifting capital from primary heavy crude oil to light crude oil in 2018, resulting in an additional 7 net light crude oil wells targeted to be drilled in the second half of the year. Primary heavy crude oil drilling was reduced by 24 net primary heavy crude oil wells in Q2/18, with an additional 35 primary heavy crude oil well reduction targeted for the second half of the year,” Canada Natural Resources said yesterday.

Canada is producing record amounts of heavy oil from the oil sands and its economic recovery is driven by the oil industry, but drillers are finding it increasingly difficult to get this oil to market because pipelines are running at capacity and new ones are finding opposition from various groups.

…click on the above link to read the rest of the article…

Oil Prices Unlikely To Breakout Or Collapse

Oil Prices Unlikely To Breakout Or Collapse

Traders on the floor

Oil prices took a breather in the second half of July, but the price correction may have been a temporary reprieve rather than the start of another downturn.

On Monday, WTI breached $70 per barrel for the first time in over two weeks, rising once again on fears of supply outages.

Part of the reason that prices sank so sharply in mid-July was because of a wave of liquidation by hedge funds and other money managers, selling off their bullish positions in crude futures. Two weeks ago, investors slashed their long positions on crude oil by the most in a single-week in more than a year. As Reuters points out, the shift in positioning was concentrated in the cut of long bets, rather than the increase in shorts. That suggests profit-taking rather than a belief that a deep downturn is imminent.

The reduction of net length helped push down oil prices for a few weeks, but it also let some steam out of the futures market. Investors had become overly bullish in their positions, so the reduction in net length leaves the market a bit more balanced. That means that there is now more room on the upside for oil prices.

Last week, money managers began scooping up bullish bets once again, with net length in Brent rising by more than 4 percent. That coincided with a recovery in oil prices and it suggests that oil traders believe the price correction went far enough. “It lines up with our call to buy the dip in July,” Chris Kettenmann, chief energy strategist at Macro Risk Advisors LLC, told Bloomberg. “We’ve been pretty vocal about adding to length through the July sell-off.”

…click on the above link to read the rest of the article…

Oil Jumps After Saudis Say August Exports To Slide

Trump is about to have another OPEC twitter meltdown.

With oil sliding in recent days on a combination of greater inventory builds and production increases both in the US and in places like Libya and Canada, moments ago WTI jumped as much as 1.6% after it was  trading as much as -1.4% following a Bloomberg report that Saudi Arabia claims that they expect a “substantial stock draws due to robust demand” in the second half, that Saudi crude exports in July will be equal to June’s and that August exports will drop by 100kb/d.

This is notable as so far this month, third party sources have reported that Saudi exports have been far lower than the large production increase that was supposed to happen.

The statement by the Saudi Energy Ministry also notes that an oversupplied market “repels potential investment in the oil industry, curtailing future supply”, and finally that Saudi Arabia will “only export barrels that are earmarked to match confirmed lifting requests by end users, and does not try to push oil into the market beyond its customers’ needs.”

The most likely reason for the sharp kneejerk higher is that many of the shorts that had piled on in recent days got spooked and promptly covered, sending WTI just shy of $70, a $2 swing on the day, and a move that may lead Trump to further angry tweeting in the next few hours.

Oil Prices At Risk Of Economic Downturn

Oil Prices At Risk Of Economic Downturn

Oil

Oil prices have retreated as disrupted supply from Libya has started to come back online, threatening the recent gains in oil prices. But a bigger threat to crude over the second half of 2018 and into 2019 is a slowdown in the global economy.

The International Monetary Fund warned in its latest World Economic Outlook that a series of threats to economic growth are brewing. The Fund maintained its projection for solid global GDP growth of 3.9 percent for both 2018 and 2019 – rather robust figures – but said that “the expansion is becoming less even, and risks to the outlook are mounting.”

“Growth generally remains strong in advanced economies, but it has slowed in many of them, including countries in the euro area, Japan, and the United Kingdom,” the IMF said.

As John Kemp of Reuters points out, these are signs that the U.S. economy is in a late stage of an economic growth cycle, with growth topping out, inflation picking up, rising interest rates and an inversion in the yield curve for U.S. treasuries, which tends to precede recessions.

As has happened in the past, the last phase of an economic expansion has often coincided with a surge in oil prices, which is then followed by both a dip in oil prices and an economic contraction. The recessions following the price spikes in 1973 and 2008 are the most obvious, but not the only examples.

Others take a different tack, arguing that rising oil prices need not be a drag on the economy. “[T]he rise in oil and commodity prices today is leading to a recovery in pricing power for commodity companies and an improvement in terms of trade for commodity-exporting nations, thus providing support to capex in these segments,” Morgan Stanley’s chief economist and global head of economics Chetan Ahya wrote in May.’

…click on the above link to read the rest of the article…

Oil Prices Crash As Libya Resumes Production

Oil Prices Crash As Libya Resumes Production

oil rig

Oil prices fell sharply on Wednesday on news that Libya was suddenly set to restore hundreds of thousands of barrels per day, and the U.S. struck a softer line on Iran sanctions.

Brent sank more than 6 percent during midday trading on Wednesday, as Libya’s National Oil Corp. (NOC) said that it would lift the force majeure on several major export terminals and resume shipments of oil.

The standoff with General Khalid Haftar appeared to be on its way to some sort of resolution, with the militia handing the ports back over to the internationally-recognized NOC in Tripoli. As is always the case with Libya, the situation is fluid, and any return of production does not come with a guarantee that it will be sustained.

But for now, some 700,000 bpd could swiftly come back online. The outage in Libya had helped drive up oil prices over the past few weeks, fueling speculation that Saudi Arabia would need to burn through much of its spare capacity in order to keep the market well-supplied. The timing was also crucial: Libya’s outage was unexpected, and it came just as Canada temporarily lost 350,000 bpd and the expected interruptions from Iran were revised higher due to a hardline from the U.S. on sanctions.

“The lifting of force majeure at all the Libyan ports will certainly come as relief from a supply perspective, but it remains to be seen how quickly exports can return to normal,” Harry Tchilinguirian, head of oil strategy at BNP Paribas, told Reuters Global Oil Forum.

Another factor pushing down oil prices midweek were the comments from U.S. Secretary of State Mike Pompeo, who seemed to soften America’s position as it relates to how severely it would treat countries buying Iranian oil.

…click on the above link to read the rest of the article…

10 years after the oil price spike: Is peak oil a process rather than a moment?

10 years after the oil price spike: Is peak oil a process rather than a moment?

Ten years ago this week—July 11, 2008 to be exact—the price of a barrel of oil on the New York Mercantile Exchange hit an intraday high of $147.27, its highest price ever. By the following autumn the world economy was in shambles and the price of oil was tumbling. The oil price eventually bottomed out around $34 per barrel in mid-February the following year.

Oil prices started 2002 around $20 per barrel and then rose almost continuously until mid-2008. As they rose, the world’s best known critic of peak oil* prognostications, Daniel Yergin, began to look so foolish for having predicted ample supplies for decades to come that his firm finally reversed itself in mid-2008 and began to forecast higher prices. That should have been read as a contrarian signal; just two months later the oil bull market ended.

Peak oil thinkers at the time believed that their forecast of a nearby all-time peak in the rate of world oil production had been fulfilled. The official numbers seemed to confirm this. Petroleum geologist Kenneth Deffeyes’ had made a half-serious prediction that Thanksgiving Day 2005 would mark the all-time high for production. Production of crude oil including lease condensate (which is the definition of oil) was slightly more than 74 million barrels per day (mbpd) in December 2005, but thereafter declined.

Despite high and rising prices oil production failed to exceed that number for two years. In December 2007 production inched above the previous high mark and stayed there through July 2008, the month the oil price peaked. That month the world produced slightly more than 75 mbpd.

In August production fell by more than one million barrels and did not surmount 75 mbpd until two years later.

…click on the above link to read the rest of the article…

Iran Furious After Trump Calls Saudi King, Demands 2MM Barrel Production Boost 

Update: as expected, it did not take long for Iran – which has the most to lose from any Saudi output hike which would not only send the price of oil lower but also allow Riyadh to capture Iran’s sanctioned market  share – to respond, and moments ago Bloomberg reported that in an interview with Hossein Kazempour Ardebili, Iran’s OPEC governor, he said that “if Saudi Arabia accepts U.S. President Donald Trump’s request to boost output, that means he is calling on them to walk out from OPEC.

“We are 15 countries in an agreement. Set aside that they do not have the capacity, there is no way one country could go 2 million b/d above their production allocation unless they are walking out of OPEC.”

Well, if they don’t have the capacity (which they do), there is no reason to be concerned. And yet Iran is precisely that, and considering that Trump said Saudi Arabia has “agreed” to his demand, we may have just witnessed the end of OPEC.

* * *

Earlier this week, when within minutes of each other, news hit last Tuesday that first Saudi Arabia would boost production to a record 10.8mmb/d, an increase of nearly 1 million barrels per day from the Kingodm’s current 10.03mmb/d output, only to be followed almost immediately by a warning from the State Department advising US allies of a crackdown on Iran, and demanding they cut their Iranian oil exports to 0 by the Nov. 4 deadline, oil first dipped then spiked, as the market weighed the news of the potential drop in Iranian production far more than any potential Saudi output: after all that was already largely priced in during last weekend’s OPEC summit.

…click on the above link to read the rest of the article…

Rig Count Falters Amid Oil Price Correction

Rig Count Falters Amid Oil Price Correction

Oil rigs

Baker Hughes reported a dip in the number of active oil and gas rigs in the United States today. Oil and gas rigs decreased by 3 rigs, according to the report, with the number of oil rigs increasing by 1, and the number of gas rigs decreasing by 4.

The oil and gas rig count now stands at 1,059—up 126 from this time last year.

Canada, for its part, gained 27 oil rigs for the week—after last week’s gain of 13 oil and gas rigs. Despite weeks of significant gains, Canada’s oil and gas rig count is still down by 20 year over year.

Oil benchmarks experienced a huge slide on Friday as Russia and Saudi Arabia proclaimed their willingness to increase output ahead of the June 22 OPEC/NOPEC meeting in Vienna, even if the oil production cut deal were to fall apart. The loose commitment by two of the largest signees to the production cut deal was enough to drag down prices that were earlier being pulled upwards by Venezuela’s freefalling oil production that some think will fall below 1 million barrels per day, and continuing reports that Iran may face multiple obstacles on the road to exporting its oil in the wake of renewed sanctions levied by the United States. Related: The Permian Faces A Long Term Natural Gas Crisis

At 12:07pm EDT, the WTI benchmark was trading down a massive 3.36% (-$2.25) to $64.64, with Brent down 3.48% (-$2.64) to $73.30. Both benchmarks are down week on week as well as on the day.

US oil production continues putting downward pressure on oil prices, and for the week ending June 08, production reached 10.900 million bpd—just a hair shy of the 11 million bpd production that many had forecast for the year.

At 7 minutes after the hour, WTI was trading down 2.93% at $64.93, with Brent trading down 3.29% at $73.44.

Trump Slams OPEC Again, Demands Lower Prices: “Oil Prices Are Too High, OPEC Is At It Again”

Nearly two months after Trump drew a line in the sand on oil prices, when on April 20 he lashed out at OPEC, tweeting that “Oil prices are artificially Very High! No good and will not be accepted!”which promptly set a ceiling on crude and prompted Saudi Arabia to scramble to boost production…


Looks like OPEC is at it again. With record amounts of Oil all over the place, including the fully loaded ships at sea, Oil prices are artificially Very High! No good and will not be accepted!


… moments ago Trump doubled down on his oil- price targeting, and in a lengthy tweetstorm that touched on everything from Marc Sanford’s loss, to the strength of the economy, to the just concluded North Korean summit, his relationship with Kim Jong Un and the cancellation of war games with South Korea, even the announcement of the world cup host nation  (US, Mexico and Canada), Trump once again lashed out at OPEC, tweeting that “Oil prices are too high, OPEC is at it again. Not good!


Oil prices are too high, OPEC is at it again. Not good!


Translation: Trump realizes that the middle-class is spending increasingly more on gasoline, taking away from disposable income, and hopes that Saudi Arabia will pump more to offset the loss of Venezuela and Iran oil (which would not be impaired if Trump hadn’t killed the Iran deal), in line with what we described in “Rising Gas Prices Threaten To Wipe Out Trump’s Tax Cut Benefits“.

This time, the market reaction to Trump’s angry tweet was far muted, with oil barely moving – so far – after it slumped following yesterday’s API report, even if it recovered most of the losses.

…click on the above link to read the rest of the article…

It’s The Demand, Stupid! Is China About To Burst The Black Gold Bubble?

For months we have heard about how the oil market’s over-supply ‘glut’ has been removed thanks to OPEC/NOPEC’s production cut deal and the narrative of ‘global synchronous recovery’ has buoyed the demand side of the equation – sending crude prices to four year highs (helped considerably by an increasing geopolitical risk premium, that is now evident more in Brent than WTI).

However, the last couple of weeks have turned ugly for the ‘no brainer’ record spec longs in crude oil as prices have tumbled (and President Trump has complained)..

The 50% surge in crude prices – and concurrent rise in gas prices at the pump – has begun to worry some that demand destruction looms. However, as The Wall Street Journal’s Nathaniel Taplin reports, what investors may not appreciate is that demand growth is also poised to slow in the world’s largest net oil importer last year, China.

Chinese petroleum demand still appears fine. Growth bounced back to a healthy 9% on the year in April, twice the rate in March. April’s petroleum burn was flattered, however, by exceptionally weak demand in the same month the year before – and probably by the official end of the government’s winter pollution controls, which had given temporary shot in the arm to Chinese industry this spring.

Unfortunately the overall trend for the industrial and transport sectors – which together account for about 70% of Chinese oil demand – looks shaky.

Growth rates in freight traffic and electricity production both peaked in the third quarter of 2017, excluding January and February figures distorted by the Lunar New Year holiday.

Freight tonnage growth is now running at barely half the 11%-12% rate it reached in mid-2017.

Weakening global trade, driven partly by the slowdown in Europe, will put further downward pressure on those numbers.

…click on the above link to read the rest of the article…

Higher Oil Prices Might Not Destroy Demand Growth

Higher Oil Prices Might Not Destroy Demand Growth

Gas station

The recent jump in oil prices to $80 per barrel raised a lot of questions about whether or not the heady demand growth projections for this year would hold up. In fact, signs of strain quickly popped up in disparate parts of the world. But as governments move to protect their citizens from high fuel prices (and to protect their political positions), demand might not be as price sensitive as analysts tend to think.

The history of oil price cycles show demand is highly sensitive to sharp increases in prices – demand took a hit in 1973, the early 1980s, the extraordinary 2005-2008 price increase, and the 2011-2014 period, when prices routinely topped $100 per barrel.

That record provides some guidance about what we should expect. Brent hit $80 per barrel for the first time in more than three years in May, a price level that would start to test the durability of demand growth. The run up in prices coincided with some early signs that consumers were losing their patience.

For example, U.S. President Donald Trump complained to OPEC in April about “artificially” high prices, and reportedly sent a request to the Saudis for higher output recently. Crippling protestsin Brazil brought the economy to a standstill and led to the ouster of the CEO of Petrobras. The International Energy Agency revised down its forecast for demand growth this year by 100,000 bpd, citing high prices.

Just as prices started to become painful, the OPEC+ coalition felt compelled to change course, and are on the verge of increasing output. Even with the recent price correction, demand threats still loom. The U.S. Federal Reserve continues to hike interest rates, which is strengthening the U.S. dollar and making dollar-denominated debt more painful to service. That is putting a strain on emerging market demand. The currencies of Argentina and Turkey have been slammed in the past few months.

…click on the above link to read the rest of the article…

Next Stage of Pressure on Iran – Lower Oil Prices

Next Stage of Pressure on Iran – Lower Oil Prices

President Trump is stepping up his attack on Iran.  He’s now planning the long-game for maximum pressure.  The news that Trump quietly asked Saudi Arabia to ramp up output by 1 million barrels a day is the key.

From the analysis at Oilprice.com:

Saudi Arabia and some of its close Arab allies in the Gulf, as well as the leader of the non-OPEC nations taking part in the production cut deal—Russia—are the only producers that have the spare capacity to increase production. So, in case of increased production from OPEC and allies, the potentially lower oil prices would hurt the other OPEC members that don’t have the spare capacity to boost output.

The point here is to begin dropping oil prices now that the U.S. has blown out Turkey’s finances and helped Saudi Arabia improve its fiscal position for the rest of the year with high oil prices.

Turkey is a net energy importer and $75+ per barrel oil is a huge drain on its finances at a time when its currency and bond markets are under serious pressure from a strengthening U.S. dollar.  Don’t think for a second the Turkish lira wasn’t helped in its fall.  This is a classic hybrid war attack on a country not playing by U.S. rules.

But, now that Trump’s U.S. economy is threatened by high energy costs, he’s looking to improve that situation while also putting a strain on Iran’s finances through the double whammy of losing not only up to 1 million barrels of production per day but also getting $20-25 less per barrel.

And right on target, oil shorts are piling on because that’s what happens when the markets are told which way policy is heading.

…click on the above link to read the rest of the article…

Don’t Take Higher Oil Prices For Granted

Don’t Take Higher Oil Prices For Granted

Oil

Oil prices collapsed at the start of this week, with WTI and Brent dropping 5.5 percent and 7.5 percent respectively from their three and a half year peaks.

This recent price slump serves as a timely reminder for market observers and players alike that, while a heightened geopolitical risk premium and declining inventories have boosted prices, there is plenty of downside in today’s markets.

The prices started to fall when Saudi Arabia and Russia, two key brokers in the Vienna agreement, announced that they are ready to ramp up production to counter the threat of falling supply from Iran and Venezuela. The fear of a huge surge in U.S. shale production also played a part in sending oil prices lower, with rising U.S. exports to Asia beginning to impact the market share of both Russia and Saudi Arabia in the region.

Many already understand that this price rally is not sustainable. Vladimir Putin recently saidthat an oil price of $60 “suits Russia”. Last year, Russia’s finance minister shared his plans to draft the 2017-2019 budget based on oil prices as low as $40. These statements, taken alongside the recent reports that Russia and Saudi Arabia are looking to bring some production back online, have been seen by some as a sign that the recent oil price rally is coming to an end. It has long been known that these kind of production deals are not long term and sustainable solutions to an oil market crisis.

This is not to say that oil prices can’t rise again, or even touch $100 in the near future. Both the Iran nuclear deal and collapsing production in Venezuela could provide plenty of upside to oil prices.

…click on the above link to read the rest of the article…

 

Art Berman: Think Oil Is Getting Expensive? You Ain’t Seen Nothing Yet.

A global supply crunch approaches…

After issuing clear warnings on this program that sub-$50 oil prices were going to be short-lived, oil expert and geological consultant Art Berman returns to the podcast this week to explain why today’s $70 oil prices will go higher — likely much higher — and start materially contricting world economic growth.

Art explains how the current glut of oil created by the US shale boom — along with high crude output by both OPEC and non-OPEC  producers — is a temporary anomaly. Fundamentally, we are not finding nearly as much oil as we need to continue the trajectory of the global demand curve. And at the same time, we’re extracting our reserves at a faster rate than ever. That’s a mathematical recipe for a coming supply crunch — it’s not a matter of if, but when:

The price of oil has gone up 30%+ percent just here in the last year alone. There are some very good reasons for that.

In the United States, we’ve been drawing down our reserves, our inventory and the amount of oil we have in storage, consistently since February of 2017. We’re going into the 15th month of drawing from storage each week because we’re not producing enough to meet the need.

To those paying attention: the United States is right now producing more oil than it ever has in its history. We are a million barrels a day higher than the peak in 1970 — the one that King Hubbert got in trouble for warning about. We’re higher by 50,000 or so barrels per month of production. Yet, here we are, still sucking oil out of storage. What does that tell you? There is only one way to interpret that: We are using more than we are producing.

…click on the above link to read the rest of the article…

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