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Is An Oil Price Spike Inevitable?

Is An Oil Price Spike Inevitable?

Oil Rig

The oil glut is over, at least when it comes to U.S. commercial inventories: over the past two months they have been within the average range for the season, thanks to hefty draws. These draws, one analyst argues, are a signal of higher-than-expected demand that is not only an American trend but a global one.

Judging by recent price movements, Flynn is hardly an exception: Brent touched $70 last week, a level only the most bullish of the bulls hoped to see at this time of the year as doubts about OPEC and Russia’s ability to offset growing American production persisted. Now, with new discoveries continuing to sit at record lows, there is a chance that $70 a barrel is only the beginning—as long as demand delivers on expectations, that is.

For now, global crude oil demand forecasts seem to be overwhelmingly positive. The EIA, in its latest Short-Term Energy Outlook, forecast global oil consumption growth of 1.7 million bpd this year and a bit less in 2019.

The International Energy Agency is a bit more guarded, forecasting in its latest Oil Market Report an average demand growth rate of 1.3 million bpd for this year. This would be a slowdown from last year’s 1.5 million barrels daily, but still a robust growth rate, in spite of the wider adoption of EVs and the increase in renewable power generation capacity.

If these forecasts turn out to be accurate—the oil market is notoriously difficult to predict—then we could see a real price spike before too long. In fact, we could see a deficit at some point in the future, according to Flynn, who estimates that the one-trillion-dollars in exploration investments that fell victim to the 2014 price collapse could cause a global production drop of between 8 and 11 million barrels per day.

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Norway Desperately Needs Large Oil Discoveries

Norway Desperately Needs Large Oil Discoveries

Norway Rig

Thanks to costs cuts and large oil discoveries made before the oil price crash, Norway will be able to sustain its oil and gas production over the next five years. But reduced exploration drilling and lack of big discoveries in the past two years spell trouble for Western Europe’s biggest oil and gas producer after 2023, authorities fear.

Nearly two-thirds of the undiscovered resources are thought to be located in the Barents Sea, the Norwegian Petroleum Directorate (NPD) directorate said last week in its review of the Norwegian Continental Shelf in 2017.

However, last year’s exploration campaign in Norway’s Arctic was a flop. Oil companies are not giving up on Barents Sea exploration, but firms and authorities alike have now lowered expectations about the possibility of a huge discovery in those areas.

“In the part of the Barents Sea that’s currently open, you’ve sort of tried the elephants — the big opportunities,” Bente Nyland, Director General of the Norwegian Petroleum Directorate, told Bloomberg in a recent interview. “You’re now down to the next generation in size,” Nyland noted.

The authority would be happy with any discovery of around 500 million barrels of oil, Nyland told Bloomberg.

Last year, the most promising exploration well Korpfjell—the first well drilled in the Norwegian section of a formerly disputed area between Norway and Russia, and the northernmost wildcat well drilled on the Norwegian shelf—was a disappointmentcompared to expectations that it could contain more than 250 million barrels of oil equivalent, or even 1 billion boe.

The disappointing Barents Sea campaign led to just 11 companies applying for production licenses in Norway’s 24th licensing round that offered 93 blocks in the Barents Sea and 9 blocks in the Norwegian Sea. Statoil, Aker BP, and Lundin were all applying, but the NPD said that “The applicant landscape could indicate that some parties are prioritizing exploration in mature areas this time around,” commenting on the applications.

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Could An Oil Surplus Be A Sign Of Things To Come?

Could An Oil Surplus Be A Sign Of Things To Come?

Oil

Today, we have a surplus of oil, which we are trying to use up. That has never happened before, or did it? Well, actually, it did, back around 1930. As most of us remember, that was not a pleasant time. It was during the Great Depression.

(Click to enlarge)

Figure 1. U.S. ending stocks of crude oil, excluding the Strategic Petroleum Reserve. Amounts will include crude oil in pipelines and in “tank farms,” awaiting processing. Businesses normally do not hold more crude oil than they need in the immediate future, because holding this excess inventory has a cost involved. Figure produced by EIA. Amounts through early 2016.

A surplus of a major energy commodity is a sign of economic illness; the economy is not balancing itself correctly. Energy supplies are available for use, but the economy is not adequately utilizing them. It is a sign that something is seriously wrong in the economy–perhaps too much wage disparity.

(Click to enlarge)

Figure 2. U. S. Income Shares of Top 10 percent and Top 1 percent, Wikipedia exhibit by Piketty and Saez.

If wages are relatively equal, it is possible for even the poorest citizens of the economy to be able to buy necessary goods and services. Things like food, homes, and transportation become affordable by all. It is easy for “Demand” and “Supply” to balance out, because a very large share of the population has wages that are adequate to buy the goods and services created by the economy.

It is when we have too much wage disparity that we have gluts of oil and food supplies. Food gluts happened in the 1930s and are happening again now. We lose sight of the extent to which the economy can actually absorb rising quantities of commodities of many types, if they are inexpensive, compared to wages.

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Russia To Discuss Possible Exit From OPEC Deal

Russia To Discuss Possible Exit From OPEC Deal

Russia

Russia may be on its way out of the OPEC output reduction deal, according to the country’s Energy Minister, Alexander Novak.

Reuters reports that Novak might discuss the country’s potential exit from the pact in Oman next week. Russia had vowed to cut output by 300,000 barrels per day under the agreement as part of a group of non-OPEC producers who elected to coordinate the bloc’s market stabilization initiative.

“We see that the market is becoming balanced. We see that the market surplus is decreasing, but the market is not completely balanced yet and, of course, we need to continue monitoring the situation,” Novak said.  Russian oil majors have been complaining about the deal and how it is creating stumbling blocks on the road towards the industry’s expansion plans.

Brent barrel prices are currently approaching $70 a barrel, suggesting crude markets are rebalancing as we approach June, when the deal is set for “review” – a process with little description in the full text of the OPEC deal’s renewal, which was agreed upon in November.

As far as OPEC members are concerned, the deal could carry on beyond the end of 2018. Speaking to CNBC, the United Arab Emirates’ energy minister, Suhail al-Mazrouei said: “I am expecting that this group of countries that stood and have become responsible for helping the market to correct, (that) there is a very good chance that they could stick together and put a shape around that alliance.”

His statement comes amid a variety of scenarios on how the deal might come to an end, featuring civil unrest in Venezuela and Iran that may lead to supply disruptions; Russia pulling out of the pact in June; OPEC members and other parties to the deal starting—or continuing—to cheat; and oil prices rising too high.

Coastal States Protest Trump’s Offshore Drilling Plan

Coastal States Protest Trump’s Offshore Drilling Plan

Offshore

Less than a week after the Trump Administration proposed to open almost the entire U.S. coast to oil and gas drilling, Secretary of the Interior Ryan Zinke backtracked and took Florida off the table for offshore oil and gas exploration. Now many are wondering why just Florida was given a pass.

Opposition by coastal states, both East and West, had already been strong, even before Secretary Zinke said on Tuesday that he supports Florida Republican Governor Rick Scott’s position that “Florida is unique and its coasts are heavily reliant on tourism as an economic driver.”

“As a result of discussion with Governor Scott’s and his leadership, I am removing Florida from consideration for any new oil and gas platforms,” Secretary Zinke said in a statement posted on Twitter.

But taking Florida off the table sparked even more backlash from nearly all other coastal states along the Pacific and the Atlantic, with governors and representatives demanding the states they represent be exempt, too.

Analysts see the administration’s move as opening a wider legal crack in the offshore drilling plan, with states and environmentalists waiting in the wings to start suing.

Potential lawsuits could further derail the timeline of the process that would turn this initial draft plan into a proposed final program. Mounting uncertainties over the timeline and legislation could deter oil companies from planning to spend big on exploration, while drilling along the coastal areas could be challenged by states and could increase risks for oil firms’ budget planning and possible legal expenses. Then there is the price of oil in a few years’ time to consider, as well as the fact that companies in the U.S. are increasingly earmarking investments into onshore shale at the expense of conventional offshore.

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$60 Oil Will Not Last Long

$60 Oil Will Not Last Long

Refinery

U.S. oil prices are treading water above $US 60/B (WTI) again, the first time since 2015.

Crude oil has a northerly wind in its sails, though everybody on board this fickle ship is cautious about its compass bearing. Since 2013 we’ve seen the price of a barrel peak to $110, capsize to $26, and roll back to $60.

The gyrations make sense.

Here is what we’ve learned over the past decade:

Above $80 is too high. Cash flow is ample. Investors gladly fund more drilling rigs. Pump jacks work hard. Too much productive capacity is added. But costs inflate quickly too—competitiveness diminishes within the oil industry, and also encourages alternative energy systems. Consumers become more miserly and demand growth decelerates.

Under $40 is too low. Cash flows dry up and investors jump ship. Rigs head back to their yards with drooping masts. Costs deflate, rapidly decimating employees and equipment in the service industry. Production begins to decline in marginal regions. State-owned enterprises are unable to pay their ‘social dividends’. On the consumption side, conservation and efficiency lose meaning; consumers revert to guzzling oil like free refills of coffee.

So, simplistically a mid-range price of $US 60/B should represent what oil pundits call “market balance.” It’s the elusive price point where daily consumption is equal to production; inventory levels are neither too low nor too high; and economists’ cost curves intersect with demand.

Yet, if there is one thing 160 years of the oil age teaches us, there is no such thing as a mid-range balancing point in oil markets. Everyone either rushes to one side of the ship or the other, almost always at the wrong time.

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3 Million Barrels Per Day Could Go Offline In 2018

3 Million Barrels Per Day Could Go Offline In 2018

Venezuela

Venezuela’s oil production has been falling for years, but 2018 could mark a new, darker chapter for the South American nation.

Late last year, Venezuela’s government defaulted on millions of dollars’ worth of debt, with larger and more significant payments maturing this year. The ability to service billions in debt payments this year is almost certainly out of the question, although the size of the default this year remains to be seen.

The cash crunch that Venezuela has suffered through has worsened substantially over time, and the country’s oil sector has paid the price. Venezuela produced over 3.5 million barrels per day (mb/d) in the late 1990s, but output has been falling for much of the past two decades, although often at a gradual pace. The declines really started to accelerate in the past two years.

(Click to enlarge)

But 2018 could be even worse. A year ago, Venezuela produced between 2.0 and 2.2 mb/d, depending on whose data one uses. By the end of 2017, production really began to plunge, dipping to just 1.7 mb/d in December, according to S&P Global Platts. That is the lowest figure since the 1980s, aside from a brief period in 2003 when a strike knocked output offline.

Worryingly for Venezuela, the monthly declines are accelerating. A year ago, monthly declines typically ran somewhere between 10,000 bpd and 30,000 bpd. By the third quarter, those monthly dips ballooned to around 40,000 bpd, month-on-month. But Between November and December, output fell by massive 100,000 bpd, according to S&P Global Platts. Argus Media says the losses are even larger than that, with production falling by 151,000 bpd in December to 1.686 mb/d.

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Iran Sanctions Will Help China’s Petro-Yuan

Iran Sanctions Will Help China’s Petro-Yuan

China

In a few days, U.S. President Trump may try to re-impose sanctions on Iran, a dramatic step that could heighten tensions between the two countries. Some analysts believe the move could contribute to a much broader global economic power shift from the U.S. to China.

The connection between the issues may not be obvious at first glance, but by seeking to isolate Iran from the international market, Iran could look elsewhere. Because the global oil trade is conducted in greenbacks, the U.S Treasury was able to restrict Iran’s ability to access the global financial system in the past. That made it extremely difficult for Iran to sell its oil prior to the thaw in relations in 2015, which kept millions of barrels of daily oil production on the sidelines.

This time around, however, the U.S. will likely go it alone. The Trump administration won’t have the backing of the international community in its campaign to resurrect sanctions against Iran, which will make isolation much more difficult. A few months ago, Goldman Sachs predicted that unilateral sanctions from the U.S. could affect a few hundred thousand barrels per day from Iran, but without help from the rest of the world, the effort would not curtail nearly the same amount of oil as the last time around.

Moreover, some analysts argue that the Washington crackdown could merely push Iran to begin selling oil under contracts denominated in yuan rather than dollars.

“Potential consequent reactivation of sanctions may cause Iran to export oil using the Chinese Yuan denominated contract, which launches on 18 January,” Bjarne Schieldrop, Chief Commodities Analyst at SEB, said in a statement. “This may spark a move away from the present long-established U.S. Dollar (USD) denominated oil trading regime.”

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Is This The Beginning Of An Oil Sands Revival?

Is This The Beginning Of An Oil Sands Revival?

pipelines

New life was breathed into the Canadian oil sands with a decision by foreign-owned Harvest Operations Corp to commission its BlackGold project south of Fort McMurray.

The Calgary-based arm of South Korean state-owned Korea National Oil Corp announced on Dec. 21 it will start the 10,000 barrels of oil per day (bopd) steam-assisted gravity drainage (SAGD) operation, construction at which was halted in 2015 due to low oil prices.

In a press release on SEDAR, Harvest said that major work at the site has already started, with the aim of commissioning wells and starting steam injection in Q2 2018. Production is slated for the third quarter.

It cites “the stabilization of crude oil pricing and the improved operational and financial performance of Harvest’s conventional business as factors in its decision to move forward with BlackGold.”

The start-up has been helped through a refinancing of $1.36 billion of maturing debt, plus the raising last month of an additional quarter-million in financing, the company said.

Global News notes the project was built for around $900 million and was “considered mechanically complete” when it was shelved in the spring of 2015 when WTI oil prices were around $50 a barrel, half as much as a year earlier.

WTI on Thursday closed at $59.84, for a percentage gain of 0.34%. Related: 2018: The Year Of The Oil Bulls

The Canadian oil sands have seen an exodus of foreign investment since the oil price collapse of 2014 and US shale plays gathered momentum. The divestments have included Royal Dutch Shell, Marathon Oil, Statoil and ConocoPhillips.

Yesterday AXA SA, the third-largest insurer in the world, said that it will divest about $822 million from the main oil sands producers and associated pipelines, and will stop further investments in these businesses. The move could affect companies such as TransCanada, Enbridge and Kinder Morgan.

But as foreign companies have pulled out money, Canadian firms have made multi-billion-dollar deals to expand their holdings. According to energy consultancy Wood Mackenzie, Canadian ownership of oil sands production now sits at over 80%, reported the Calgary Herald.

The 5 Most Popular Energy Stories Of 2017

The 5 Most Popular Energy Stories Of 2017

Oil

The year in which WTI went from barely above $50 to over $60 a barrel and Brent hit OPEC’s much sought after $65 was full of the usual mix of price forecasts, warnings, and unpredictable events that left readers wondering what will happen next…

Here are five of Oilprice.com’s most popular stories from 2017 as we look back on an eventful year.

The Oil War Is Only Just Getting Started

Now in its second year, the OPEC/Russia oil production cut pact was the number-one headline maker of 2017. After the initial praise—and price spike—doubts began to emerge that the deal might not work as there was a strong likelihood that some members may cheat. Very soon, other doubts overshadowed these: U.S. shale production was growing, and it was growing fast.

Despite OPEC publicly dismissing shale production growth as hype, by the end of the year it was crystal clear that if there was anything threatening the success of the pact, it was U.S. shale. This threat still looms, even though the U.S. shale industry has been warned that it would be wise to slow down the pace of its rig count growth. Ultimately though, it will be the three years of record-low exploration investment that tightens markets rather than this battle.

The Next Big U.S. Shale Play

This may come as a surprise to readers, as the Permian occupied the spotlight for most of the year, but the June drilling productivity report by the EIA revealed that the Powder River Basin could challenge the Permian’s star status. Shale dominated headlines in 2017, so anything about shale, be it problems or achievements, was top news.

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What’s Behind The Canadian Rig Count Crash

What’s Behind The Canadian Rig Count Crash

oil rig

The U.S. rig count has been on the rise for months, despite some recent hiccups, but Canada’s rig count recently plunged amid low oil prices.

Canada’s rig count fell from 210 to 136 for the week ending on December 29, a massive drop off. That took the rig count to a six-month low. Obviously, the losses were concentrated in Alberta, where most of the rigs tend to be. Alberta’s rig count sank from 162 to 118 in the last week of 2017. But Saskatchewan also saw its rig count decimated—falling from 43 in mid-December to just three at the close of the year.

The losses can likely be chalked up to the meltdown in prices for Canadian oil. Western Canada Select (WCS), a benchmark that tracks heavy oil in Canada, often trades at a significant discount to oil prices in the United States. But the WCS-WTI discount became unusually large in November and December for a variety of reasons. The outage at the Keystone pipeline led to a rapid buildup in oil inventories in Canada, and storage hit a record high in December.

Also, Canada’s oil industry has been unable to build new pipelines to get the landlocked oil from Alberta to market. Alberta oil producers are essentially hostage to their buyers in the U.S., and with oil production now bumping up against a ceiling in terms of pipeline capacity, the glut is starting to weigh on WCS prices.

In December, Enbridge announced that it will ration the space on its Mainline oil pipeline system for January as Canada’s pipelines are essentially at full capacity. Enbridge said that it will apportion lines 4 and 67, which move heavy crude, by 36 percent. The term “apportionment” is a euphemism for rationing—essentially oil producers are unable to get all of their product onto the pipeline and are hit with restrictions. That means the oil has to be diverted into storage.

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The 10 Energy Stories That Defined 2017

The 10 Energy Stories That Defined 2017

Electricity

As 2017 comes to a close, it’s time to review the top energy stories of the year. There are several stories that could compete for the year’s top spot, but this year I have decided to list the stories roughly in the order they occurred during the year. Thus, the recent tax reform bill, which would be the top energy story on some lists, is near the end.

Here are the stories that shaped the year in energy.

Executive Orders on Pipelines

Just after he was sworn in last January, President Trump signed executive orders on two stalled pipeline projects. One was the Keystone XL Pipeline rejected by his predecessor. Trump asked TransCanada, the pipeline’s backer, to reapply for the permit. Shortly after, the company did just that, and the permit was approved.

The other project backed by Trump was the Dakota Access Pipeline (DAPL). The $3.8 billion project had been halted by President Barack Obama following months of protests. Trump instructed the Secretary of the Army to cut through the red tape that had stalled the project. That directive was followed, the project was restarted, and oil began to flow through the pipeline in May.

Repeal of the Clean Power Plan

In March, Donald Trump signed an executive order that instructed EPA Administrator Scott Pruitt to begin the process of dismantling the Clean Power Plan (CPP). The CPP was first proposed by the Obama administration in 2014 and would have required states to cut carbon dioxide emissions from existing coal- and gas-fired power plants, targeting an emissions reduction of 30 percent below 2005 levels by 2030.

An Exodus from the Oil Sands

Citing high costs and better opportunities in U.S. shale oil, oil majors like Statoil, Shell, and ConocoPhillips sold off $24 billion in assets in Canada’s oil sands sector. Other majors, like Total, have indicated they will follow suit.

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Iranian Crisis Could Send Oil To $100

Iranian Crisis Could Send Oil To $100

Oil

Oil prices started the year on a high note as some geopolitical tension pushed aside bearish concerns. Both WTI and Brent opened above $60 per barrel for the first time in years.

The protests in Iran were the main driver of the bullish sentiment in the oil market. Anti-government demonstrations swept across the country in recent days, and unlike the widespread protests in 2009, the current rallies are related to economic woes and are also taking place in more cities than just Tehran. “Growing unrest in Iran set the table for a bullish start to 2018,” the Schork Report said in a note to clients on January 2.

At least 14 people have been killed in the protests and an estimated 450 have been arrested. It is the most serious challenge to the Iranian government in years, and Iran’s Supreme Leader put the blame on foreign agents, presumably the United States. “In recent days, enemies of Iran used different tools including cash, weapons, politics and intelligence apparatus to create troubles for the Islamic Republic,” Ayatollah Ali Khamenei said.

Meanwhile, tension over North Korea – although not a new development – could be spreading to include a spat between the U.S. and Russia as well as the U.S. and China. Reuters reportedlate last week that Russian oil tankers have sent fuel to North Korea on multiple occasions in the last few months by transferring cargoes at sea. If true, the actions would amount to a violation of UN sanctions. Sources told Reuters that there is no evidence that the Russian state was involved, but the news has raised the specter of U.S.-Russian tension as Washington seeks a hard line on Pyongyang.

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Russia’s Grip On European Gas Markets Is Tightening

Russia’s Grip On European Gas Markets Is Tightening

Russia

Despite years of effort from the EU, Russia’s grip over natural gas supplies in Europe is tightening, not waning.

Gazprom shipped 190 billion cubic meters of natural gas to Europe in 2017—a record high, according to Bloomberg. In 2018, that figure is expected to dip slightly to 180 billion cubic meters, which will still be the second most on record.

The higher reliance on Russian gas may come as a surprise, not least because of the ongoing tension between Russia and some European countries on a variety of issues. Russia’s intervention in Ukraine and its annexation of Crimea in 2014 led to a standoff between Russia and the West—but Europe’s imports of Russian gas are up more than 25 percent since then, despite a lot of rhetoric in Brussels about diversification.

There has been some progress. U.S. LNG has begun arriving on European shores for the first time, promising to compete with Russian gas. Importing LNG has been a lifeline particularly in some areas that are acutely exposed to Russia’s gas grip. Lithuania began importing LNG, offering an alternative to Russian gas and forcing price concessions from Gazprom.

For years, U.S. LNG has been billed as somewhat of a game changer, threatening to end Russia’s control of the European market. There have been some notable concessions from Gazprom—more flexible pricing, for example, and an erosion of oil-indexed pricing—but the Russian gas giant has not lost market share. A lot of U.S. LNG has been shipped to Latin America, not Europe.

Part of the reason is that European natural gas production continues to fall, leaving a void that Russia has been eager to fill. At the same time, Gazprom’s Deputy Chief Executive Officer Alexander Medvedev told Bloomberg that coal prices are expected to rise a bit in 2018, making Russian gas more competitive.

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U.S. Shale Can’t Offset Record-Low Oil Discoveries

U.S. Shale Can’t Offset Record-Low Oil Discoveries

Rig

The U.S. shale resurgence has been one of the main themes in oil markets this year, while OPEC’s production cut deal to deplete the oil overhang and boost oil prices has been the other key development in 2017.

U.S. shale production is expected to grow over the next few years as the companies that survived the worst of the downturn showed resilience in the face of the lower-for-longer oil prices. But three years of low oil prices also led to the global oil industry slashing investments in conventional oil exploration, and deferring or revisiting development plans.

This has led to the lowest ever volumes of oil discoveries in 2017, Rystad Energy said last week. While the low level of discoveries is not an immediate threat to global oil supply, it could become such ten years down the road, according to Rystad Energy.

In ten years’ time, U.S. shale production may have peaked, at least according to OPEC that sees shale peaking after 2025, although the cartel has conceded that U.S. tight oil has defied previous forecasts and has increased production more than initially expected and will continue to do so in the short term.

This year has seen less than 7 billion barrels of oil equivalent discovered globally, a volume as low as last seen in the 1940s, Rystad Energy has estimated. What worries analysts the most is the fact that this year the reserve replacement ratio—the amount of discovered resources relative to the amount of production—was a mere 11 percent, compared to 50 percent in 2012, Sonia Mladá Passos, Senior Analyst at Rystad Energy, said.

The Biggest Factors In Future Oil Production

Another point of concern is that the resources discovered per field also dropped, and this could affect the commercial viability of new discoveries.

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Olduvai II: Exodus
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