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Why OPEC+ Needed To Add More Oil

Why OPEC+ Needed To Add More Oil

OPEC

The OPEC+ group has decided to increase output by aiming to return compliance back to 100 percent, rather than the “over compliance” the group has posted to date. Although it remains to be seen how that translates into tangible production increases, because the number most kicked around was about 600,000 bpd, which is a rough figure that the markets will be assuming.

The decision will still leave the oil market rather tight on supply, and could require further action in the not-so-distant future.

Still, there are several reasons why OPEC+ feels compelled to increase production. First, the oil market is already in a supply deficit, and in fact, it may have been experiencing a deficit for four straight quarters, according to Bank of America Merrill Lynch. In 2017, the supply gap averaged 340,000 bpd, evidence that the original OPEC+ agreement succeeded in draining inventories last year.

The inventory drawdown led to total stocks dropping below the five-year average, a development that likely occurred several months ago, although data is published on a lag.

A second reason OPEC+ needed to increase supply is because demand continues to grow at a strong pace. The IEA pegs demand growth at 1.4 million barrels per day (mb/d) this year compared to 2017; more bullish analysts like Goldman Sachs estimated demand growth at 1.7 mb/d. The forecasts may vary, but either way, demand looks robust, which would likely exacerbate the supply gap as the year wears on.

On top of that, demand rises seasonally in the summer months. According to Rystad Energy, demand could jump by 1.1 mb/d in the third quarter from the second quarter. Read that again. That is 1.1 mb/d quarter-on-quarter growth, not compared to 2017 levels. Of course, that seasonal demand will ease after the summer, but the strain on the market cannot be ignored.

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

OPEC production increase shows it’s still fighting U.S. shale oil

OPEC production increase shows it’s still fighting U.S. shale oil

It felt like opposite day as traders bid up the price of oil last week even as OPEC announced an increase in oil production that should have sent prices downward. The cartel decided it had room to move because of outages in Venezuela, Libya and Angola amounting to 2.8 million barrels per day (mbpd). The increase apparently wasn’t as much as traders had expected.

Even though oil prices have drifted upward from the punishing levels of three years ago, OPEC is still interested in undermining the shale oil industry (properly called “tight oil”) in the United States which it perceives as a threat to OPEC’s ability to control prices. So, it is no surprise that OPEC has chosen to increase output in the wake of lost production elsewhere. OPEC does not want prices to reach levels that would actually make the tight oil industry’s cash flow positive.

You read that correctly. The industry as a whole has been free cash flow negative even when oil was over $100 per barrel. Free cash flow equals cash flow from operations minus capital expenditures required for operations. This means that tight oil drillers are not generating enough cash from selling the oil they’re currently producing to pay for exploration and development of new reserves. The only thing allowing continued exploitation of U.S. tight oil deposits has been a continuous influx of investment capital seeking relatively high returns in an era of zero interest rate policies. Tight oil drillers aren’t building value; they are merely consuming capital as they lure investors with unrealistic claims about potential reserves. (Some analysts have likened the situation to a Ponzi scheme.)

To demonstrate how unrealistic the industry’s claims are, David Hughes, in his latest Shale Reality Check, explains that expectations for recovery NOT of proven reserves, but of UNPROVEN resources are exceedingly overblown.

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

OPEC “Deal” Ends With Output Confusion, Sets Stage For “Deal Unraveling”

Just 24 hours after OPEC appeared on the edge of splintering, Iran seemed to cave and in a deal that was described as a victory for everyone, OPEC member states and Russia provided a vague assurance they would boost output by striving to return to full compliance of the original production quotas as set in the 2016 Vienna production cut agreement.

As Goldman summarized in its post-mortem, “no further details were provided, including no country level allocation, no guidance for non-OPEC participants or timeline for the increase.” Furthermore, during the press conference following Friday’s deal, the one question which never got an explicit answer is how much output would be boosted by, with little clarity shed beyond “targeting full compliance at the group level”.

This suggests that there is room for countries with spare capacity to increase production above the individual quotas but also that such adjustments could not be resolved.

As a result, Goldman’s energy analyst Damien Courvalin said that he views today’s agreement “as masking disagreements within the group and a potential start to the unraveling of the deal, with core-OPEC and Russia looking to increase production but Iran opposing such an increase.”

Bloomberg’s Javier Blas confirmed as much, noting that Friday’s agreement was a “fudge in the time-honored tradition of OPEC, committing to boost output without saying which countries would increase or by how much” a fudge which gave every member – especially Iran which by endorsing a production boost would have been seen as effectively approving of Trump’s sanctions and allowing other states to take its market share – an “out” to save face, by sufficiently masking up the details so no explicit accusations of backtracking can be made.

Importantly, “it gives Saudi Arabia the flexibility to respond to disruptions at a time when U.S. sanctions on Iran and Venezuela threaten to throw the oil market into turmoil.”

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

We Have A Deal: OPEC Agrees In Principle To A “Real” Production Increase Of 600,000 Barrels/Day

What was expected to be a drawn-out affair, with Iran potentially resisting and even leading to the collapse of the cartel, moments ago OPEC reached a deal in principle to raise oil production by 1 million b/d on paper, and in reality by 600 kb/d as many of the OPEC nations are already tapped out and unable to produce more.


OPEC reaches deal in principle to raise 1 mil b/d “on paper”: BBG. Brent up $1.30 on Thu’s close, around $74.41/barrel.

“Real” increase of 600,000 b/d: BBG


The deal is roughly what the committee had agreed to yesterday and is the plan pushed by Saudi Arabia all week.

As Bloomberg notes, this is the deal traders have been waiting for:

The fear was that, if the meeting broke up in disarray, Saudi Arabia would simply open the taps and other producers would follow suit, unleashing far more supply than the market needed. What this deal does is to bring some order to the process of easing supply restraint.

Indeed, absent some last minute shock, Iran appears to have gone along with the majority and will comply with what is effectively A Saudi-Russian decision, prompted by Trump complaints for the cartel to produce more oil .

As Bloomberg further adds, any distribution of output increases among OPEC and non-OPEC members “is going to create winners and losers.”

While the headline number is what will matter for oil prices, the relative gains and losses against their fellow members will also be important to the participants. That could mean ministers still have a way to go before they are finally done. But the fact that they have got as far as they have means that cohesion has, once again, proved paramount.

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

 

GoM: First Quarter 2018, Production Summary

GoM: First Quarter 2018, Production Summary

crude and condensate

BOEM has March 2018 production at 1696 kbpd, which is down 1% month-on-month and 4% year-on-year (March 2017 was the peak production month for GoM so far). EIA numbers were very similar, although last month’s were higher and haven’t been revised yet – typically EIA numbers end up almost exactly corresponding to the BOEM reported total qualified lease production, whereas BOEM can be a little higher, maybe including test wells or non-qualified leases.

chart/

The major new project, Stampede, started in January, has no reported production numbers yet. BOEM and EIA estimate non-reported values and then retrospectively adjust their reports when actual numbers are available. I don’t know how they estimate new production but Stampede could produce around 60 kbpd with current plans, though likely a lot less initially as only one of two leases has been ramping up. I’ve assumed 20 and 40 kbpd for February and March respectively, which still might be high. Even allowing for that, and assuming other late numbers are the same as the previous month, since December EIA and BOEM both have estimates about 30 to 40 kbpd higher than the reported lease and well production numbers (which always match closely) would suggest. Usually the difference is no more than ten. It is unlikely that the other late numbers, of which there are few, and none for all four months, will show such large, sudden and unexplained increases so either I’m missing something (maybe a lease not yet included in the numbers, but also not reported as starting up) or there could be some future downward adjustments.

Rigel and Otis are still off-line following the failure at a subsea manifold last October and are taking out about 22 kbpd plus some gas (Otis is a small gas field). Great White, Stones (for the full month) and Caesar/Tonga all had noticeable downtime in March taking about 90 kbpd off-stream.

chart/

…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.

OPEC May Oil Production

OPEC May Oil Production

All OPEC data below is from the OPEC Monthly Oil Market Report. All OPEC data is in thousand barrels per day and is through May 2018.

OPEC 14 Crude oil production was up 35,000 barrels per day but that was after March production had been revised down by 32,000 bpd and April production was revised down by 89,000 bpd.

Nigeria’s April production was revised down by 27,000 bpd and Saudi Arabia’s April production was revised down by 58,000 bpd.

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

IEA: Oil Prices Could Rise Further As Shale Can’t Fill The Gap

IEA: Oil Prices Could Rise Further As Shale Can’t Fill The Gap

refinery

U.S. shale will continue its breakneck growth rate into 2019, despite bottlenecks, but the oil market still faces serious supply risks from the potential losses from Venezuela and Iran, the International Energy Agency (IEA) said in a new report.

The IEA said that the run up in oil prices in the last few months dampened oil demand growth, although the agency left its forecast for oil demand growth unchanged at 1.4 million barrels per day, after downgrading that estimate last month. Subsidies and price regulation in a growing number of countries, intended to blunt the impact of rising fuel prices, could keep demand growth on track, despite oil prices trading significantly higher than, say, a year ago.

Looking ahead to 2019, the IEA thinks that oil demand growth will expand by yet another 1.4 mb/d, this time with the help of the petrochemical sector. A number of projects are coming online earlier than expected, adding more consumption to the mix. The demand estimate is a rather strong one, given substantial expansion in demand over the past few years.

There are risks to that forecast, including “a weakening of economic confidence, trade protectionism and a potential further strengthening of the US dollar,” the IEA said. Those factors should not be overlooked. Indeed, strong demand does not stand independent of the price variable, for instance. How this plays out is unclear, but with the oil market now much tighter than at any point in the last few years, strong demand going forward will start to drive up prices much more than it did in the past.

The supply side of the equation is much more interesting. On the positive side of the ledger, the IEA sees non-OPEC supply growing by 2 mb/d in 2018, followed by another jump of 1.7 mb/d in 2019. The U.S. makes up three quarters of both of those figures.

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

Is Russia Bailing On The OPEC Deal?

Is Russia Bailing On The OPEC Deal?

Offshore rig

For the first week of June, Russia, the world’s largest oil producer, exceeded the amount it agreed to produce as part of the January 2017, OPEC/non-OPEC supply cut deal.

For the first week of June, Russia produced some 11.1 million barrels per day (bpd), far exceeding production limits outlined in the deal, Interfax news agency said on Saturday, citing a source familiar with the matter.

As part of the oil production cut, Russia agreed to trim its production by 300,000 bpd from 11.247 million bpd. The output cut deal called for its members to remove some 1.8 million bpd of oil from global markets.

That deal was orchestrated to stop the bloodletting in global oil markets at the time due to a ramp up in U.S. shale production and Saudi Arabia’s late 2014 strategy of trying to drive U.S. shale producers out of business by opening the production flood gates and sending prices to multi-year lows.

However, the Saudi’s plan backfired. Global oil prices tumbled from more than $100 per barrel in mid-2014 to under $30 per barrel by the start of January 2016, throwing global markets into a historic supply overhang, and causing financial chaos for the Saudis who had to start issuing international bonds to offset record budget deficits – a development that is still ongoing as the Kingdom shores up its finances from that low oil price period.

Now that OECD oil inventory levels have reached the OPEC/non-OPEC members’ goal of five-year averages, there is talk and speculation among not only media but oil producing countries asking if it’s time to ramp up production. Also, geopolitical factors are coming into play as renewed U.S. sanctions against Iran will remove as many as 500,000 bpd from global markets, perhaps more according to other forecasts. In addition, OPEC member Venezuela’s oil production is coming apart at the seams, also removing more barrels from the market.

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

Saudi Oil Production Jumps In June Despite Drop In Oil Demand: OPEC

It will probably not come as a surprise that at a time when both Trump, and Saudi Arabia, are pressing OPEC to reverse the 1.5 year long OPEC agreement and pump more oil so US gasoline prices dont soar in the summer months, that according to the just released monthly report from the cartel, total OPEC production rose by 35.4kb/d to 31.869mmb/d mostly thanks to Saudi output rising by 85.5kb/d (according to secondary) sources to 9.987mmb/d and up a whopping 161.4kb/d as per direct communication, and back over 10 million barrels.

Joining Saudi Arabia in producing more oil in June were Algeria & Iraq, while production again declined in Venezuela, with Libya and Nigeria also seeing a decline in output.

Commenting on the state of the market, OPEC noted that 2018 global oil demand growth forecast unchanged; and is forecast to increase by around 1.65mln bpd to average 98.85mln bpd, with total oil consumption projected to surpass 100mln bpd during Q4 2018.

However, OPEC did warn that its outlook for H2 2018 warrants close monitoring of the factors impacting both world oil demand and non-OPEC supply that will shape the outlook of the oil market going forward; the tacit warning here is that oil prices may be so high to pressure oil demand.

“Looking at various sources, considerable uncertainty as to world oil demand and non-OPEC supply prevails,” said report read. “This outlook for the second half of 2018 warrants close monitoring.”

Indeed, according to the report, Saudi April oil demand saw its biggest drop on record, falling across all product categories, with most of the weakness in the heavy part of the barrel, OPEC reported. Demand was down more than 5% y/y in 1st 4 months of 2018, with April falling y/y by 420k b/d, or 17%.

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

Canada Bets On Trans Mountain Expansion To Sell Oil In Asia

Canada Bets On Trans Mountain Expansion To Sell Oil In Asia

Pipeline pieces

Canada may be the fourth largest producer and third largest exporter of oil in the world, but it has one sole customer of its oil—the United States.

At the end of last month, Canada took a step toward ensuring that its oil would have an export outlet to the world’s fastest-growing energy market, Asia.

Analysts believe that the federal government stepping in to save the Trans Mountain expansion project has boosted the chances that the pipeline will be built and give Canada an export outlet from the Pacific Coast to the Asian markets. The industry is cautiously optimistic, but some companies say that Canada must do more to level the playing field for its oil.

Last year, Canada’s crude oil exports increased by 6.5 percent annually to 3.3 million bpd. Of those, exports to destinations other than the U.S. accounted for just 0.8 percent of all, according to data by the National Energy Board (NEB).

Due to congested takeaway capacity and lack of enough pipelines to either the Pacific or the Atlantic Coasts, Canada’s oil is currently priced at a huge discount to the U.S. benchmark. 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 West Texas Intermediate (WTI) has been US$20, and at times US$30 a barrel this year.

Fierce opposition in British Columbia has forced Kinder Morgan to reconsider its commitment to expand the Trans Mountain pipeline that would increase the daily capacity of the pipeline to 890,000 bpd from 300,000 bpd. So the Government of Canada reached an agreement with Kinder Morgan last month to buy the Trans Mountain Expansion Project and related pipeline and terminal assets for US$3.5 billion (C$4.5 billion).

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

Geopolitical Tensions Reach Boiling Point Ahead Of OPEC Meeting

Geopolitical Tensions Reach Boiling Point Ahead Of OPEC Meeting

Globe

The upcoming OPEC meeting on June 22 is shaping up to be a contentious one, after news broke that the U.S. government asked Saudi Arabia to increase oil production before Washington pulled out of the Iran nuclear deal.

Earlier last week, news surfaced that the U.S. government asked Saudi Arabia to boost output to relieve pressure on prices. But Reuters followed up with a report on June 7, adding more context to that story. According to Reuters, a high level Trump administration official called Saudi Arabia a day before Trump was set to announce the U.S. withdrawal from the Iran nuclear deal, asking for more oil supply to cover for disruptions from Iran.

The last time the U.S. government pressured OPEC into adding supply, it was also over Iran. The Obama administration wanted the cartel to offset disrupted Iranian production, after an international coalition put stringent sanctions on Iran in 2012. Roughly 1 million barrels per day were knocked offline.

While the Trump administration’s request might irk OPEC members, with Iran obviously the most aggrieved, the apparent willingness of Saudi Arabia to comply with Washington’s request has ignited furor from within the group.

“It’s crazy and astonishing to see instruction coming from Washington to Saudi to act and replace a shortfall of Iran’s export due to their Illegal sanction on Iran and Venezuela,” Iran’s OPEC governor, Hossein Kazempour Ardebili, said in comments to Reuters. He said that OPEC would not simply comply with Washington’s requests. “No one in OPEC will act against two of its founder members,” he said, referring to Iran and Venezuela. “The U.S. tried it last time against Iran, but oil prices got to $140 a barrel.”

“OPEC will not accept such a humiliation. How arrogant and ignorant one could be (to) underestimate the history of 60 years’ cooperation among competitors,” he said.

…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…

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