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Saudis Scramble To Stop Oil Price Slide

Saudis Scramble To Stop Oil Price Slide

oil infra

Saudi Arabia is moving quickly to halt the slide in oil prices, telegraphing a production cut intended to erase some of the re-emerging supply surplus.

Saudi oil minister Khalid al-Falih said on Monday that the kingdom would slash oil exports by 500,000 bpd in December, a move that would go a long way to reversing the 1 million-barrel-per-day increase in output agreed to by OPEC+ in June.

It was only a few weeks ago that al-Falih was trying to reassure the market that Saudi Arabia had enough spare capacity in the event of an outage; now he is rushing to try to stop the slide in prices but paring back production.

The production cut would come just after crude oil officially entered bear market territory, falling 20 percent from its October peak.

But it is unclear at this point if the rest of the OPEC+ coalition, including Russia, will join the Saudis. The OPEC-Non-OPEC Joint Ministerial Monitoring Committee (JMMC) met over the weekend in Abu Dhabi to consider options for 2019. The group was rumored to be considering a collective production cut, although the meeting ended on Sunday with no firm commitments.

Still, in an official statement, the group seemed open to the idea. The JMMC “noted that 2019 prospects point to higher supply growth than global requirements,” which is another way of saying that they are nervous about a supply glut. Also, the committee stated that a global economic downturn could depress demand, and “could lead to widening gap between supply and demand.” These conditions “may require new strategies to balance the market.” It would seem that the OPEC+ coalition is laying the groundwork for a production cut. The official ministerial meeting in Vienna in early December will reveal much more about the group’s plans heading into 2019.

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The Biggest Threat To Dollar Dominance

The Biggest Threat To Dollar Dominance

Russian oil exporters are pressuring Western commodity traders to pay for Russian crude in euros and not dollars as Washington prepares more sanctions for the 2014 annexation of Crimea by Moscow, Reuters reported last week, citing as many as seven industry sources.

While it may have come as a surprise to the traders, who, Reuters said, were not too happy about it, the Russian companies’ move was to be expected as the Trump administration pursues a foreign policy where sanctions feature prominently. This approach, however, could undermine the dominance of the U.S. dollar as the global oil trade currency.

Early indications of this undermining became evident this spring, when Russia and Iran launched an oil-for-goods exchange program seeking to eliminate bilateral payments in U.S. dollars and plan to keep it going for five years. The sanction buddies discussed this sort of agreement earlier, back in 2014, when Iran was still under Western sanctions. Even after the notorious nuclear deal was reached, the two countries decided to go ahead with their barter deal, and the preliminary agreement was reached last year. According to it, Russia would receive 100,000 bpd of Iranian crude in exchange for US$45 billion worth of Russian goods.

In March, Iran banned purchase orders denominated in U.S. dollars and said that any merchant using dollars in their orders will not be allowed to conduct the import trade. A month later, Tehran announced that it will publish all its official financial reports in euros instead of dollars in a bid to encourage a switch to euros from dollars among state agencies and businesses.

Now, Russia’s biggest oil producers are renegotiating oil delivery contracts with commodity traders, and three of them, Rosneft, Gazprom Neft and Surgutneftegaz, have raised traders’ hackles by insisting they, the traders, commit to paying penalties beginning next year if U.S. sanctions disrupt sales and as a result the buyers fail to make payments.

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Oil Prices Hit Multi-Month Lows

Oil Prices Hit Multi-Month Lows

Oil

Oil prices fell to multi-month lows at the end of the week, as a confluence of factors all point in a bearish direction.

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Venezuela’s Glaring Gasoline Crisis

Venezuela’s Glaring Gasoline Crisis

gas pump

Iran has dominated the headlines over the last few weeks, but Venezuela’s oil sector continues to meltdown.

Venezuela’s oil production fell to just 1.197 million barrels per day in September, down 42,000 bpd from a month earlier. However, because things are moving so quickly, that figure is now woefully out of date. With a few weeks left in 2018, many analysts believe production could fall below 1 mb/d.

Venezuela’s oil exports to the United States declined by 19 percent in October, compared to a month earlier. The decline came as a result of maintenance from the country’s upgraders, which turn heavy oil from the Orinoco Belt into exportable forms of oil. Without the ability to process, exports plunged.

But Venezuela is replete with operational and financial problems that are also contributing to the sharp decline in output and exports. Another issue has been the damaged port of Jose, the main conduit for oil exports. A tanker collision in August disrupted shipments from the port for weeks, and it remains only partly operational.

Nobody is hurting more than the Venezuelan people. At least 2.3 million people have fled Venezuela since 2015, according to a new estimate from the United Nations. The country’s inflation rate topped 833,997 percent in October, according to a report from Venezuela’s opposition-controlled Congress. The number is so astronomical that it is virtually meaningless, just as the currency itself is completely worthless.

Fuel shortages are growing worse. State-owned PDVSA has seen its refineries run into the ground, and many are not operational or operating at very low levels. On paper, the refineries can process about 1.3 million barrels per day, but in reality, many have ceased operations due to a combination of factors, including a breakdown in parts, a lack of oil supply to work with, and no financial resources. According to Bloomberg, refinery utilization is down to around 17 percent, down from 50 percent as recently as 2016.

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Nat Gas Prices Spike On Cold Weather

Nat Gas Prices Spike On Cold Weather

Natural Gas

Natural gas prices are sharply up as cold weather is set to sweep much of the country, putting a strain on already low storage levels.

We are heading into the winter season with natural gas inventories at their lowest level in 15 years. Natural gas inventories stood at 3,143 billion cubic feet (Bcf) for the week ending on October 26, or about 623 Bcf lower than at this point last year and 638 Bcf below the five-year average.

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As the chart shows, natural gas inventories ebb and flow with the seasons – drawing down in the winter as American households crank up the heat, and rising again in warmer months as demand slows.

This year has been an interesting one for gas markets. U.S. production continues to break records, with surging output in the Marcellus and Utica shales, as well as skyrocketing gas production in West Texas as Permian drillers pull out gas along with crude oil.

However, higher levels of gas exports in the form of LNG, higher power burn in gas-fired power plants for electricity, and higher demand for gas in petrochemicals and other industrial uses have all led to structural increases in demand. Add to that the seasonal factors – hot temperatures this summer, which stretched into fall, and now, a coming blast of cold weather. In many parts of the country, autumn seemed a little shorter than usual, sandwiched between a long summer and a rapidly approaching winter.

Tight inventories and a bout of cold weather led Henry Hub natural gas prices to jump at the start of November by nearly 8 percent. In fact, prices jumped $0.28/MMBtu on November 5, the largest daily increase in two years. At $3.50 per million Btu (MMBtu), natural gas spot prices are up 15 percent in the past two months, and they are also at their highest level since last January.

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France Takes The Lead In Protecting Iran Oil Trade From U.S. Sanctions

France Takes The Lead In Protecting Iran Oil Trade From U.S. Sanctions

Tank farm

France aims to lead the European Union (EU) efforts in defying U.S. sanctions on Iran, by supporting the creation of a payment mechanism to keep trade with Iran and making the euro more powerful, France’s Economy Minister Bruno Le Maire said in an interview with the Financial Times.

“Europe refuses to allow the US to be the trade policeman of the world,” Le Maire told FT, adding that the EU needs to affirm its independence in the rift between the EU and the United States over the sanctions on Iran.

The EU has been trying to create a special purpose vehicle (SPV) that would allow the bloc to continue buying Iranian oil and keep trade in other products with Iran after the U.S. sanctions on Tehran return.

The idea behind the SPV is to have it act as a clearing house into which buyers of Iranian oil would pay, allowing the EU to trade oil with Iran without having to directly pay the Islamic Republic.

As the U.S. sanctions on Iran snapped back on Monday, the SPV hasn’t been operational and reports have had it that the undertaking is very complicated and politically sensitive. The bloc is also said to be struggling with the set-up, because no EU member is willing to host it for fear of angering the United States, the Financial Times reported recently, citing EU diplomats.

On Monday, the Belgium-based international financial messaging system SWIFT said that it would comply with the U.S. sanctions on Iran and would cut off sanctioned Iranian banks from its network. This was a blow to the EU’s attempts to defy the U.S. sanctions.

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U.S. Oil Production Is Set To Soar Past 12 Million Bpd

U.S. Oil Production Is Set To Soar Past 12 Million Bpd

shale oil

Rising shale production is putting the United States on track to hit the 12 million bpd oil production mark sooner than previously forecast, the Energy Information Administration (EIA) said in its November Short-Term Energy Outlook (STEO).

Next year’s U.S. crude oil output is now expected to average 12.1 million bpd, up from a forecast of 11.8 million bpd just a month ago in the October STEO.

U.S. crude oil production reached a new monthly record of 11.3 million bpd in August 2018, exceeding 11 million bpd for the first time. Production in August was 290,000 bpd higher than expected in the October STEO, and it was this higher level that raised the baseline for the EIA’s forecast for production in 2019.

Comparing the forecasts in the latest STEO with the October estimates, the EIA now sees U.S. crude oil production hitting the 12-million-bpd mark in the second quarter of 2019 rather than the fourth quarter.

The EIA raised its 2018 production forecast by 1.5 percent compared to the October STEO, to 10.9 million bpd, and the 2019 forecast by 2.6 percent from 11.76 million bpd to 12.06 million bpd.

While the EIA lifted its projections for U.S. oil production, it revised down its forecasts for oil prices in 2019. In the November outlook, it forecasts Brent Crude prices of $72 per barrel in 2019 on average, which is $3 a barrel lower than previously forecast. The EIA sees WTI Crudeprices to average $65/b next year, down by $5/b from the previous estimate.

“The lower crude oil price forecasts are partly the result of higher expected crude oil production in the United States in the second half of 2018 and in 2019, which is expected to contribute to growth in global oil inventory and put downward pressure on crude oil prices,” the EIA said.

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Is Shale The Future For Big Oil?

Is Shale The Future For Big Oil?

oil rig

If anyone had compared shale oil to Google five years ago, it would have sounded strange. Yet when last week in a report Wood Mackenzie’s chairman and chief analyst Simon Flower did just that, comparing shale oil to the FAANG stocks, he had a good reason to do so. Shale oil is the star of the decade as far as the global energy industry is concerned, and now even Big Oil has woken up to this fact.

In a report detailing the relationship of Big Oil and shale, Wood Mac’s analysts forecast a bright future for both, with the share of shale oil in the supermajors’ total production rising from the current 700,000 bpd to 2.2 million bpd in 2026 before it starts declining. This will represent a tenth of the supermajors’ total production, Wood Mac’s research analyst Roy Martin said in the report.

Meanwhile, it’s not just the supermajors that are expanding their shale oil footprint at a fast pace. Large independents are getting larger, too. As Houston Chronicle commentator Chris Tomlinson noted in a recent story on the same topic, “Seasoned oil executives know that when both prices and production rise, it’s time to cash out and sell to the big boys.”

There’s a consolidation underway in the U.S. shale patch, and it will likely continue for some time until, Tomlinson argues, only the strongest players remain, all in a position to benefit from the marriage of lower costs, higher drilling and production efficiency, and consequently, consistent output growth.

Among the most notable acquisitions in this area so far this year were BHP Billiton’s sale of its shale operations to BP for US$10.5 billion, after it was pressured by Elliott Management to exit shale, as well as Encana’s purchase of Newfield Exploration for US$5.5 billion, and Chesapeake’s acquisition of WildHorse Resource Development for US$4 billion.

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The Rapid Acceleration Towards Peak Oil Demand

The Rapid Acceleration Towards Peak Oil Demand

crude oil

The drumbeat towards peak oil demand is accelerating, but since much of the acceleration is happening outside of the United States, its cadence is muted.

To be clear, the developed world passed peak oil demand a decade ago and has for years been forecast to continue reducing its demand. Increasing demand in industrializing countries, particularly China and India, each with a population tantamount to that of the OECD, slightly overpowers declines in the developed world, and as a result, global demand continues to increase. In its 2015 World Energy Outlook, the IEA forecast 1.5% y/y increase outside the OECD, -1.2% y/y in the OECD, and an overall growth of 0.5%. Global peak demand will likely occur while developing world demand is still growing. Increased decline in the first world could crest demand, but merely slowing the growth in the rest of the world is the more likely to tip the global balance to plateau then decline.

Demand for oil is dominated by transportation (cars, trucks/trains, planes and boats) and industry (plastics, fertilizers, steam/heat). Passenger vehicles comprise about 25% of global oil demand and thus are the number one target for major emissions reductions. When the IEA released its 2015 World Energy Outlook mentioned above, not a country on the planet had stated plans to ban new sales of oil-fueled cars. Only Japan and Portugal had even created incentives for electric vehicles. In 2016, three European countries outlined plans to end sales of new gasoline and diesel engines. Before the year was over, IEA revised its OECD forecast downward to -1.3% per year.

In 2017 a rash of targets to constrain fossil fuels for cars led Forbes to declare it to be “The Year Europe Got Serious about Killing the Internal Combustion Engine.”

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Why Trump Decided To Back Down On Iran

Why Trump Decided To Back Down On Iran

Trump Iran speech

The Trump administration has finally faced up to what many knew all along: It won’t be able to take Iran’s oil exports down to zero.

The U.S. is set to grant waivers to eight countries, allowing them to continue to import some level of oil from Iran, on the condition that they ratchet down their purchases in the months ahead. The full list of the countries will be released on Monday, but they will surely include China, India, South Korea and Japan, which are four of Iran’s top buyers.

“The reported awarding of waivers by the US for up to eight countries to continue buying Iranian oil, on the basis that they reduce volumes, shows that in the short term at least the Trump administration has set aside the goal of trying to cut Iran’s oil exports to zero,” Peter Kiernan, lead analyst of energy at the Economist Intelligence, said in a statement.

Convincing countries to zero out imports from Iran was always going to be tricky. On the one hand, even if the Trump administration had a free hand, it would be technically difficult to achieve. Iran continues to discount its crude, offer cargoes in barter deals, use currencies other than the U.S. dollar, and otherwise ship oil using a variety of furtive means. Iran was always going to be able to maintain some level of exports.

More importantly, however, the oil market is simply too tight to zero out Iranian supply. Notwithstanding the latest plunge in oil prices – down more than 15 percent in the past month – the market is still tight.

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Oil, Gas Drilling In Canada Set For A Decline

Oil, Gas Drilling In Canada Set For A Decline

Canada oil rig

Drilling for oil and gas in Canada will likely decline by 5 percent in 2019, the Petroleum Services Association of Canada has forecast, blaming pipeline capacity shortages and the resultant discount in Canadian heavy to the West Texas Intermediate benchmark for the outlook.

The PSAC said it expected oil and gas companies to drill 6,600 new wells next year, which would be down from 6,980 this year and the lowest number of new wells in three years. Yet over the year, drilling will increase, the PSAC forecast, as the volume of oil transported by rail, for lack of enough pipelines, continues to grow.

On the good news front, the discount at which Western Canadian Select trades to West Texas Intermediate is seen to narrow from the current over US$50 a barrel to about US$24.50 a barrel, with the average WTI price for 2019 projected at US$69 a barrel.

The National Energy Board of Canada recently released a report forecasting that oil and gas production will continue to increase while domestic consumption declines thanks to energy efficiency. Natural gas, along with hydropower and other renewable sources, will come to account for a bigger share of the country’s energy mix while oil production grows for exports.

In the next 20 years, NEB expects crude oil production to grow by as much as 58 percent while natural gas production expands by 33 percent, both helped by improving extraction technology that will maintain the industry’s competitiveness.

Not all believe, however, in this competitiveness. In fact, industry executives are quite disgruntled about the discount at which WCS is trading to WTI as well as by the high carbon taxes they are obliged to pay. The combination of factors has eaten into their bottom lines and will likely continue doing it as no new pipeline projects are coming on line any time soon and producers are forced to resort to costlier oil-by-rail options.

Iran’s Top Oil Customers Resist U.S. Calls For Zero Imports

Iran’s Top Oil Customers Resist U.S. Calls For Zero Imports

oil loading

Just a few days before U.S. sanctions on Iranian oil exports return on November 5, the keywords about how much of Iran’s oil will come off the market are ‘lack of clarity’.

On the one hand, it’s unclear how much Iranian oil will really be removed from the market, considering that Iran has already started to switch off transponders on board of some of its cargoes, although ship-tracking data on the tankers that can be tracked shows that Iranian oil exports are falling, but not as steeply as the market and analysts were expecting just a month or two ago.

On the other hand, it’s unclear whether the United States would grant any waivers, with U.S. Administration officials giving mixed signals.

Yet, one thing is clear, and here analysts were right—Iran’s top two single largest oil customers, China and India, will continue to import Iranian crude. Although China and India’s Iranian oil intake in recent months has fluctuated, and although some of their companies most exposed to the U.S. financial system have drastically reduced or outright stopped imports from Iran (like India’s Reliance Industries), the countries saw their imports in the first three weeks of October increase or hold steady around the volumes from recent months.

According to S&P Global Platts trade flow data, Iran’s oil shipments to China between October 1 and 21 averaged 800,000 bpd, up from around 600,000 bpd average for September. Last year, average Chinese imports of Iranian oil were 602,500 bpd, Platts has estimated.

About half of China’s crude oil and condensate imports from Iran in October, around 400,000 bpd, were bound for a storage hub in Dalian in northeastern China, according to Platts sources and shipping data. The National Iranian Oil Company (NIOC) has reportedly leased some storage capacity at Dalian.

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U.S. And OPEC Flood Oil Market Ahead Of Midterms

U.S. And OPEC Flood Oil Market Ahead Of Midterms

Eagle ford rig

OPEC and the U.S. are together adding enormous volumes of new supply, which together have softened the oil market.

In October, OPEC hiked oil production to the highest level since 2016, back before the oil production cuts went into effect, according to a recent Reuters survey. The higher output, led by Saudi Arabia and the UAE, come just as Iranian oil is going offline. Also, Libya saw a sharp rebound in production, although the country is not part of the OPEC+ production cuts.

The 15 countries in OPEC produced an average 33.31 million barrels per day in October, the highest since December 2016. That was also up 390,000 bpd from September. “Oil producers appear to be successfully offsetting the supply outages from Iran and Venezuela,” said Carsten Fritsch of Commerzbank.

Russia, which is not part of OPEC but part of the OPEC+ coalition, continues to produce at post-Soviet record highs.

Iran lost 100,000 bpd in October, due to buyers cutting back as U.S. sanctions near, but the losses were more modest than many analysts had expected. In fact, despite the hardline rhetoric from Washington, the U.S. is poised to grant waivers to several countries that are unable to cut their imports of Iranian oil to zero.

That was largely predictable. Top importers of Iranian oil, including India, China and Turkey, could not slash their purchases to zero without incurring a significant economic cost. The U.S. pressed these countries, but ultimately had to back down. “We want to achieve maximum pressure but we don’t want to harm friends and allies either,” U.S. national security adviser John Bolton said on Wednesday. He recognized that some “may not be able to go all the way, all the way to zero immediately.” The admission is notable since Bolton is widely known as one of the most extreme hardliners when it comes to Iran.

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Trump: There’s Enough Oil To Offset Iran Loss

Trump: There’s Enough Oil To Offset Iran Loss

Trump Iran

President Donald Trump has determined there was enough crude oil and oil products supply globally to offset any loss of supply from Iran after U.S. sanctions enter into force next week.

In a memorandum, Trump said “there is a sufficient supply of petroleum and petroleum products from countries other than Iran to permit a significant reduction in the volume of petroleum and petroleum products purchased from Iran by or through foreign financial institutions.”

The memorandum also mentioned there was enough spare production capacity globally to allow for any necessary production increase. Amid growing worry about the global economy, however, the necessity for any production increases in oil has been questioned by analysts and Saudi Arabia’s Energy Minister, Khalid al-Falih, although Falih also separately said the Kingdom will continue to boost production this month.

Earlier this week, Reuters reported that the world’s top three producers—Russia, the United States, and Saudi Arabia—pumped 33 million bpd combined in September. A month later, Russia’s production alone hit another post-Soviet record of 11.41 million bpd.

These figures are in line with the sentiment expressed by President Trump and expectations by some observers that the effect of the sanctions’ entry into effect on prices will be moderate. This is what the Congressional Research Service’s top Iran expert Kenneth Katzman said, commenting on Trump’s memorandum, as quoted by the Washington Examiner.

Recent reports that Iran’s oil exports ahead of the sanctions were higher than earlier estimated also provided fuel for expectations of a moderate price effect, as did the news that Washington has granted India a waiver from the sanctions, obviously satisfied with the nation’s efforts to reduce its imports from Iran.

Sanctions against Iran will enter into effect on November 5 at midnight, a day before the mid-term elections in the United States. Keeping a lid on oil prices ahead of the vote has been a priority for the Trump administration.

World’s Cheapest Natural Gas Market Could Be Facing A Shortage

World’s Cheapest Natural Gas Market Could Be Facing A Shortage

Natural Gas

A natural gas shortage in Canada is expected to last through the winter months, forcing gas users ranging from industrial forces to local governments to seek alternative fuel sources and strategies for slashing consumption and conserving the gas they have. The shortage stems from this month’s pipeline explosion near Prince George, British Columbia.

In the aftermath of the explosion, FortisBC, one of British Columbia’s largest utilities, says that their supply of natural gas will be reduced by a whopping 50 to 80 percent throughout the coldest months of the year. This sudden squeeze will necessitate a lot of unforeseen expenditures on alternative fuel sources. This is a cost that will be passed directly onto consumers, affecting everything from the price of gas and heating to even the price of vegetables, among other subsequent price hikes.

Natural gas has service has already been restored to the province in the wake of the October 9th disaster, and pipeline owner Enbridge says that it will have the section of the pipeline that ruptured back online by the middle of November. The National Energy Board, however, has mandated that Enbridge limit pressure in the ruptured line, and a smaller line nearby will also remain running below capacity until the spring of next year. As a safety measure, pressure levels will be kept at 80 percent along the entire length of the damaged pipeline up to the United States border.

The shortage is occurring in what is one of the cheapest natural gas markets in the world. Canadian gas has been hit hard by competition from the United States and limited pipeline infrastructure, which has only been made worse by the Prince George explosion. After the announcement that FortisBC’s pipes would remain running under capacity through the winter, gas prices fell to a five-month low last week.

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